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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

29 JULY 2013

The Candyman

Who can take tomorrow Dip it in a dream Separate the sorrow And collect up all the cream? The candyman, the candyman can The candyman can 'cause he mixes it with love And makes the world taste good. And the world tastes good 'cause the candyman thinks it should. "The Candyman", Willy Wonka and the Chocolate Factory

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
When Youre Rattled by Collateral, Do the Fed Taper Talk .....................................19 IMF Fears Fed Tapering Could "Reignite" Euro Debt Crisis .......................................21 Only Hope for Italy Is Bankruptcy ...................................................................22 When Giants Slow Down ..............................................................................24 Questions as Developers Spend Big on Land Deals ...............................................25 World's Tallest Skyscraper Remains a Hole in Chinese Ground .................................27 Greek Public Broadcaster Goes Underground .....................................................28 Is the Emerging Market Boom Over? ................................................................29 This Is the Most Feeble Recovery in Our History ..................................................31

CHARTS THAT MAKE YOU GO HMMM... ..................................................33 WORDS THAT MAKE YOU GO HMMM... ...................................................36 AND FINALLY ................................................................................37

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Things That Make You Go Hmmm...

In 1964, Roald Dahl penned what is arguably his most famous book. It tells the story of a poor boy who, thanks to the discovery of a golden ticket concealed in a bar of chocolate, wins his way into a magical factory run by a mysterious oddball named Willy Wonka. The book, Charlie and the Chocolate Factory, was a smash hit; and inevitably the book was turned into a screenplay, which spawned a 1971 movie in which the word Charlie was replaced in the title with the name of the character the movie's producers felt was far more important to the narrative: Willy Wonka. And so it was that one of cinema's great transformations from written page to silver screen took place, and in the process one of its finest characters was born. Gene Wilder's Willy Wonka is the only portrayal officially recognised and endorsed by Things That Make You Go Hmmm.... Accept no imitations. As much respect and admiration as I have for the extraordinary talents of Johnny Depp, just ... no, sorry. There is only one Willy Wonka, and it's Gene Wilder. Now that I've clarified my position on that particular issue, let's proceed. I am sure that, somehow, there may be readers who haven't either read the book OR seen the movie; and so for them I include a short synopsis of the story. Please be apprised that it contains spoilers that, well, give away the entire plot and the ending, to be honest. If you have read the book or seen the movie, it may be worth reacquainting yourself with the plot before we dive in any deeper: Mr. Willy Wonka, the eccentric owner of the greatest chocolate factory in the world, has decided to open the doors of his factory to five lucky children and their parents. In order to choose who will enter the factory, Mr. Wonka devises a plan to hide five golden tickets beneath the wrappers of his famous chocolate bars. The search for the five golden tickets is fast and furious.... Charlie Bucket, the unsuspecting hero of the book, defies all odds in claiming the fifth and final ticket. A poor but virtuous boy, Charlie lives in a tiny house with his parents, Mr. and Mrs. Bucket, and all four of his grandparents. In the factory, Charlie and Grandpa Joe marvel at the unbelievable sights, sounds, and especially smells of the factory. Whereas they are grateful toward and respectful of Mr. Wonka and his factory, the other four children succumb to their own character flaws. Accordingly, they are ejected from the factory in mysterious and painful fashions.

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During each childs fiasco, Mr. Wonka alienates the parents with his nonchalant reaction to the childs seeming demise. He remains steadfast in his belief that everything will work out in the end.... After each childs trial, the Oompa-Loompas beat drums and sing a moralizing song about the downfalls of greedy, spoiled children. When only Charlie remains, Willy Wonka turns to him and congratulates him for winning. The entire day has been another contest, the prize for which is the entire chocolate factory, which Charlie has just won. Charlie, Grandpa Joe, and Mr. Wonka enter a great glass elevator, which explodes through the roof of the factory. (Source: iSL Collective) In the movie's first act, Bill, the owner of the sweetshop, sings a song written by Anthony Newly and Leslie Bricusse, called "The Candyman", which praises the wonderful world created by Wonka and espouses the pure joy of living in a place where everything is deliciously sweet; miracles, dreams, and rainbows are ubiquitous; and any sorrow is separated and discarded in favour (yes, there's a u in favour deal with it!) of cream ... pure cream. As Bill hands out free candy to a group of wide-eyed kids, you can see in their eyes the pure joy that only comes of living in a world where everything is wonderful and nothing bad ever happens. Ladies and gentlemen, I give you ... the S&P 500.
1750

S&P500 July 2012-July 2013

1650

1550

1450

1350

1250 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Source: Bloomberg

Yes, the US equity markets have bought firmly into the idea that everything is right in the world and that nothing will ever be allowed to go wrong. A prime example of this attitude emerged last Thursday, when we were greeted with two irreconcilable headlines on the same day:

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Detroit declares bankruptcy, becoming largest city in U.S. history to go belly up

