HMMM November 27

Hmmm...
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
27 NOVEMBER 2012
The Mousetrap
"Nay, indeed, if you had your eyes, you might fail of the knowing me: it is a wise father that knows his own child. Well, old man, I will tell you news of your son: give me your blessing: truth will come to light; murder cannot be hid long; a man's son may, but at the length truth will out." Launcelot Gobbo, The Merchant of Venice, Act II, Scene 2 "I play to win and if it looks like I've lost, it's only because it's not over yet." Kiera Dellacroix, Engravings of Wraith "Is it more childish and foolish to insist that there is a conspiracy or that there is not?" China Miville, The City and the City "You see a mousetrap; I see free cheese and a f****** challenge!" Scroobius Pip
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
Death Metal: Tin Mining in Indonesia ...............................................................22 Treasury to Crack Down on UK's Offshore Tax Havens ...........................................23 The PMIs Warn Europe Is Getting Worse ...........................................................25 Argentina Nearing Technical Default ...............................................................26 Why Can't India Feed Its People? ....................................................................28 Goodbye Petrodollar, Hello Agri-Dollar? ............................................................29 The Faustian Bargain Between States and Banks .................................................30 Obama 2.0 and the World ............................................................................32 Catalans Take Step Towards Break-up Vote ........................................................33 Going Up in Flames ....................................................................................34
CHARTS THAT MAKE YOU GO HMMM... ..................................................36 WORDS THAT MAKE YOU GO HMMM... ...................................................40 AND FINALLY ................................................................................41
27 NOVEMBER 2012
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Things That Make You Go Hmmm...

October 6, 1952 saw the debut of a new play at the Theatre Royal Nottingham in England that was based upon a short radio play titled Three Blind Mice. The playwright, Agatha Christie, asked that the short story upon which the original radio play was based not be published in the United Kingdom for as long as her stage play ran because it contained a twist in the ending that she desperately wanted to protect. The play would tour Britain, being staged in Oxford, Birmingham, Liverpool, Manchester, and Newcastle before it reached the West End of London where it was to take up residence at the New Ambassador's Theatre on November 25, 1952. The author was forced to rename the play at the insistence of Emile Littler, who had produced a play in the West End with the same title prior to WWII, and, when casting around for a suitable title, Christie sought the counsel of her son-in-law, Anthony Hicks, who suggested a tip of the hat to a famous scene in Shakespeare's Hamletspecifically Act III, Scene 2: Hamlet. Madam, how like you this play? Queen. The lady doth protest too much, methinks. Hamlet. O! but she'll keep her word. King. Have you heard the argument? Is there no offence in 't? Hamlet. No, no, they do but jest, poison in jest; no offence i' the world. King. What do you call the play? Hamlet. The Mouse-trap. Marry, how? Tropically. This play is the image of a murder done in Vienna: Gonzago is the duke's name; his wife, Baptista. You shall see anon; 'tis a knavish piece of work: but what of that? your majesty and we that have free souls, it touches us not: let the galled jade wince, our withers are unwrung. And so it was that Christie's play about a murder came to be titled The Mousetrap.
27 NOVEMBER 2012
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For his contribution to the play, Hicks received the author's profound thanks, but Lady Luck would smile far more profoundly on Christie's young grandson, Matthew Prichard, whose 9th birthday coincided with Christie's writing of the play. By way of a gift to the young boy, Christie bequeathed him the rights to a play which she expected to have a reasonably successful run (though not as successful as others predicted): (Wikipedia): Christie herself did not expect The Mousetrap to run for such a long time. In her autobiography, she reports a conversation that she had with Peter Saunders: "Fourteen months I am going to give it", says Saunders. To which Christie replies, "It won't run that long. Eight months perhaps. Yes, I think eight months." Now, eight months wasisa respectable time for a play to run, but both Saunders and Christie were a little off with their predictions concerning the longevity of The Mousetrap. In April of 1955, the play celebrated its 1,000th performance. In September 1957, The Mousetrap broke the record for the longest-running play in the West Endan event marked by a telegram to Christie from a rather begrudging Noel Coward, who wrote: "Much as it pains me, I really must congratulate you...." By December 1964, it had racked up 5,000 performances, by 1976, 10,000, by December 2000, 20,000, and on 25 November 2002, it celebrated a remarkable 50-year continuous run with a gala performance in front of Queen Elizabeth II and Prince Philip. Last Sunday, November 18th, 2012, a cast of theatrical celebrities staged the 25,000th performance of a play that keeps on going year after year. Amazingly, a film version of The Mousetrap has never been made because Christie stipulated, when the play opened in 1952, that no such project could be undertaken until the West End production had been closed for at least six months. How little she knew. The thing that sets Christie's play apart is the big twist in the tale that has been delighting and surprising audiences for years. So integral to the audience's enjoyment of the play is the dramatic shift, that Christie worried that, should the killer's identity be leaked by those who had seen the play, its impact would be ruined. After much deliberation, she and her director, Peter Saunders, came up with a simple yet ingenious plan by which to keep the identity of the killer a secretthey would simply ask the audience, at the end of each performance, not to tell anybody who it was that did away with Mrs. Boyle (a character described as "A critical older woman who is pleased by nothing she observes") at the end of Act I, Scene 2. Somewhat amazingly, this worked beautifully. Audiences, imbued with a sense of involvement in a great secret, gave the play glowing reviews to their friends and relatives but stopped short of revealing whodunnitencouraging people to instead go and find out for themselves. And go they did. In their droves.
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Since its opening night, an estimated 10 million theatregoers have seen The Mousetrap in London alone. Throw in those who have watched any of the 60 productions that have been licensed in places such as China, Russia, the US, South Africa, and Canada, and the number increases significantly. And yet... The identity of the killer remained a closely guarded secret for over 50 years. So much so that, when, in August 2010, Wikipedia opted to reveal the identity online, it caused uproar: (UK Daily Mail): For 58 years, the identity of the killer in Agatha Christie's The Mousetrap has been one of theatreland's most closely guarded secrets. At the end of each performance of the world-famous countryhouse whodunit, the audience is asked not to reveal the name of the killer when they leave. It was supposed to prevent the ending of the world's longest-running play from being spoilt for those who hadn't yet seen it. Until now, it appeared to have worked. But the identity of the killer has been published online by Wikipedia, despite protests from the author's family and petitions from fans to remove the spoiler. Wikipedia tells readers the famous play is "known for its twist ending, which at the end of every performance, the audience is asked not to reveal." But anyone who keeps reading will be told who the murderer iswithout any warning. Matthew Prichard, Christie's grandson, described the online encyclopedia's decision as "unfortunate". So, after 58 years and with well over 10 million people in on the "conspiracy," the secret of the identity of Christie's most famous killer was revealed to a wide audience. Still, if you can keep 10 million people quiet for over 50 years, I'd say you were doing pretty well.
One would have
to hazard a guess that there are substantially less than 10 million people who know the truth behind both the amount of gold bullion held by Western central banks as well as the degree to which prices are manipulated in order to maintain price stabilitybut, as conspiracies go, this one is right up there with the killing of JFK (certainly in financial circles).
27 NOVEMBER 2012
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Now, these conspiracy theories have polarized some of the finest minds in finance for many years, and many commentators for whom I have the utmost respect feel they are all utter nonsense. Personally, I believe there is no smoke without fire, and I always apply the two criteria of motive and means to any suspected conspiracy. In the case of gold (and silver), I cannot help but conclude that central banks and governments certainly have the motive to suppress prices (as they reveal only too clearly the extent to which the purchasing power of fiat currency is being debased), and as for the means...? Well, based on what we have seen in terms of intervention in the far larger sovereign bond markets in recent years, I think arguments over that particular part of the equation have been rendered somewhat redundant. How ridiculous has government intervention become in the bond markets? Ladies and gentlemen, I give you the US Treasury curves of November 2000 and November 2012 plotted against a backdrop of the US Public Debt Outstanding:
US Treasury Yield Curves vs Public Debt Outstanding