That was courtesy of the New York Post, and the opening paragraph in true New York Post style went straight to the meat of the story: (NY Post): Detroit on Thursday became the largest city in U.S. history to file for bankruptcy, as the state-appointed emergency manager filed for Chapter 9 protection. In paragraph 10 of the article, the Post went on to disclose the size of the hole on Detroit's balance sheet: Detroit's budget deficit is believed to be more than $380 million. [State-appointed bankruptcy expert Kevin] Orr has said long-term debt was more than $14 billion and could be between $17 billion and $20 billion. Wait ... what? "... more than $14 billion and could be between $17 billion and $20 billion." Sadly, this is the world we live in where a state-appointed bankruptcy expert talks about a possible discrepancy of $6 billion in a city's accounts and the figure is relegated to paragraph 10. Unicorns and rainbows. (Jefferson County, AL, the biggest previous municipal bankruptcy, totaled only $4 billion.) Meanwhile, gracing Reuters on the same day was this little beauty:

Dow, S&P 500 end at all-time highs on earnings, Bernanke

The first paragraph of that story read as follows: (Reuters): The Dow and the S&P 500 closed at record highs on Thursday after Morgan Stanley and others reported better-than-expected earnings and Federal Reserve Chairman Ben Bernanke's comments further reassured markets. A little higher up in the story than the Detroit balance sheet shortfall in the New York Post piece (in paragraph 6, for those of you keeping score at home) was this expansion on the headline:

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(Reuters): Bernanke, speaking before the Senate banking committee, reiterated comments he made on Wednesday to the House Financial Services Committee. He stressed that the timeline for winding down the Fed's stimulus program was not set in stone. "We got no negative surprises from the Fed chairman today, so the market liked that," said Bucky Hellwig, senior vice president of BB&T Wealth Management in Birmingham, Alabama. Ladies and gentlemen, I give you Ben Bernanke the Candyman. (Or perhaps that should be the Bendyman? Quite suitable, given the extent of his flexibility, don't you think?)

Source: Warner Brothers/Zimbio

As Bucky Hellwig points out, the market likes it when there are no negative surprises from the Fed chairman the corollary of which is that the market HATES it when the Candyman threatens to stop with the sugar last month's Taper Tantrum being the obvious and most recent example. But in its adherence to whatever is being handed out by Bernanke, the market is failing to pay attention to signals that would ordinarily call for caution. That is the danger of getting kids hooked on candy: rationality tends to fall by the wayside and behaviour becomes harder and harder to understand until, ultimately, a sugar crash occurs: (Wikipedia): A sugar crash or glucose crash is the term used in American popular culture to refer to a supposed sense of fatigue after consuming a large quantity of carbohydrates, also known as reactive hypoglycemia. It is variously described as a sense of tiredness, lethargy, irritation, or hangover, although the effects can be less if one has undertaken a lot of physical activity within the next few hours after consumption.
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The symptoms of a sugar crash are of interest in the context of this discussion: (Wikipedia): Symptoms associated with sugar crashes are similar to those experienced during periods of hypoglycemia, though not as severe ... Confusion and difficulty concentrating on daily tasks Anxiety Light-headedness Fatigue Headache Irritability The majority of these symptoms, often correlated with feelings of hunger, mimic the effect of inadequate sugar intake as the biology of a crash is similar in itself to the bodys response to low blood sugar levels following periods of glucose deficiency. Hmmm... OK... now that we know what a sugar crash looks like, let's file that information safely away under "To Be Continued..." and get back to Willy Wonka and the Chocolate Factory, and in particular to the moment when the five eager children who have found the golden tickets get their first glimpse inside the magical wonderland created by Willy Wonka, where everything is both edible and almost painfully sweet. Huge toadstools are made of cream, trees bear candy canes by the hundreds, gigantic lollipops sprout from the ground, and a waterfall of pure chocolate cascades into a chocolate river that bisects Wonka's wondrous world. As the kids go hog-wild, falling over themselves to gorge on all the free candy made available by their generous, if sartorially challenged, benefactor, Wonka begins to sing: Come with me And you'll be In a world of Pure imagination Take a look And you'll see Into your imagination We'll begin With a spin Traveling in The world of my creation What we'll see Will defy Explanation

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If you want to view paradise Simply look around and view it Anything you want to, do it Wanna change the world? There's nothing to it There is no Life I know To compare with Pure imagination Living there You'll be free If you truly wish to be Wonka's message naturally finds favour (yep, still with the u) with the kids because, let's face it, they're not really listening to the rantings of the strange man with the crazy hair in the purple suit; all they see is free candy, and that's all they care about. The scene reminds me of a cartoon by one of the greatest cartoonists of the modern era, and one of my idols, Gary Larson. I first saw these panels whilst living in Japan in the late 1980s (the Far Side cartoon in the Japan Times was invariably a highlight in the days after the Nikkei bubble burst!), and they have stayed with me ever since. (Incidentally, one of the finest birthday gifts I ever received was The Complete Far Side 1980 1994. If you are a fan or know one with an upcoming birthday it's spectacular.) This need to suspend reality and venture into a world of pure imagination is becoming ever more necessary as the S&P scores a series of new highs against a backdrop of sobering indicators and events such as the biggest municipal bankruptcy in US history. The market, like Larson's "Ginger", hears just the words it is interested in. Words like stimulus and zero percent for the foreseeable future. To put the Detroit situation into proper perspective, Tyler Durden and the team at Zerohedge have published a list of 25 facts about Detroit that make clear the momentous proportions of the demise of what was once America's fourth-largest city. To pick a few beauties at random:

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At this point, the city of Detroit owes money to more than 100,000 creditors. Detroit is facing $20 billion in debt and unfunded liabilities. That breaks down to more than $25,000 per resident. At this point, there are approximately 78,000 abandoned homes in the city. About one-third of Detroit's 140 square miles is either vacant or derelict. But, in our world of pure imagination, the S&P 500 shrugged off Detroit to make another new high, despite warnings about possible future defaults: (CNBC): "Everyone will say, 'Oh well, it's Detroit. I thought it was already in bankruptcy,'" said Michigan State University economist Eric Scorsone. "But Detroit is not unique. It's the same in Chicago and New York and San Diego and San Jose. It's a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems.