(November 2000 - November 2012)
10Y 20Y 1M 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 30Y 20 Trillion
6%
November 2000
5%
15 Trillion
4%
3% 10 Trillion
Novemb er 2012
2%
1% 5 Trillion 0%
00
01
02
03
04
05
06
07
08
09
10
11
No v
No v
No v
No v
No v
No v
No v
No v
No v
No v
No v
No v
Source: Bloomberg
27 NOVEMBER 2012
No v
12
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As you can see, as the US has plunged deeper and deeper into debt, its cost of borrowing money has gotten lower and lower. In fact, the US can currently borrow 10-year money lower than at any time in the country's history (see chart, bottom of next page). How has that happened? Well, in large part it can be explained by the chart at the top of the next page, which shows the US Federal Reserve's holdings of US Treasury Securities between 2002 and today. As you can see, those holdings have trebled in that time period, which has helped yields hit those all-time lows depicted on the second chart. Meanwhile, on the debt side of the ledger, as Kyle Bass pointed out most recently: (Kyle Bass): It took the United States 193 years (1789-1981) to aggregate $1 trillion of government debt. It then took 20 years (1981-2001) to add an additional $4.8 trillion and, in the last 10 years (2001-2011), a whopping $9.8 trillion has been added to the federal debt. Since 1981, the US increased its sovereign debt by 1,560% while its population increased by only 35%
2,000,000
1,500,000
US Federal Reserve Holdings of US Treasury Securities

(November 2002- November 2012)
US$ millions
1,000,000
500,000
02
03
04
05
06
07
08
09
10
11
No v
No v
No v
No v
No v
No v
No v
No v
No v
No v
Source: Bloomberg
27 NOVEMBER 2012
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Source: Global Financial Data
All the debt that has been accumulating across the globe (and, as I have discussed ad nauseam, it is not just in the US) against the backing of an ever-dwindling public hoard of gold bullion is eventually going to matter, and probably to everybody at the same time, for that is generally the way these things work in the 21st century, and when it does, very few people seem to grasp the full implications. What better reason for governments to attempt to engineer the lowest gold price they possibly can? Recently, there has been renewed focus on the amount of physical gold actually held by central banks and, potentially more worryingly, where it is held. Allow me to elaborate. It began in August 2011 with Hugo Chavez. The ailing Venezuelan dictator demanded that the Bank of England return the 99 tons of gold bullion that was stored in its vaults below Threadneedle Street in the heart of the City of London. (Bloomberg): Venezuelan President Hugo Chavez ordered the central bank to repatriate $11 billion of gold reserves held in developed nations' institutions such as the Bank of England as prices for the metal rise to a record. Venezuela, which holds 211 tons of its 365 tons of gold reserves in U.S., European, Canadian and Swiss banks, will progressively return the bars to its central bank's vault, Chavez said yesterday... "We've held 99 tons of gold at the Bank of England since 1980. I agree with bringing that home," Chavez said yesterday on state television. "It's a healthy decision."
27 NOVEMBER 2012
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As I wrote at the time (Things That Make You Go Hmmm..... August 20, 2011): Chavez's move this week could set in motion a chain of events whereby central banks that store the bulk of their gold overseas in "safe" locations scramble to repossess their country's true "wealth." If that happens, the most high-stakes game of musical chairs the world has ever seen will have begun... Personally, if I were a central bank governor, I know I would want to be absolutely certain that my gold was a) exactly where it was supposed to be, b) held in the amount advertised, and c)... well... made of gold, ideallyas opposed to tungsten. Now, it has taken a little longer than I had expected for some movement to occur in the central bank gold market, but then so has the collapse of the European Union, the demise of the euro, the top of the US bond market, and the unmasking of France (more on that next week), but at last, the first signs are becoming apparent that ever so quietly, the game of musical chairs that I predicted would soon commence may finally be beginning. It started at the end of October, when those traditional guardians of fiscal propriety (at least until recently), the Germans, reverted to type: (Zerohedge): The German court of auditors (Bundesrechnungshof) has demanded that the Bundesbank undertake an audit of its gold reserves. In an "audit-the-Fed" style effort, the court wants to ensure that the nearly 3400 tons of gold is in fact in existence"because stocks have never been checked for authenticity and weight". Furthermore, the Bundesbank's gold is stored in three other vaults around the world: The Bank of England, The Bank of France, and the US Federal Reserve. The court questions the practice of relying on a written confirmation from the custodians (foreign central banks). The decision means negotiating with the three foreign central banks for physical verification, but in anticipation, the Bundesbank has begun the process of shipping 50 tons per year from the Fed back to Germany for the next three years. Der Spiegel added a little more colour (emphasis added): (Der Spiegel): For quite some time now, [Peter] Gauweiler [CSU politician] has been pestering the government and the Bundesbank with questions concerning where and how the country's reserves are stored, and how often they are checked. He has submitted requests and commissioned reports on the topic.
27 NOVEMBER 2012
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Last week, Gauweiler celebrated his greatest triumph to date in his gold campaign, which has been a source of some amusement for many fellow German politicians: A secret report by the Federal Audit Office had been made publicand it contained stern criticism of the German central bank in Frankfurt. The Bonn-based auditors urged a better inventory system, including quality checks. This demand, which even the bank's inspectors saw as nothing more than routine, alarmed the Berlin political establishment. Indeed, the partially blacked-out report read like the prologue to an espionage thriller in which the stunned central bankers could end up standing in front of empty vaults in the US. For decades, German central bankers have contented themselves with written affirmations from their American colleagues that the gold still remains where it is said to be stored. According to the report, the bar list from New York stems from "1979/1980." The report also noted that the Federal Reserve Bank of New York refuses to allow the gold's owners to view their own reserves. Not surprisingly, this prompted strong reactions in Berlin: The relevant Bundesbank board member Carl-Ludwig Thiele was summoned to Berlin to provide an explanation to the parliamentary budget committee. Heinz-Peter Haustein of the business-friendly Free Democratic Party (FDP) was even quoted by Germany's mass-circulation Bild newspaper as saying that "all the gold has to be shipped back." As the late Michael Jackson once said: "You wanna be startin' somethin'?" A couple of days later, folks in the Netherlands (supposedly the world's 9th largest holder of gold by tonnage) began to get a little twitchy: (Nederlands Dageblad): Almost 300 "concerned Netherlands citizens" have joined the German initiative for insight about the gold reserves. In a petition the citizens committee demands "full openness on the quantity and storage location of the Netherlands' physical gold, and on the extent and nature of the gold claims." In Germany, a lot of uneasiness has risen about the quantity, value, and quality of the gold reserves, which have not been audited in many years at various storage locations. Led by the tabloid newspaper Bild, German news media are wondering whether the 3.4-million kilograms of ingots are really there (valued at about 150 billion).
27 NOVEMBER 2012 10
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Under pressure from the German federal audit office, part of the gold stock will be repatriated from the United States to Frankfurt. The Netherlands faces similar uneasiness about the position of its gold treasure612,000 kilograms with of a value of about 25 billion. The gold, in part located at De Nederlandse Bank in Amsterdam (about 10 percent), is also located at the Federal Reserve Bank of New York, in Ottawa, and London. A few more days went by before Ecuador dived for a chair: (Zerohedge): Ecuador's government wants the nation's banks to repatriate about onethird of their foreign holdings to support national growth, the head of the country's tax agency said. Carlos Carrasco, director of the tax agency known as the SRI, said today that Ecuador's lenders could repatriate about $1.7 billion and still fulfill obligations to international clients. Carrasco spoke at a congressional hearing in Quito on a government proposal to raise taxes on banks to finance cash subsidies to the South American nation's poor. According to official statistics, Ecuador holds just 26.3 tonnes of gold which, in the scheme of things, isn't a whole lotbut to the good people of Quito and beyond, that represents about 16.5% of their wealth. Is it any wonder they'd prefer to have it under their own mattress? Considering national gold holdings are supposed to be the property of the citizens of a given country, there seems to be an enormous amount of sensitivity surrounding any independent audit or verification of many of these stockpiles. Various excuses are always trotted out about the cost of an audit, but it seems as though the idea of even showing the gold to an outside party who could vouch for its existence is anathema to central banks and governments everywhere. You'd think they'd be kind of proud of all that shiny yellow metal? Eric Sprott, a man who knows more about gold than most, recently penned another wonderful piece titled "Do Western Central Banks Have Any Gold Left???". The multiple question marks were Eric's, not mine. The set-up began thus: (Sprott): Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone, and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today's gold price. Beyond the suggested tonnage, however, very little is actually known about the gold that makes up this massive stockpile. Western central banks disclose next to nothing about where it's stored, in what form, or how much of the gold reserves are utilized for other purposes. We are assured that it's all there, of course, but little effort has ever been made by the central banks to provide any details beyond the arbitrary references in their various financial reserve reports.
27 NOVEMBER 2012
11
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But soon Eric moved on to the nitty-gritty, providing a series of compelling metrics to back up his argument: Global annual gold mine supply ex Russia and China (who do not export domestic production) is actually lower than it was in year 2000, and ever since the IMF announced the completion of its sale of 403 tonnes of gold in December 2010, there hasn't been any large, publicly disclosed seller of physical gold in the market for almost two years. Given the significant increase in physical demand that we've seen over the past decade, particularly from buyers in Asia, it suffices to say that we cannot identify where all the gold is coming from to supply it but it has to be coming from somewhere. After identifying the various sources of demand for gold bullion, Eric pondered the supply side of the equation: What entities are releasing physical gold onto the market without reporting it? Where is all the gold coming from? There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked. Indeed. But what has happened to this missing gold (if, as Eric and many othersincluding myself believe, it is missing)? Well, per the Central Bank Gold Agreement (CBGA), Western central banks were restricted in the amount of gold they could sell on an annual basis and, over the first two five-year periods that the agreement was in place, they took full advantage, as you can see from the shaded area in the chart below:
27 NOVEMBER 2012
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1,350 1900 1800 1,300
O cial Central Bank Gold Holdings vs. Spot Gold Price

(Millions of Ounces) (IMF) 1965-2011
1700 1600 1500 1400 1300 1200
1,250
1,200
1,150
Gold Holdings (moz)
1100 1000 900 800 700
1,100
1,050
600 500
1,000
400 300
950
200 100
900 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: IMF, Bloomberg
That didn't stop the price going up, but concerted selling on the part of the largest holders of gold would certainly have dampened its upward trajectory somewhat. So what has been happening to all this physical gold over what has become a 12-year bull market (or, in the eyes of many who simply look at the price of the yellow metal, a gigantic bubble)? Well, in order to help readers understand this, I turned to my good friend Nick Laird of Sharelynx, who is among the savviest of all gold-watchers. Nick's database of gold-related charts is, in my opinion, the most complete anywhere on the planet, and you can find out a lot more about them by visiting his excellent website, www.sharelynx.com. The direction of physical-bullion movement has been consistent and telling throughout the entire bull-run; West to East. If you'd like to know what that looks like, thanks to Nick, I can show you. The shape of this chart you will recognize from the one above, but by adding one extra line, the story it tells is significantly different. The gold bars represent the total official holdings of gold as per the IMF that you saw in the previous chart. The red line illustrates the percentage of world official gold holdings that are in the hands of Asian central banks. As can be seen quite clearly, this number had been growing consistently until the beginning of the 2008 financial crisis, at which point it went parabolic.
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Source: Sharelynx
A look at the demand statistics that make up those numbers is even more compelling. First up, fabrication demand from the East and the West:
Source: Sharelynx
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Throw in investment demand and you get the complete picture of the flows of gold bullion over the last twenty-five years; and it makes for a sobering illustration of prudence versus folly:
Source: Sharelynx
Since the turn of the century, Western fabrication and investment demand has fallen 50% whilst that from the East has grown 30%and when people talk of "The East," invariably they mean Chinaso let's take a look at what has been happening in everybody's favourite mystery kingdom.
Source: Sharelynx 27 NOVEMBER 2012 15
Hmmm...
Since 1980 (coincidentally, when the previous gold "bubble" was at its peak), Chinese gold production has increased at a staggering pace from around ten tonnes per year in 1980 to 365 in 2011, which made China the world's largest producer of gold. Not one ounce of that gold is allowed to (legally) leave China. Instead, in addition to worldleading production, Chinese imports through Hong Kong have also jumped at a mind-numbing pace, as can be seen in the chart below, which shows net imports up almost 1,000% since 2007.
Source: Sharelynx
Putting that into perspective over a longer time frame is even more telling, as can be seen from the chart below, which Nick assembled using data going back to 1930:
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Source: Sharelynx
As of today, China's official gold holdings total 1,054 tonnesor approximately 1.8% of their reserves. That number was released by the PBOC in 2009. Since then? Silence. All we know is that over the last four years, China has produced a similar amount of gold to that which they officially held in 2009none of which has left the countryand has imported roughly the same again through Hong Kong. When they made the 2009 announcement that they had bought around 600 tonnes of gold, thus increasing their reserves by 76%, it sparked a 20% rally in the gold price, and even though the fact that China is voraciously accumulating gold is staring the world in the face, until an official announcement is made, there will be no great rush into gold by investors trying to piggyback China. But here's the thing... Western governments are bankrupt. They all have huge, stifling, unfunded liabilities after a credit binge the like of which the world has never seen before. Their balance sheets are in disarray and are expanding monthly as they try desperately to keep things together long enough for "growth" to magically return and fix everything. In order to buy the time they believe they need, they have instituted a series of policies that are potentially wildly inflationary and that, in days gone by, would have seemed to the world to be exactly what they arefarcical. But community hides culpability, and so, as a group, these governments are able to act in unison to try and devalue their currencies whilst suppressing interest rates in a doomed experiment of Frankenstein dimensions.
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Hmmm...
Meanwhile, across the world, in Asia, stands a collection of governments that entered 2008 in far better shape from a balance sheet perspectivefor the simple reason that, when their own crisis hit in 1997/1998, they were forced to take the pain that came with a credit-fuelled bust. The Asian currency crisis of 1997/1998 was horrendous for this region, and yet, amazingly, many outside Asia don't know much about it. The havoc wreaked throughout Asia was significant (as the tables below highlight), but it had the effect of lowering debt levels significantly (mostly through default... are you listening, Europe? The USA?) and preparing Asia for 2008.
Exchange Rate per US$ June 1997 24.5 2,380 26.3 2.5 850 July 1998 41 14,150 42 4.1 1,290
Currency Thai Baht Indonesian Rupiah Philippine Peso Malaysian Ringgit South Korean Won
Change - 40.2% - 83.2% - 37.4% - 39.0% - 34.1%
Source: R Cheatham/Wikipedia
GNP (US$1 billion) June 1997 170 205 75 90 430 July 1998 102 34 47 55 283
Currency Thailand Indonesia Philippines Malaysia South Korea
Change - 40.0% - 83.4% - 37.3% - 38.9% - 34.2%
Source: R Cheatham/Wikipedia
A look at government debt-to-GDP levels and forecasts (courtesy of Blackrock) shows just how skewed the regions have become and how they are headed in different directions:
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% 140 120 100 80 60 40 20 0 G7 (Developed Markets) 2011 Emerging Markets 2012 Forecast 2013 Forecast Emerging Asia 2014 Forecast
Government Debt-to-GDP Levels
Source: IMF/Blackrock
So... we have a group of nations in the West (and I include Japan, the world's third-largest and most-indebted economy) whose biggest problem is debt and which, to counter that, have implemented a series of desperate measures designed to avoid taking the necessary pain to purge the systempreferring to set about trying to create the inflation they deem necessary to dissolve the debt in the most politically expedient way possible. This monetary debasement is showing up in weakening currencies and a steadily (but in the scheme of things, slowly) increasing gold price (though inflation remains mysteriously muted certainly if you choose to believe the various official CPI statistics instead of your own monthly food and energy bills). On the other side of the world, you have a series of countries that don't have the massive debt overhang that so tortures the West, but that are at the mercy of inflation, with vast populations who need feedinga task that gets harder with every new dollar printed by Benny and the (ink) Jets. So what happens? Well, as we have seen, Western central banks have been consistently selling their gold over the last 30 years, whilst the Asian nations have been steadily accumulating it. In addition to outright sales, the spectre of central bank gold having been leased out many times over has bubbled away for years before raising its head spectacularly this past week when Austria's central bank boasted about how they had made a "profit" of $300 million from gold leasing. (Bullion Street): Austria announced earning a whopping 300,000,000 through leasing its 280 tons of gold in the last ten years. Replying to questions in the country's parliament, Austrian central bank, National Bank (OeNB) governor Wolfgang Duchatczek said 224. 4 tonnes (around 80%) of Austrian gold reserves were in the United Kingdom, around 6.9 tonnes (around 3%) are in Switzerland and around 48.7 tonnes (around 17%) are in Austria itself.
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The OeNB said that the reason to store gold abroad was that because in a time of crisis it could be speedily traded. Since 2007, Austria's National Bank had had a constant reserve of around 280 tons of gold. Through leasing of its gold, the Austrian National Bank has in the last 10 years earned around 300,000,000. My friend, Ronni Stoeferle of Erste Bank in Vienna emailed me immediately after this news hit the wire with his own take on things: I actually gave our central bankers a really hard time today... after they stated that they've "earned" 300 mln in 10 years by lending the gold, I made a back-of-the-envelope calculation, which had the result that 300 mln is impossible (given the lease rates in the last 10 years), unless they've leased out 100% (or even more??) of their gold... I think I have stirred up a hornet's nest, because they shot out a press release immediately... stating that "only" 16% are lent out anymore... again: the numbers just don't add up... Believe me when I tell you, Ronni knows his gold... Either way, in Austria, like many other nations, we have gold leasing and bullion stored outside the countrya familiar pattern that continues to crop up with alarming regularity. The West sees gold as a means to hide the existence of inflation while the East sees it as protection from inflation. That means the West is selling gold whilst the East is buying it. The longer the price of gold is kept as low as possible by Western central banks, the more bullion will flow from West to East, and the more gold emerging nations accumulate, the more they are likely to want custody of that gold. The more central banks ask for audits and repatriation of their gold, the faster that trend will accelerate; and the faster that trend accelerates, the less gold will be left in the "safe" confines of the Federal Reserve and the Bank of England. So let me ask you this, dear reader: Just suppose for a moment that you apply means and motive to this little conundrum. And just suppose thatGod forbidcentral bank data was either misleading or downright wrong and the gold supposedly in vaults beneath the Bank of England and the Federal Reserve (amongst other places) had, in fact, been leased out through the bullion banks in return for a little interest. Now suppose that the creeping trend for audit and repatriation that started with Hugo Chavez and seems to be spreading rapidly to other nations continues to gather pace, and suppose that everybody decides that they'd rather err on the side of caution and have their gold back. If the gold isn't all there, what do you suppose would happen? "Is it more childish and foolish to insist that there is a conspiracy or that there is not?"
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The secret of the killer's identity in The Mousetrap was kept intact by over 10 million
people for half a century until the good folks at Wikipedia decided that they were doing the public a favour by revealing it. Now, if you want to know who the killer is, you just have to Google it.
If the truth about the bullion holdings of the world's central banks is finally revealed and it turns out that the rumours surrounding them are based in fact, all hell will let looseI guarantee it. Consequently, don't expect any great admissions anytime soon. However, you might want to keep an eye on the increasing number of requests for repatriation. They may just flush out the truth anyway...
Until next time...