"Anyone who lives within their means suffers from a lack of imagination." Oscar Wilde
As the chart below so clearly demonstrates, the S&P 500 has decided that the assets on the Fed's balance sheet are a far better indicator of the health of the economy than such outdated things as, oh, I don't know ... revenues, maybe? Sales? Growth? And why not; the sugar is still being doled out left and right, and investors can gorge with abandon.

Source: ZeroHedge/@not_jim_cramer

But it's not just the S&P 500 living in a world of pure imagination.

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Everywhere you look there are signs of a severe disconnect between the real world and the world of free candy and everflowing chocolate rivers that investors are being urged to believe in. Take Europe please. (Hat tip, Henny "I'm here all week" Youngman)

"Everything you can imagine is real." Pablo Picasso

Source: ECB/Soc Gen

(Zerohedge): Presenting Europe's annual change in M3, alongside the far more important bank lending to the Euro area private sector. It is the latter which just dipped at a record low, indicating once more that Europe's monetary transmission mechanism is not only clogged up (a rising M3 should have a favorable impact here) but hopelessly broken. In other words, it is the brown line in the chart [above] that is ... giving the ECB chairman nightmares, and is leading to such secondary effects as record high unemployment and negative GDP growth virtually across the entire Eurozone.

"Reality leaves a lot to the imagination." John Lennon

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Yes, the monetary transmission mechanism in Europe remains broken despite the trillions spent in trying to free up the blockages in the system. No matter how strong the financial encouragement given to European banks, their desire (and, more importantly, their ability) to lend remains impaired; but you would never know it from behaviour of the euro, which, as you can see from the first chart below (courtesy of Greg Weldon), seems set to break through overhead resistance and strengthen further. That development, perversely, is exactly what Mario Draghi doesn't want and Europe cannot possibly allow to happen. (For a free trial of Greg's phenomenal, and to my mind indispensable, work, click HERE.)

Source: Greg Weldon

Ordinarily, with the region's troubled currency going precisely where it can't be allowed to go and creating significant headwinds to corporate profit growth, European equity markets would of course be under pressure. The following chart demonstrates that far from suffering mightily under pressure, the DAX and CAC40 have entered the realm of pure imagination.
German DAX Index vs French CAC40 Index
9000

2012-2013

4200

3900 8000

3600

7000

CAC 40 Index DAX Index

3300

6000 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

3000

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"You can't depend on your eyes when your imagination is out of focus." Mark Twain
The folks at Zerohedge have been on a tear lately, and this weekend they showed us yet another chart which, against the backdrop of all-time equity market highs, highlights the fantasyland created by the Candymen of the central banks: US GDP revisions.

Source: Zerohedge

(Zerohedge): There appears to be a level of optimism priced into every macro-economic forecast. Whether this is simply mean-reverting models or a systematic need to justify an ever-increasing equity market is unclear, but over the past few years the consensus GDP growth forecast has fallen by around 0.7 percentage points over the year before its final release (as hope turns to reality). So just how bad is the current environment? With the latest update of Q2 2013's GDP consensus forecast now at 1.0%, the last year has seen the consensus drop a stunning 2.0 percentage points (almost triple the average loss of hope). Of course, as we noted here, we'll make it all up in H2 2013 (even as CEO after CEO adjust down their outlooks). In the real world, forward-looking predictions of weakening GDP would be akin to what Bob Geldof described as "clanging chimes of doom" and send equity investors scurrying for the safety of the bond market before slowing growth showed up in corporate profits; but unfortunately (see earlier comments on the Taper Tantrum), as long as the Sugar Daddy is still in control, the real world can take a hike, and we'll all live in the Funny Money Factory.

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"Disneyland will never be completed. It will continue to grow as long as there is imagination left in the world." Walt Disney
If investors did rush into the bond market, they would discover another world where traditional safe-haven assets are priced at all-time highs, on the pure fantasy of low rates forever.

"Logic will get you from A to Z; imagination will get you everywhere." Albert Einstein
The Candyman of the Federal Reserve has promised low rates until unemployment drops to 6.5% (kinda), and since he made that linkage explicit, the rate has been falling fairly consistently:
US Unemployment Rate
1998-2013
10

%
6

2 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: BLS

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But, as everybody now surely realizes (but I will show again), the labor force participation rate has been falling in similar fashion, which adds an element of fantasy to the headline number:
70 69 68 67 66 65 64

US Labor Force Participation Rate

1948-2013

63 62 61 60 59 58 57 56 55 1948 1958 1968 1978 1988 1998 2008 2013

Source: BLS

Buried elsewhere in the reality of the unemployment statistics are such irritating details as the percentage of the labor force who have bachelor's degrees and full-time jobs:
82.0 81.3 80.6 79.9

US Employment Participation (%) Bachelors Degree 1992 - 2013

79.2 78.5 77.8 77.1 76.4 75.7 75.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: BLS

Oops! Never mind.