**********
27 NOVEMBER 2012
21
Hmmm...
Suge doesn't have a mobile phone, so he uses a friend's to tell us the news: he
doesn't want any visitors and he won't talk. His boss has told him not to say anything. They're neighbours and the mine's just up the road and he needs this jobthe job he hopes to go back to when he gets better, inshallahbecause mining is good money. Everything is OK. Just please don't come. We leave at dawn. In the black morning sky the two-lane highway cuts west across the island towards Suge's village, a cluster of wooden and cinderblock houses near mangroves so deep the palm trees look like drowned bonsais. There are mosques with orange gates and lime roofs, clapboard shacks selling sweets to schoolchildren, and then, every so often, vast expanses of seeming desert. At the bottom of the sandy dunes sit wide turquoise craters, looked over by gritty hills where haphazard tents made from tarpaulins and thatch serve as shelters for the men descending into the hollowedout pools with pickaxes and buckets. Fifteen metres deep, they scavenge for tin, cutting into the sand with their hands and feet, just like Suge used to do, until one day in August his pit collapsed, burying him alive and snapping his left shin in half. His cries of "Longsor! Longsor!"Landslide!were drowned by the mud that killed the three friends who had been working beside him. The tin that 44-year-old Suge has mined over the past 12 years on Bangka islanda granite outcrop just east of Sumatra in Indonesiahas been in heavy demand for the past few centuries. Bangka is a key point in its global trade. A long, boot-shaped belt of the metal stretches from Burma all the way down through Thailand, Malaysia, Singapore and Indonesia, with Bangka and its sister island Belitung comprising its toe. When the Dutch colonised Indonesia in the early 19th century, one of their first tasks was to carve out vast mines on the island where locals and Chinese coolies worked side by side digging for dark specks of cassiteritethe main mineral in tin oreto be used in alloys, conductors and tin plating. Today that same tin is mined for use primarily as solder in consumer electronics, according to tin industry group ITRI, holding together the circuit boards, transistors and resistors in items such as smartphones and tablets and mobiles. Around seven grams of tin goes into every mobile phone. There is a chain here: Bangka and Belitung produce 90% of Indonesia's tin, and Indonesia is the world's second-largest exporter of the metal. A recent Businessweek investigation into tin mining in Bangka found that Indonesia's national tin corporation, PT Timah, supplies companies such as Samsung directly, as well as solder makers Chernan and Shenmao, which in turn supply Foxconn (which manufactures many Apple products).
27 NOVEMBER 2012
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Hmmm...
Chernan has also supplied Samsung, Sony and LG. So it is highly likely that the smartphone or tablet you use has Bangkanese tin in it, perhaps mined by Suge or one of the many tens of thousands of men like him, most of whom earn around 5 a day in a local industry that fetches roughly 42m of revenue for Indonesia every year. It is still early morning when we knock on Suge's peeling front door, the village chief in tow to help him feel comfortable talking about his accident. Inside, Suge is propped up on a mattress on the floor watching soap operas, an overflowing spittoon at his side. Dangling from the rafters is the rope that keeps his leg elevated at night; today it whirls around his head like a noose not quite reaching its target. Suge's father tells us that his son's accident was unavoidable. "The act of Allah," he splutters, "a big warning from God for him to change his life!" Suge is crying, spitting tears into the spittoon, moved by his father's accusation that he never prayed enough before the accident. He begins describing the crumbling wall of mud that enveloped him, the image of his young daughter propelling him to fight to the surface and take his first breath of air. "Look, mining has changed our community," he says, trembling. "People are wealthier now. They can send their kids to school." But he knows that change is afoot. Two of his neighbours recently died while mining, bringing the unofficial death toll this year to 78, and the number of police crackdowns on informal miners has increased significantly in the past month. "We are on the cusp of a revolution here," Suge says quietly. "My accident was a small sacrifice to give happiness to people in the world, to give them phones and electronics." He begins likening himself to Napoleon Bonaparte, "the leader of the revolution", until his father cuts in suddenly: "It's silly. We are the ones producing the tin but we don't use it. We don't have handphones."
*** UK GUARDIAN / LINK
Radical plans to
force the UK's tax havens to reveal the names behind hidden companies, account holders and trusts have been drawn up by the Treasury. The news has delighted tax justice campaigners, who predict that the move, which is expected to be unveiled in the chancellor's autumn statement and come into force in 2014, will have major consequences for those trying to hide their money offshore. A leaked document reveals that the UK plans to impose its own version of the US Foreign Account Tax Compliance Act (Fatca) on the crown dependencies of Jersey, Guernsey and the Isle of Man, as well as its overseas territories, such as the Cayman Islands. Fatca, which will come into force in the middle of next year, requires foreign banks to report American account holders to the US Inland Revenue Service. The draft UK equivalent, seen by the magazine International Tax Review, will require British tax havens to make similar disclosures about UK account holders to UK tax authorities.
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"It's a complete bombshell for these places," Richard Murphy, a tax expert who has seen the draft plan, told the Observer. "Some people will try to flee, but this is going to change the whole of the offshore market." He explained that the draft plan amounted to the UK using US legislation to give tax havens an ultimatum: "It's either they give the UK the same data that they want to give the US or the UK won't pass their laws to let data flow to the US." The ultimatum is crucial, Murphy suggested. If the UK refuses to pass the laws, its tax havens "might just as well shut up shop since there would be almost no banks or other institutions willing to locate there". News of the plans is likely to surprise many tax experts. This month, responding to an international development committee report, the government publicly rejected the need for a UK version of Fatca. Joseph Stead, Christian Aid's senior adviser on economic justice, said that if the draft was implemented it "would be the beginning of the end for tax haven secrecy". However, he said it was vital that it should not just be the UK which obtains full information disclosure from its tax havens: "We should ensure that other countries get it too, so they can catch up with people and companies hiding money. Otherwise there will be tax haven secrecy for some countries and not others. "Poor countries lose billions every year to tax dodging and tax havens are often involved. We hope the UK government will use the G8 meeting it is hosting next year to agree action to ensure a global end to tax haven secrecy." The Treasury declined to comment but confirmed to the Review that it was assisting the UK's crown dependencies and overseas territories to produce their response to Fatca. However, former Liberal Democrat Treasury spokesman Lord Oakeshott was sceptical about whether the plan could succeed. "Tax havens really coming clean are as likely as a snowy Christmas day in the Cayman Islands," he said. Last night the Labour shadow chancellor, Ed Balls, outlined a five-point plan for tackling tax avoidance. In an article for the Huffington Post, Balls writes: "We urgently need to look at how UK tax laws can be made stronger so as to properly deter tax avoidance."
*** UK GUARDIAN / LINK
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More Purchasing Manufacturers Index (PMI ) data overnight. Comments from