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There are no rules of architecture for a castle in the clouds. G.K. Chesterton
Everywhere you look (as long as you are prepared TO look), the differences between the evidence surrounding us every day and the vision of a perfect world being generated by the Candymen are so blindingly apparent that it makes the willingness to believe in the fantasy simply ... fantastic (and I mean that in the literal sense). Slowly, surely, despite official headlines that suggest strength is returning and economies are about to embark on a miraculous growth spurt, commentators are looking out through the bubble walls of the fantasy and into the harsh light of reality. What they are finding isn't pretty. Last week, as headlines suggested the UK economy was nothing short of "robust" after a surprise 0.6% increase in GDP in the second quarter, Liam Halligan pointed out both the fantasy (UK Daily Telegraph): Among our political classes, this latest GDP data is widely viewed as "game-changing". The Tories, while not wanting to tempt fate by claiming to have spotted the "green shoots of recovery", are nevertheless cock-a-hoop. The economy is "on the mend", says George Osborne, the newly emboldened Chancellor. On the surface, at least, that seems plausible. Between March and June, the economy grew at its fastest rate since the third quarter of 2012, the time of the London Olympics. Aside from that one growth boost last summer, the latest 0.6pc expansion represents the quickest growth since the second quarter of 2010. The GDP fine-print also shows that all four main UK sectors services, manufacturing, construction and agriculture grew over the last three months. Again, that hasnt happened since 2010. So nobody could credibly argue these latest statistics arent good news. and the reality: Despite that, it would be foolish to suggest that the British economy is out of the woods, or that a sustainable recovery is now probable or even likely. Grave economic dangers lurk on the global horizon not least in the shape of the eurozone bond market and the oil price. Whats more, the growth were now seeing in Britain is, Im sorry to say, largely illusory the result of still massive government borrowing and ongoing money printing, which in turn has kept headline interest rates artificially low. ... consider that we remain locked in the most feeble economic recovery in our history. While other leading Western nations like Germany and the US have more than recovered the GDP losses sustained during the sub-prime crisis, the British economy, even after this latest growth flicker, is still 3.3pc smaller than at the time of its pre-Lehman peak.

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Beyond the headline numbers, real wages continue to shrink as inflation which has been above the Bank of Englands 2pc target for more than three and a half years now, despite extremely weak growth continues to erode purchasing power. Including population growth, British GDP per head is actually some 7pc below its 2007 peak. There has been no sign, either, of the "rebalancing" away from consumption and towards exports and investment that the Coalition said it wanted. Back in 2010, Osborne declared his confidence in "a march of the makers", claiming that manufacturers would power growth via a surge in exports. It hasnt happened. This is anemic growth (from a historical perspective), coated in a nice, sugary shell. But there's a nasty twist in the tale, folks. I'm afraid that the creation of today's world of pure imagination was made necessary not by the 2008 crisis, as many will argue, but by another fantasy that has perpetuated itself for almost 40 years and convinced just about everyone that it is a beautiful, blissful, incorruptible reality. The chart below is one I have used before, but it illustrates beautifully that the illusion of a wave of increasing prosperity sweeping across the world since the early 1970s is just that. The reality is that a preposterous amount of borrowed money was used to create the illusion of growth and skyrocketing wealth. All 2008 did was call in some of the loans:
60,000

United States: Total Credit Market Instruments vs GDP

1929-2012

50,000

40,000

30,000

20,000

10,000

0
All Sectors: Credit Market Instruments (liabilities) US Gross Domestic Product

-10,000

1929

1939

1949

1959

1969

1979

1989

1999

2009 2012

Source: Bloomberg

Today's world of pure imagination harbours so many departures from reality that it is impossible to point them all out in these pages, but try looking at the lumber price versus the "housing recovery" or at the "growth" in US personal income (hint: -5% and falling). Look at China's shrinking GDP and poor PMI numbers. Survey the reality of life in Greece (which will no doubt be front and centre in these very pages again soon) or Spain ... or Italy.
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Read about the depositors in Cyprus who still can't get their life savings back, or the impending fragmentation of the Portuguese government. How about the increasing volatility in the JGB market or the swirling talk of a major shortage of physical gold? Everywhere you look, the reality is far from the sweet-tasting sugar rush that the Candymen in authority keep trying to get us hooked on. Remember those symptoms that signal a sugar crash? Confusion and difficulty concentrating on daily tasks Anxiety Light-headedness Fatigue Headache Irritability Well colour me crazy, but I've got the first five symptoms and they are really making me irritable. So there we have it, folks. The synopsis of Willy Wonka and the Chocolate Factory included a description of Wonka's response to the procession of disasters that befell the children who entered his fantasy world: During each childs fiasco, Mr. Wonka alienates the parents with his nonchalant reaction to the childs seeming demise. He remains steadfast in his belief that everything will work out in the end. Sound like anybody we know? The world of pure imagination created by the Candymen of the world's major central banks seems like an innocuous and, frankly, pleasant place in which to live, but investors should beware. The levels of complacency made worse as we enter the summer doldrums are terrifying to me. The VIX Index is bumping along its all-time lows (below 13), suggesting risk is just about as low as it has ever been; Angela Merkel's re-election in mid-September's German parliamentary vote is seemingly underwritten (even by Frau Merkel herself); problems in Syria and Egypt are seemingly inconsequential; and Mario Draghi's as-yet untested vow to "do whatever it takes" to preserve the euro still rides roughshod over the obvious decay eating at the PIIGS and now threatening to engulf France. Oil prices remain stubbornly high and growth anemic; corporate results, whilst optically passing the smell test, are less than stellar; but poor results are not being punished as one would expect in a normally functioning market; and bond markets remain priced for near-perfection. In short, a sugar rush is coursing through just about every artery of the market and leading to the kind of symptoms one would expect from such a massive injection of monetary glucose:
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(Urban Dictionary): Sugar Rush: The intense physiological effect of consuming too much sugar or glucose...; eating excessive amounts of sugar makes the brain release dopamine and endorphins, often inducing a mild sense of euphoria and happiness. This is often accompanied by a strong surge of energy as the sugar hits the bloodstream. Sounds pretty much on the money to me, only that's not where the definition ends: Sugar highs cause twitchiness, spasms, and hyperexcitability. Sugar highs do not last very long, and leave a person feeling drained afterwards. In order to sustain this euphoria, the system needs constant sugar to be introduced to the bloodstream. The moment that stops, the crash will begin in earnest. Beware the day the Candyman runs out of candy.

*******
OK ... Here we go again. Another crazy week comes to an end, and here I go dumping a bunch more reading material into your no doubt already crowded brains. This week you'll find yourself transported to Italy, Greece, and China, where the respective topics du jour are bankruptcy, underground public broadcasting, and the world's tallest skyscraper/hole in the ground. Then we look into the matter of collateral in light of all the taper talk (this will be VERY important at some point, I suspect ... just not yet, it seems), and we hear how the IMF is afraid that all that taper talk will bring the Eurozone crisis roaring back. Elsewhere, Nouriel Roubini looks at the faltering BRICs and the Economist wonders what happens when giants slow down, whilst Liam Halligan takes a realistic look at the supposedly strong UK economy and gives us a welcome dose of reality. We have charts of hurricane exposure ahead of the North Atlantic hurricane season, gold's best-fit price, and some perspective on the gargantuan scale of Detroit's bankruptcy, courtesy of Barry Ritholtz, Frank Holmes, and the New York Post. Our three interviews all touch on the intriguing recent developments in the gold bullion leasing market, courtesy of Egon von Greyerz, Alasdair Mcleod, Mike Maloney, and ... yours truly.

Until Next Time. *******

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When youre rattled by collateral, do the Fed taper talk

Tim Duy, professor of practice at the department of economics at the University of Oregon, is confusing Brad DeLong, professor of economics at Berkeley, with his observation that the Fed seems to be striving to change the mix but not the level of outright accommodation. This, at least, seems to be the motivation for taper talk. Were less confused, and quite like what Duy is saying. Note the following (our emphasis): Bernanke is talking as if the goal is to change the mix of monetary policy but not the level of accommodation, essentially trading some reduced accommodation from ending asset purchases for additional accommodation by extending the forward guidance on interest rates. But why? If the level of accommodation is the same, does the mix matter? Thats an interesting question does the Fed have research saying the mix matters, and why? I can see two reasons. One is that somehow asset purchases have a more negative distortionary impact. Another is that there exists an internal bias in the FOMC against expanding the balance sheet. Arguably, some elements of both where on display in Bernankes testimony today: The second reason for increases in rates is probably the unwinding of leveraged and perhaps excessively risky positions in the market. Its probably a good thing to have that happen, although the tightening thats associated with that is unwelcome. But at least the benefit of that is that some concerns about building financial risks are mitigated in that way and probably make some FOMC participants comfortable with this tool going forward. The point is simple. For some reason, Bernanke and the Fed have opted to rein in asset purchases in favour of pure interest rate steering. In Duys opinion there are two possible reasons for this: one is that the Fed is aware of some sort of negative side-effect associated with asset purchases that it wishes to suspend, the other is that the body is getting uncomfortable with ongoing balance sheet expansion. This is a fair observation. So lets consider for a second that the motivation is really the first explanation. If its true that the Feds asset purchases are creating liquidity problems in the underlying so much so that short squeezes are impeding daily market operations, causing settlement fails and negative repo rates this leaves Bernanke in a tricky communication position. For one, the mechanics of QE are not easy to explain to Congress, or the market both of whom have become far too accustomed to the notion that QE equals pure money printing.