Chris Williamson, Chief Economist at Markit economics, sum it up nicely: The eurozone economy continued to deteriorate at an alarming pace in November, and is entrenched in the steepest downturn since mid-2009. Officially, the region saw only a very modest slide back into recession in the third quarter, with GDP falling by a mere 0.1%, but the PMI suggests that the downturn is set to gather pace significantly in the fourth quarter. The final three months of the year could see GDP fall by as much as 0.5%. While it is reassuring to have seen signs of stabilisation in some survey indicators, the overall rate of decline remains severe and has spread to encompass Germany, suggesting the situation could deteriorate further in the coming months. With jobs being cut at the second-fastest rate since January 2010 and expectations for the year ahead in the services sector slumping to the lowest since March 2009, firms have clearly become increasingly anxious about the economic outlook and are seeking to control costs as much as possible. All this suggests that any swift return to growth is unlikely. There isn't much new here, this is the same dynamic I have been commenting on for well over a year now. In recent weeks it has become all too obvious that economic weakness has now got a firm grip on "the core" of the EZ with the downgrade of France and the acceleration of a downturn in the Netherlands. Germany too is slowly weakening as the PMI report shows. So no surprises here, and we continue to travel along the path of expected outcomes. Attempts at internal devaluation across Southern Europe are crushing aggregate demand in those countries, this is flowing back into the "core" via the tradeable sectors, lowering manufacturing production and output, which is in turn pulling down the service sectors of those countries. External surpluses require a counterparty external deficit, and, as I've explained many times before, when you're all each other's trade partners and are all trying the same trick, it simply becomes a race to the bottom.
Source: Markit
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Hmmm...
The fact is that the "fiscal compact" is forcing further retrenchment on an already indebted private sector in much of the periphery, and the inevitable outcome is lower aggregate demand. Without demand, in the absence of debt relief, there's no trade. Without trade, there is no income, and so unemployment rises, industrial production lowers, bad debts and defaults begin to accumulate and inevitably government finances sink. Over the last 6 months, we've seen a swathe of countries attempt to counteract this outcome with even more ambitious fiscal tightening, but as you are surely aware by now, this is akin to strangling someone in an attempt to save them from choking to death. What worries me most about this situation is that Eurozone leaders appear well aware that the fundamental issue is the economic imbalance across the region, yet again they seem completely unable to consider any credible plan to address this. There is no sign that northern creditors are about to loosen fiscal policy in order to bring forwarded consumeristic demand from the populace, in fact the reverse is true, and there is certainly no new capital investment flowing into the periphery in order to support the transformation into those "export machines" they are supposed to become. All we have seen up until now is a crushing of demand in the south, met with fiscal tightening in the north as everyone frets that the economy is slowing while debts continue to rise. I'm simply not sure what else they thought would happen. The current political convulsions over Greece show the European leadership are once again losing their grasp on the situation with politically sanitised "kick the can" solutions up for offer while they hope for god-knows-what to occur to dig them out of the hole they've all dug themselves. Previously this type of failure would inevitably be met with another round of emergency action from the ECB, but with the OMT in place, Draghi looks to be at his limits. That all being the case, 2013 is certainly looking extremely risky in terms of political and social stability in many nations because, as you can see from the data, this just ain't getting any better.
*** MACROBUSINESS / LINK
Argentina CDS spread has blown out to new highs last week. In spite of Argentina's
government driving the nation's economy into the ground, this widening was caused by increased risks of the so-called "technical default" rather than deteriorating economic conditions.
For years, bond holders of Argentina's government debt (issued under NY law), who did not participate in Argentina's restructuring plan from the 2001 default, have been fighting to be treated equally (pro rata) with those who had accepted the restructuring terms. But Argentina has insisted that that those who did not play ball in their restructuring planthe "holdouts" should get nothing. Last week, however, a US judge gave Argentina a Thanksgiving surprise by ruling in favor of the holdouts. That means the holdouts will need to be paid everything that the restructuring participants got over the years, including all the interest.
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Hmmm...
JPMorgan: - Last Wednesday, District Judge Griesa issued his decision in the pari passu ruling ahead of Thanksgiving ... in favor of holdout creditors. Griesa defined a pro rata payment formula that requires full upfront payment by Argentina to holdouts of US$1.3 billion...
3000
Argentina 5-Year Sovereign CDS