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Second, to say "we have to suspend QE because there arent enough assets for us to purchase without us becoming the market" is to admit that the Feds most important tool QE is now broken, which risks freaking out the market completely. Even if its not, its still important for the Fed to maintain the illusion that QE remains a viable option. If the illusion can be maintained, then communication and rate-steering alone may be sufficient to keep the market supported. If the illusion is shattered, its unlikely that inflation expectations will be easy to manage with words alone, opening the door to even more drastic policy shifts such as unsterilised moneyprinting, expanded asset purchases into Reits and ETFs (a la Japan) or something even more exotic. So its better to pretend that the economy is strong enough to handle a taper, than to admit that the taper is the result of checkmated Fed. Whats more theres plenty of market clues to suggest this is really whats going on. For example, Ben Bernanke may have publicly denied that the Feds purchases were hindering liquidity or causing market dysfunction but when examined more closely what he told Congress this week was hardly reassuring. For example in response to a question proposing that the Fed had become the market for mortgage-backed securities, he said (our emphasis): But our assessmentand, of course, were in that market quite a bit, so we have a lot of information about itour assessment is that that market is still working quite well, and that our purchases are not disrupting the normal price discovery and liquidity functions of that market. What immediately draws our eye, of course, is the use of the word quite. Then theres the fact that the comments refer only to the MBS market and overlook the Treasury security market completely (which fair enough, he wasnt asked about). Bernankes reassurances about market liquidity to our eyes conflict with the fact that we know the market experienced enough of dysfunction this year to prompt the Fed to call for a large position report from the market. We also know that there has been a significant shift in the pattern of Fed purchases since March 2013 about the time of that large position request.
*** FT ALPHAVILLE / LINK

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IMF fears Fed tapering could "reignite" euro debt crisis

The tapering of stimulus by the US Federal Reserve risks reigniting the eurozone debt crisis and pushing the weakest countries into a "debt-deflation spiral", the International Monetary Fund has warned. "The macroeconomic environment continues to deteriorate," said the Fund in its annual "Article IV" health check on the eurozone. "Recovery remains elusive. Growth has weakened further and unemployment is still rising, and the risks of prolonged stagnation and inflation undershooting are high. Mounting social and political tensions pose an increasing threat to reform momentum." The report warned that the onset of a new tightening cycle in the US had already led to major spill-over effects in the eurozone, pushing up bond yields across the board. Early tapering by the Fed "could lead to additional, and unhelpful, pro-cyclical increases in borrowing costs within the euro area. This could further complicate the conduct of monetary policy and potentially damage area-wide demand and growth. Financial market stresses could also quickly reignite," it said. The Fund said the European Central Bank must take countervailing action to prevent "a vicious circle setting in," ideally by cutting interests, introducing a negative deposit rate, and purchasing a targeted range of private assets. It should launch "credit-easing" policies to alleviate the deepening lending crunch in Spain, Italy, and Portugal, where borrowing costs for firms are 200 to 300 basis points higher than in Germany, with small businesses struggling to raise any money at all. The IMF said the more the Fed tightens in the US, the more the European authorities need to offset this with other forms of stimulus. The report came as fresh data from the ECB showed that loans to the private sector contracted by 46bn in June, after falling by 33nbn in May , and 28bn in April. The annual rate of contraction has accelerated to 1.6pc. The M3 broad money supply is also fizzling out, with growth dropping to 2.3pc year-on-year. There has been almost no growth in M3 since October 2012. The money data tends to act as an early warning indicator for the economy a year or so ahead, and therefore casts doubt on recent claims by EU leaders that the crisis is over. "Today's figures put serious question marks over the strength of the nascent recovery," said Martin van Vliet from ING.

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The data is at odds with the recent rebound in industrial output and rising PMI survey indexes for manufacturing. The IMF said the eurozone economy would shrink by 0.6pc this year, the same as in 2012. It is expected to grow by 0.9pc next year but this will not be enough to make a dent on unemployment, and could easily be thrown off course by a fresh global shock. "There is a high risk of stagnation, especially in the periphery. Such an outcome could push the periphery toward a debt-deflation spiral," it said. The report said that it may take years to unwind the colossal credit boom of the early EMU years. "Historically, almost all of the run-up in household debt tends to be reversed. But in the euro area, the reduction in debt-to-GDP ratios has barely started, and the boom was more pronounced." "Furthermore, in past deleveraging episodes, the debt reversal was largely facilitated by high inflation and growth, and supported by expansionary fiscal policy. Because these factors will not contribute much to the ongoing deleveraging process in the euro area periphery, the adjustment is likely to be protracted and have to rely more on reductions in nominal debt. The contrast with history is similarly sobering when it comes to corporate debt," said the Fund, adding that the EMU periphery has the daunting task of triple deleveraging by governments, households, and firms all at the same time.
*** AMBROSE EVANS-PRITCHARD / LINK

Only Hope for Italy Is Bankruptcy

Via Mish-modified Google translation from Libre Mercado (LM), Enrico Colombatto, Professor of Economics at the University of Turin, says in an interview, "The only hope for Italy is the bankruptcy of the State". Enrico Colombatto (EC), Professor of Economics at the University of Turin and director of the Center of Economic Research in the Piedmontese town, offers a groundbreaking proposal: "Do not pay the debt." It seems unthinkable, but he believes it will be the only way to start fresh, leaving those who have lent money to irresponsible politicians to pay for their mistake. LM: Spain and Italy have very large states, but they are very inefficient. Our laws are stifling, heavy.