2500
November 2011-November 2012
2000
bps
1500
1000
500 Nov 11 Dec 11 Jan 12 Feb 12 Mar12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12
Source: Bloomberg
The judge told Argentina's lawyers that the nation needs to put $1.3 billion into escrow by December 15th, pending the Appeals Courts ruling. If Argentina fails to do so and the country's appeals process in the US is exhausted, the sovereign CDS will be triggered. JPMorgan: - A potential refusal by Argentina to comply with an adverse ruling would threaten "technical" default on 2005 and 2010 restructured claims (92% of total debt defaulted in 2001). This would occur if US courts considered the remedy (pro rata payments) adequate and equitable. Based on the Argentine government's belligerent behavior toward the rest of the world (see discussion), the odds of the $1.3bn showing up in the escrow account next month are not great. That, combined with the Appeals Court (as well as whatever other appeals Argentina can come up withpossibly appealing to the US Supreme Court) agreeing with Judge Griesa, will put the nation into defaultagain. By the way, those who still don't think Argentina's government is acting like thugs toward foreigners, just read this story from the Mail. The market-implied peso exchange rate (the so-called "shadow" exchange ratesee discussion) now puts the peso at 42.3% discount to the official rate as the currency continues to decline. Should the technical default take place, the US will begin freezing the Argentine government's dollar accountswhich will push the shadow exchange rate to new lows.
*** SOBER LOOK / LINK
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It was 1958, my father was still a child, and India was running out of food. That years
wheat crop had slumped by 15 percent, the rice harvest by 12 percent, and prices in the markets were soaring. Far from his village in eastern India, ships loaded with wheat were steaming toward the country, part of Dwight Eisenhowers plan to sell surplus grains, tobacco, and dairy products to friendly countries. All India Radio gave daily updates on the convoys, and the army barricaded ports in Mumbai and Kolkata against the hungry crowds. "It was this very coarse, red wheat," says Narsingh Deo Mishra, a childhood friend of my father's and now a local politician in Auar, their home village. "We were told it was meant for American pigs," says Mishra. "Back then, we weren't any better than American pigs. So we ate it. We ate it all, and we begged for more." My father, Dinesh, grew up during the toughest years in modern India's history, a time of droughts and floods. At 18 he weighed about 40 kilograms (90 pounds). In a photograph taken at the time, his cheeks are sunken, his Adam's apple is prominent, and his eyes bulge from a gaunt skull. As he grew into his teens and early adulthood, however, the Green Revolution took hold: The fields were sown with hybrid seeds and enriched with chemical fertilizers, enabling the country first to feed itself and later to sell its grain on the global markets. India is a generation removed from those "ship-to-mouth" days; fewer than 2 percent of Indians now go without two square meals a day, and far fewer still die of starvation. And yet, in places like Auar, malnutrition persists. The vast majority of Indians, especially villagers, are suspended in nutritional purgatorythey eat enough to fill their stomachs but not enough to stay healthy. In the early 1970s the number of calories the average Indian ate began rolling backward. In 1973 villagers ate just under 2,300 calories a day, according to the National Sample Survey Office, a branch of the Ministry of Statistics and Programme Implementation. By 2010 that number had dropped to about 2,020, compared with the government floor of 2,400 a day to qualify for food aid. The mismatch manifests itself in some of the world's worst health score cards: Half of all children younger than three years old in India weigh too little for their age; 8 in 10 are anemic. During months of reporting on malnutrition in India, I spoke almost daily to my father, who had long since escaped Auar and now runs a national scientific research center in Kolkata, where I grew up. This June I returned by myself to the dusty, hot village of my father's childhood, hoping to understand more. I drove about 800 kilometers (500 miles) southeast from New Delhi to Auar, deep in the heart of Uttar Pradesh state. The local district of Pratapgarh is in the poorest third of the country's 640 districts, according to the government. I'd been to the village beforefirst as a child and again in 2000, when I was getting ready to leave for college in Virginia. My father, who wanted me to remember my family's origins, stood out then from cousins and old friends in his starched white shirt and tailored trousers, no longer comfortable sitting cross-legged in the dust.
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On that visit he pointed out the few reminders from his childhood. There was the elementary school built, according to family legend, with the proceeds from a single gold coin saved by a great-granduncle during years of toil in Burma in the 1920s; and there were the brick additions made to the mud house that belonged to my grandfather. By then the house was falling apart and emptied of family, who were now scattered in cities across India.
*** BLOOMBERG / LINK
Structurally, China is at a huge disadvantage as it accounts for 20% of the world's
population but only 7% of arable land. Compare that with Brazil, which has the reverse of those ratios. What that does for a country like China is to incentivise the adoption of technification. Let's look at their porcine market, which represents 50% of global production and consumption. In China, to slaughter roughly 600 mn pigs per year, which is about six times the demand in the US, they have a breeding herd of about 50 mn animals. In the US, the comparable number is only about 6 mn, so there is a huge productivity lag. Owing to its structural disadvantages, China is much more focused on increasing efficiency. For that, it needs to accelerate technification. So, we're seeing a whole series of government incentives at a national level, a provincial level and a local level, focusing on the need to move toward integrated pork production because that's a key way to optimise total economics, both in terms of pig production, slaughtering, processing and also actually taking the pork out into the marketplace.
Source: FAO
The Chinese government is important as a customer to us because of its clarity of vision on food security. It has seen the Arab Spring, and it is cognisant of the strong socio-political implications of higher food prices. Pork prices could account for about 25% of the CPI, so it knows it can be a major issue. It's because of all these pressures that China is more focused on responding to the food challenge. It's a sort of a burning platform there.
27 NOVEMBER 2012 29
Hmmm...
... Take milk production in China and India. China is basically trying to leapfrog and avoid smallscale farming by adopting a US model. In the US, you tend to have very large herds. Today about 30% of US milk production is from herds of 2,000 plus, and we expect that to reach 60% within the next five years. Today in China, there are already several hundred dairy herds of over 1,000. However, in India, there'll be less than 50. The average dairy herd size is closer to five, so it's very fragmented. So the reality is that a place like China, because of government policies, subsidies and a much more demanding, focused approach to becoming self-sufficient, has a much greater ability to respond to a supply challenge rapidly. The problem for China, and to a lesser extent India, however one defines it, is that it will need increasingly more food, processed with ever greater efficiency for the current conservative regime to be able to preserve the status quo, all else equal. And for a suddenly very food trade deficit-vulnerable China, it means that the biggest winners may be Brazil, the US and Canada. Oh, and Africa. The only question is how China will adapt in a new world in which it finds itself in an odd position: a competitive trade disadvantage, especially its primary nemesis: the USA.
*** KARIM BITAR (VIA ZEROHEDGE) / LINK
States and banks have made a deal with the devil. Banks buy the sovereign bonds
needed to prop states up in the tacit understanding that the states will bail them out in a pinch. But experts warn that this symbiotic arrangement might be putting the entire financial system at risk. When he presented his proposals for taming banks in late September, Peer Steinbrck was once again spoiling for a fight. The Social Democratic candidate for the Chancellery in next year's general election railed against the chase for short-term returns and excesses within the sector and harshly criticized the "market-conforming democracy" in which politics and people's lives had become mere playthings of the financial markets. Steinbrck's speech lasted half an hour, or a minute for each of the pages of a document he had prepared on the same issue. The paper lists a whole series of suggested regulations, most of which seem entirely sensible. Most interesting, however, is what's missing from the paperand what has thus far been absent from almost all of the proposals of other financial reformers: the disastrous degree to which countries are now dependent on banks. As European countries have dug themselves deeper and deeper into debt in recent years, there has been a dramatic increase in this dependence. Governments are addicted to borrowed moneyand banks meet this need by purchasing sovereign bonds. As an unspoken reward, the banks expect nothing less than a guarantee of their own survival. Should a bank run the risk of collapse, the state is expected to use taxpayer money to prop it up. This government-bank bargain is somewhat of a Faustian pact: States need the help of credit institutions if they want to take on more debt. But, in doing so, they place their fate in the hands of the financial markets. Indeed, the European Central Bank (ECB) estimates that European banks now hold some 1.6 trillion ($2.1 trillion) in sovereign bonds.
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Hmmm...
What's happening in Greece right now provides a dramatic example of how a state can make itself dependent on banks. The country is de facto insolvent and can no longer secure any loans on the financial markets. Nevertheless, it continues to be able to secure fresh funds by issuing short-term bonds, primarily to Greek banks, as it has recently to make up for a lack of liquidity as euro-zone member states continue to delay the release of the next tranche of emergency aid. Greek banks, for their part, finance their ailing country not only because the bonds have high yields, but also because they can deposit the bonds as collateral at Greece's central bank in return for fresh cash infusions of their own.
Source: Der Spiegel
The books of many Spanish and Italian banks are also brimming with sovereign bonds issued by their home countries. They have taken out huge amounts of cheap loans at the ECB and reinvested most of the money in sovereign bonds. The business logic behind this strategy is clear: While the ECB only charges 1% interest on loans, sovereign bonds have yields up to 6%. Such returns make great sense for the banks in the short term but present a massive problem in the medium term as they enter more and more risky assets into their ledgers. "It's important for the institutes to diversify their assets," says Hans-Peter Burghof, professor of banking at the University of Hohenheim, in southwestern Germany. Burghof also believes that their massive holdings in sovereign bonds are putting the entire financial sector at risk. "If one wants a stable banking system," he concludes, "one cannot abuse it as a vehicle for state financing."
*** DER SPIEGEL / LINK
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Hmmm...
Obama won reelection despite a high unemployment rate, declining average
incomes and skyrocketing government debt because voters blamed his predecessor for the economic problems and didn't trust his opponent, Mitt Romney. Even though the economy has improved somewhat in the past three years, the United States' situation remains dire: the poverty rate is at a historic high of 15 percent; middle class income is back to the 1995 level and wealth to 1983; the unemployed who find jobs end up with significantly lower pay than at their prior employment; and the combined local and federal government deficit at 9.5 percent of GDP and debt stock at 120 percent of GDP. The Republican Party put up a strange candidate to run against Obama. Romney is a former private equity person. So soon after a financial crisis caused by people like him, it seemed an odd choice, even though he was not one of the crooks responsible. His background just didn't pass the smell test. The contest was so close towards the end because Obama screwed up in the first debate. The role of the government was the issue during the contest. The Republicans campaigned on shrinking the government, the Democrats on a caring government. The election result, however, didn't give a clear verdict on the issue. On the surface, the election kept the status quo: the Democrats kept the White House and Senate, the Republicans the House. The undercurrents suggest a country much more divided than before. Romney won the traditional Republican states that are poorer than the national average and are net beneficiaries of federal tax dollars. Voting for a smaller government is hardly in their best interest. Also, he won among the older population who are more dependent on Medicare and Social Security. Voting for a smaller government is hardly in their interest, either. This election was more about race than anything else. Romney won 70 percent of the white vote. Obama won over 90 percent of the black vote and over 70 percent of the Hispanic and Asian vote. The tilt of the Asian vote toward Obama demonstrates the importance of race in this election. In 1992, Bill Clinton won only 31 percent of the Asian vote. Asian-Americans have relatively high incomes and are least dependent on government help. They should be a natural constituency of small-government Republicans. That they are not shows that the raison d'tre of the Republican Party is not economics anymore. The party is a coalition of business interests who want low taxes and fewer regulations and evangelical Christian voters. The latter block delivered all states Romney won. It shows what's important in the Republican Party. As demography tilts further toward the Obama coalition, the Republican Party can compete by becoming more like the Democrats or shift to extremist tactics. I'm afraid the latter is more likely.
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Hmmm...
The American democratic system is designed to slow, but not prevent change. In the 2012 general election, the Democrats actually won more votes than the Republicans in the elections for the House. But the Republicans retain a comfortable majority there. The reason is that the seats are contested one at a time within a district. The majority party at the state level can redraw the district to make the election more favorable to it. In theory, 26 percent of the voters could elect a majority in the congress or a president. Of course, it is statistically difficult. But, the system gives incumbents an advantage to overcome a majority. It prevents a temporary and irrational flare up in popular sentiment to change the political system and damage the country. If the popular sentiment is lasting, the system eventually conforms to the will of the people.
*** ANDY XIE / LINK
Catalonia has delivered a sweeping mandate to political parties pledging to hold a

referendum on independence in elections that place the northern Spanish region on a collision course with Madrid. In a result likely to heap uncertainty on the government of Mariano Rajoy, Spain's prime minister, as he considers requesting a European bailout, political parties favouring an independence vote won a majority in the Catalan regional parliament, according to the results. However, the ruling Convergncia i Uni lost seats, while more radical pro-independence parties gained ground, with Esquerra Republicana, a left-wing separatist party becoming the second largest party in the Catalan parliament for the first time. In a vote billed as "the most decisive elections in the history of Catalonia" by Artur Mas, the region's president, pro-referendum parties won 87 of the Catalan parliament's 135 seats. Of these, the CiU party slipped from 62 to 50 seats, while the ER surged from 10 to 21, and the green ICV rose from 10 to 13. The CUP, a new independence party, won three seats. Spain's ruling Popular Party increased its number of seats by one to 19, while the Catalan socialist party fell sharply from 28 to 20. Ciutadans, an anti-separatist party, rose from three to nine seats. Following weeks of intense debate about Catalonia's future relationship with Spain, turnout was 69.5 per cent, the highest for a Catalan regional election in nearly 30 years. The vote comes amid pressure from various regions around Europe for more independence, including proposals for a referendum on the issue in Scotland in 2014. Spain's central government has said any move to push ahead with a referendum on independence for Catalonia, which has an economy the size of Portugal's and makes up about a fifth of Spanish output, would be illegal and against the Spanish constitution.
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Hmmm...
"What is at stake is much more than election results; what is at stake is our future, our ability to live harmoniously together," said Alicia Snchez-Camacho, leader of Mr Rajoy's Popular Party in Catalonia ahead of the vote. The Catalan president, whose demands that Catalonia is granted greater control over its tax revenues were rejected by Mr Rajoy earlier this year, has maintained that he will ignore any attempts by Madrid to block independence. Catalonia has built up a debt pile of 42bn, the largest of all of Spain's 17 regions, and is currently locked out of international capital markets. Earlier this year the region was forced to request an emergency 5bn credit line from Spain's central government to avoid defaulting on payments.
*** FT / LINK
Critics have labeled it a Reichstag fire moment, a reference to when Hitler
consolidated power in Germany. Admirers describe it as a brave and necessary, albeit temporary, move to prevent a drift towards chaos. In either case Muhammad Morsi, Egypt's recently elected president, has pitched his country into a crisis as dire as any since the uprising in January 2011 that ended six decades of military-backed dictatorship. Seeking to break a deadlock with secular opponents, he issued a shock decree on November 22nd granting himself sweeping new powers. The move has left Egypt starkly and dangerously polarised. Whether Mr Morsi succeeds, and whether this turns out well or disastrously for Egypt, remains to be seen. Mr Morsi has had a rough ride since his wafer-thin election victory last June. The president's Freedom and Justice Party, a snazzier-clothed clone of the dowdy Muslim Brotherhood to which he owes his real allegiance, had pumped his candidacy with promises of sweeping improvements to government services during his first hundred days. This was to be followed by the launch of a so-called Renaissance Project, touted as a grand design formulated by Brotherhood experts to yank Egypt into prosperity. Yet it took the gruff, folksy Mr Morsi six weeks just to name a cabinet, which has since been widely dismissed as lame, bland and ineffective. Not only has there been no discernible uplift to living standards. Mr Morsi's brief administration has been plagued by reminders of creaking government such as power cuts, worse-than-ever traffic jams, accumulating piles of rubbish, and public sector strikes including one by doctors protesting appalling hospital conditions. A hideous accident at a level crossing last week, when a speeding train ploughed into a bus illegally overstuffed with more than 60 schoolboys on their way to a weekend Koran-reading lesson, proved a sickening reminder of just what a shoddy state Egypt is in. Mr Morsi enjoyed a moment of glory in August when he abruptly dismissed the powerful generals, appointed under the fallen regime of Hosni Mubarak, who had commanded the unsteady transition leading to his own election.
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Hmmm...
The purge seemed to augur a real and long-delayed switch to full civilian rule. Yet it soon transpired that the exiting generals had left by agreement, following a rumoured commitment by Mr Morsi not to trespass too deeply into such "sovereign" matters as internal security, intelligence, defence or foreign policy. Egypt's president seems to have stuck to his word, avoiding criticism of the police, who remain deeply tainted by a culture of torture, corruption and impunity, while assiduously attending every possible military pageant or parade. But Mr Morsi has clashed repeatedly with another part of Egypt's "deep state"the judiciary and public prosecution service. It was Egypt's high courts, still packed with Mubarak-era appointees, that infuriated the Brotherhood in June by ruling to disband the post-revolutionary parliament, three quarters of whose seats had been won by Islamists only six months earlier. Having last spring dissolved one constituent assembly, a body chosen by the parliament and tasked with drafting a new constitution, but which secularists said the Brothers had packed with Islamists, the courts have again been threatening to dissolve a second, also heavily Islamist assembly. This was meant to complete its draft constitution in December, but the resignation en masse of the third of its members who happen not to be Muslim Brothers or fellow-travellers has called its legitimacy into question. In October Mr Morsi faced humiliation when the country's judges closed ranks to block him from firing Egypt's public prosecutor. Yet another Mubarak appointee, the powerful attorneygeneral had dismayed many Egyptians by mysteriously failing to secure any serious convictions for the killings, by Mr Mubarak's police, of more than 800 people during Egypt's 2011 revolution, and of dozens more in post-revolutionary violence. Still, antipathy to the Brotherhood runs so deep that even hardened revolutionaries leapt to his defence against the president. Forced to reinstate the prosecutor, Mr Morsi looked weak and ill-advised. In what appeared to be another poorly-judged move, Mr Morsi passed up an opportunity last week to soothe relations with Egypt's large Coptic Christian minority. Battered for a decade by nasty sectarian attacks, and understandably nervous at seeing Islamists increasingly empowered, Egyptian Christians were puzzled and disappointed by the president's failure to accept an invitation to attend the crowning of the new Coptic pope, Tawadros II. His apparent disdain for minority feelings added to a growing sense that despite posing as an impartial leader, Mr Morsi instinctively embodies the Brotherhood's attitude that it is they, and their version of Islam, that represents the "true" Egypt..
*** ECONOMIST / LINK
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Hmmm...
Charts That Make You Go Hmmm
Source: UK Guardian
The Spanish region
of Catalonia is going to be somewhere readers will want to familiarize themselves with in coming weeks as important elections take placenot only its whereabouts but also the history of its fractious relationship with the rest of Spain. This corner of the country with its desire for independence could well provide the spark that lights an already smouldering tinder box. Click HERE to view the full interactive graphic.
Meanwhile, CLSA's Russell Napier
this week published what he calls "The Most Important Chart in the World," which shows the year-on-year growth in China's foreign exchange reserves: "It is the most important chart in the world. The growth in Chinese reserves has determined all the key developments in financial markets in the last two decades. It printed lots of currency and artificially depressed the US yield curve. It has been the cornerstone of global growth, and now it's over."
*** VIA ZEROHEDGE / LINK
27 NOVEMBER 2012
36
Hmmm...
Source: CLSA/Zerohedge
The big news today is Freddie Mac's Weekly Primary Mortgage Market Survey. The 30year fixed has set another all-time low, now at 3.31 percent. Here is a snapshot of selected yields and the 30-year fixed mortgage starting shortly before the Fed announced Operation Twist.
Source: Doug Short
27 NOVEMBER 2012
37
Hmmm...
A box of ten Twinkies typically sells for around $5 in American supermarketsbut that was
before its maker, Hostess Brands, began closing its bakeries and liquidating its business (as an article in this week's issue explains). Yet consumers in search of revolting cream-filled sponge cakes can still buy them from eBay for anything ranging from 40 cents to $100,000 apiece.
The mean price on offer is around $2,000 (though we don't know how many have actually been sold or at what price), while the modeie, the most common price on offeris $3 (see chart). Although some sellers are using the limited supply as an opportunity to raise money for charity, the majority are hoping to profit from the iconic American brands collapse. For those who can not live without the golden cakes, eBay also lists Twinkies "bake sets" for as little as $30; together with the recipe for $1.49, consumers can simply bake their own. With such outpouring of affection, the "Twinkie" brand (along with Hostess' other food-like snacks) might yet find a buyer.
*** ECONOMIST / LINK
Source: Economist
With last Sunday's elections approaching, the desire for an independent Catalonia had
been soaring as Spain's problems deteriorate seemingly daily. As a microcosm for what to expect when things get really tough in Europe, this was a highly illustrative situation: (Soberlook): This desire for independence is a fairly new phenomenon in Catalonia. Being the wealthier region, Catalonia's citizens think that they are being asked to bear disproportionate burden of the nation's high taxes.
27 NOVEMBER 2012
38
Hmmm...
Yes, folks, apply that same logic to Europe, only substitute Germany as the unhappy "wealthy" region, and you see why the entire project is doomed. If Spaniards don't want to pick up the tab for their own countrymen, it's hard to understand why Germans will be happy to do likewise for the citizens of another country.
Source: Credit Suisse
27 NOVEMBER 2012
39
Hmmm...
Words That Make You Go Hmmm...