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EC: In Italy, the public sector is not intended as an aid to the production of wealth and public goods and services. It has been conceived as an observatory to generate political consensus and to please its own clientele. The concept of public is of assistance but not to the public, but the public sector employee. The beneficiary of the public sector is dependent on this sector, not the public. LM: After six years of crisis we have more spending, more laws, more intervention ... Where does change start? EC: By the mentality. It has aggravated the welfare spirit that we have within us. The state is the problem, not the solution. LM: A few days ago there was a poll in which the public demanded more taxes. EC: It is a matter of propaganda. The State says "Do not worry, I will only raise taxes on the rich". However, the rich pay more, but also the poor. For example, in Italy, the Monti government introduced a tax on real estate, and 85% of Italians are owners. This is a middle class tax hike. And a country that stifles and suffocates its middle class can not grow. LM: From your perspective as a university professor, do you have bad omens in regards to a lost generation for Italy and Spain? EC: Yes and no. It could be 50 years, not just 15. The key will be in the new political class. LM: Some people think it might not be so bad that we intervene. They prefer to let Germany or the troika decide instead of our politicians. EC: Because the Germans have many Spanish and Italian bonds, they always favor higher taxation so Southern Europe can pay back those loans. I trust the Chinese more than the Germans. We need a new ruling class because the existing system is corrupt and must be eliminated no IMF, EU bureaucrats, or Germany. LM: Where to begin? EC: You have to start by deregulation. Monti's government has made things worse, especially in the labor market. The regulation is where it was 10 years ago ... well, maybe as it was 150 years ago. LM: It is always said that Spain and Italy need to get to compete globally, but many of the labor laws limit the growth of companies, with more regulation and more taxes to the largest companies.

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EC: Yes, there are two elements. First, regulation, both in general and the labor market in particular, changes to the size of companies. Often the entrepreneur thinks "It's not worth growing, because I will have many new demands." There is also an issue of tax evasion: it is much harder to do it when you're big. And finally, we have the element of funding. To grow you need a functioning credit market. And in Italy in the last thirty years, the credit market has served to finance the public debt. There are so many resources that should be used to finance the growth of businesses but have only served to finance the growth of the state. As a result, businesses remain small, because they are funded with self-financing.
*** MIKE SHEDLOCK / LINK

When giants slow down

This year will be the first in which emerging markets account for more than half of world GDP on the basis of purchasing power, according to the International Monetary Fund (IMF). In 1990 they accounted for less than a third of a much smaller total. From 2003 to 2011 the share of world output provided by the emerging economies grew at more than a percentage point a year (see chart 1). The remarkably rapid growth the world has seen in these two decades marks the biggest economic transformation in modern history. Its like will probably never be seen again. According to a recent study by Arvind Subramanian and Martin Kessler, of the Peterson Institute, a think-tank, from 1960 to the late 1990s just 30% of countries in the developing world for which figures are available managed to increase their output per person faster than America did, thus achieving what is called "catch-up growth". That catching up was somewhat lackadaisical: the gap closed at just 1.5% a year. From the late 1990s, however, the tables were turned. The researchers found 73% of developing countries managing to outpace America, and doing so on average by 3.3% a year. Some of this was due to slower growth in America; most was not. The most impressive growth was in four of the biggest emerging economies: Brazil, Russia, India and China, which Jim ONeill of Goldman Sachs, an investment bank, acronymed into the BRICs in 2001. These economies have grown in different ways and for different reasons. But their size marked them out as special on purchasing-power terms they were the only $1 trillion economies outside the OECD, a rich world club and so did their growth rates (see chart 2). Mr ONeill reckoned they would, over a decade, become front-rank economies even when measured at market exchange rates, and he was right. Today they are four of the largest ten national economies in the world.
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The remarkable growth of emerging markets in general and the BRICs in particular transformed the global economy in many ways, some wrenching. Commodity prices soared and the cost of manufactures and labour sank. Global poverty rates tumbled. Gaping economic imbalances fuelled an era of financial vulnerability and laid the groundwork for global crisis. A growing and vastly more accessible pool of labour in emerging economies played a part in both wage stagnation and rising income inequality in rich ones. The shift towards the emerging economies will continue. But its most tumultuous phase seems to have more or less reached its end. Growth rates in all the BRICs have dropped. The nature of their growth is in the process of changing, too, and its new mode will have fewer direct effects on the rest of the world. The likelihood of growth in other emerging economies having an effect in the near future comparable to that of the BRICs in the recent past is low; they do not have the potential for catch-up the BRICs had in the 1990s and 2000s. And the BRICs growth has changed the rest of the world economy in ways that will dampen the disruptive effects of any similar surge in the future. The emerging giants will grow larger, and their ranks will swell; but their tread will no longer shake the Earth as once it did.
*** ECONOMIST / LINK

Questions as Developers Spend Big on Land Deals

Official statistics show that total land transactions for commercial development in Beijing, Shanghai and Guangzhou in the first half of the year reached 167.5 billion yuan, close to the total for all of 2012. Since the beginning of the year, land transactions have rapidly revived in larger cities, and auction records have been broken in various cities since the beginning of May. Behind this increase in sales of land plots was a boom in the housing market in the first quarter. Sound performance has improved property developers' liquidity and encouraged them to make more purchases. However, analysts say the land market usually lags behind the housing market by about a quarter. Housing sales started to slow in the second quarter, posing uncertainties for developers who recently bought plots.