Hinde Capital's Ben
Davies is always worth listening to, and this week is no exception as he chats with Eric King about Japan's problems and the likely course of action to be taken in the land of the Rising Sun as well as the similarities amongst the other central banks and the wider implications their actions are likely to have. CLICK TO LISTEN
Why are TV
anchors so fixated on the price of gold? Rob McEwen talks to Bloomberg about the barriers presenting themselves to miners across the globe and, as is the norm on mainstream shows, is badgered for a price forecast. Ignore the price and focus on the market dynamics. Gold is a currency that is getting harder to produce and should be evaluated as such... CLICK TO WATCH
Jim Rickards' book Currency Wars
is a terrific read and here, in this fascinating video, he lays out a simulation of his fears as to what an extreme currency war scenario could look like. It's interesting, frightening and polarizing. Many will discount it as too far-fetched. Me? Well, I always used to think that the US 10-year trading at 1% was impossible... CLICK TO WATCH
27 NOVEMBER 2012
40
Hmmm...
And finally...
CLICK HERE TO VIEW PICTURES
A lone apartment
building stands in the middle of a newly built Chinese road after an elderly couple refused to relocate. Luo Baogen and his wife insist on living in the half-demolished building in the city of Wenling, in Zhejiang province, China, because they believe that the relocation compensation offered by the government is not enough. Now the only building left standing, the five-storey block is a strange sight as cars drive around it while the couple remain living inside. Who said there was no room to take on the State in China?
Hmmm...
27 NOVEMBER 2012 41
Hmmm...
Grant Williams
Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singaporea hedge fund running over $250 million of largely partners' capital across multiple strategies. The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between us and our investors. In Q4 2012, we will be launching the Vulpes Agricultural Land Investment Company (VALIC), a globally diversified agricultural land vehicle that will provide truly diversified exposure to the agricultural sector through a global portfolio of physical farmland assets. Grant has 26 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm... since 2009. For more information on Vulpes, please visit www.vulpesinvest.com
*******
Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH California Investment Conference 2012 Presentation: "Simplicity": Part I : Part II 2012 Fall Presentation: "Extraordinary Popular Delusions & The Madness of Markets" 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.
27 NOVEMBER 2012
42
Hmmm...
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Hmmm...

THINGS THAT MAKE YOU GO

Things That Make You Go Hmmm...

One would have

US Treasury Yield Curves vs Public Debt Outstanding

US Federal Reserve Holdings of US Treasury Securities

Source: Global Financial Data

O cial Central Bank Gold Holdings vs. Spot Gold Price

1700 1600 1500 1400 1300 1200

1100 1000 900 800 700

Source: IMF, Bloomberg

Source: Sharelynx 27 NOVEMBER 2012 15

Change - 40.2% - 83.2% - 37.4% - 39.0% - 34.1%

Currency Thailand Indonesia Philippines Malaysia South Korea

Change - 40.0% - 83.4% - 37.3% - 38.9% - 34.2%

Government Debt-to-GDP Levels

Until next time...

More Purchasing Manufacturers Index (PMI ) data overnight. Comments from

Argentina 5-Year Sovereign CDS

November 2011-November 2012

Structurally, China is at a huge disadvantage as it accounts for 20% of the world's

Source: Der Spiegel

Obama won reelection despite a high unemployment rate, declining average

Catalonia has delivered a sweeping mandate to political parties pledging to hold a

Critics have labeled it a Reichstag fire moment, a reference to when Hitler

Charts That Make You Go Hmmm

The Spanish region

Meanwhile, CLSA's Russell Napier

Source: Doug Short

Source: Credit Suisse

Words That Make You Go Hmmm...

Jim Rickards' book Currency Wars

CLICK HERE TO VIEW PICTURES

Unauthorized Disclosure Prohibited

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