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Representatives from about 70 developers participated in a recent land auction in the capital, an auction that offered a highly sought-after plot in Xiajia Hutong in downtown Beijing. Fourteen property firms participated in the auction of the Xiajia plot. Within five minutes, the price reached the 1.77 billion yuan cap set by the municipal land bureau. Buyers then started to compete over proposals for the required building of subsidized housing on the land. Beijing Maoyuan Real Estate Co. won the bidding by promising to build another 28,000 square meters of subsidized housing in addition to the required 10,000 square meters. The total area for subsidized houses promised by Maoyuan accounted for 49.6 percent of the plot. Excluding the subsidized housing, the price for commercial housing at the plot was 41,000 yuan per square meter, much higher than the average in the surrounding area. "I don't know how they calculated the deal," said an employee of a large property firm. "The sales price will have to be higher than 70,000 yuan per square meter." With such a target, the Xiajia Hutong project has to be labeled luxury, the source said, but with such a large area of subsidized housing, it will be quite challenging for the developer to operate. Three other plots went under the hammer at the auction, where land worth a total of 6.7 billion yuan was sold. Major developers Evergrande Group and China Vanke Co. both clinched deals. Research by property agent Homelink Real Estate Co. found that during the first half of the year Beijing reported 100 land deals with a total transaction value of 66.4 billion yuan, 4.5 times more than for the same period last year. In the first week of July, another six plots were sold in the city, pushing the total to 74.6 billion yuan, exceeding the figure for 2012. Beyond the capital, land markets in large cities like Shanghai and Guangzhou have also boomed. An estimate by Caixin based on public information found that Shanghai has registered more than 70 billion yuan in land transactions in the first half. In 2012, the figure was 87.6 billion yuan. Yang Hongxu, deputy director of Shanghai Yiju Real Estate Research Institute, said the revival has affected China's first- and second-tier cities. (Property market analysts in the country tend to divide its cities into four tiers. The four first-tier cities are Beijing, Shanghai, Shenzhen and Guangzhou. The second tier comprises mainly provincial capitals and the larger cities in each region. Most cities in the west are put in the third and fourth tier.) Falling inventories in these top two categories, coupled with fast growth of housing prices, have prompted developers to seek new land. But in smaller and underdeveloped cities, the markets have remained sluggish, Yang said.

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A source at a large property company said that this year developers have sought plots with good locations and higher profit potential in large cities. But competition for land in first- and second-tier cities is always strong, pushing up prices. A survey by Shanghai Yiju found that total land sales revenue in the country's ten largest cities reached 314 billion yuan in the first half, growth of 160 percent from the same period last year. Meanwhile, housing prices in the ten cities have returned to 2010 levels.
*** CAIXIN / LINK

World's Tallest Skyscraper Remains a Hole in Chinese Ground

Ground was broken for the worlds tallest skyscraper in an empty field in Chinas Hunan Province last weekend. It was a festive and audacious occasion: the Broad Group, developer of the Sky City project, promised to build 202 floors stretched over 838 meters (2,749 feet) in a mere 10 months, using pre-fabricated modular, stackable pods that require less energy and materials than traditional construction methods. The joy was short-lived. On Tuesday, four days into the turbo-charged construction schedule, Sky City hit a snag: according to a (now-deleted) article in the local Xiaoxiang Morning Post it was subsequently quoted widely in national-level Chinese media local government officials suspended the project pending completion of a government approval process designed to ensure "safety and legality." In effect, the Broad Group hadnt obtained a building permit. This surprised nobody. China is currently in the midst of an economic slowdown, and its widely believed that over-capacity in infrastructure and housing, particularly is a leading cause. The last thing China needs is another empty shell of a building, and the government has been working to limit the number of new ones. But even if over-capacity and a slowing economy werent a concern, Broad Groups claims that Sky City will be so well-built that it can withstand a 9.0 earthquake surely is. If ever there was a role for government intervention, its when developers - even those capable of building 30-story hotels in 15 days, as Broad did in 2012 - claim that they can stack blocks nearly one kilometer in the air and all-but guarantee that they cant be knocked over. Yet, despite the on-the-face absurdity of Broads claims, the companys status as one of Chinas most innovative and successful private enterprises has given it the benefit of the doubt among some architects in China, and among many environmentalists outside of China, who view prefabricated, modular pods as a more sustainable means of constructing humanitys urban future. More critically, Broad might have the support of Chinese officials with standing to over-rule Hunan Provinces cautious bureaucrats.
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That last possibility is the most likely explanation for the companys defiant claim in Thursdays South China Morning Post that in fact it has obtained all relevant permits for Sky City, and that news of the suspension was obtained "from an official who is not overseeing the project and who is unfamiliar with the progress." Meanwhile, an unnamed employee of Hunans Housing Department, presumably the local supervising authority, could only muster, "We are very confused at the moment," when questioned by the paper. Its a reasonable response. The Chinese Communist Party has long embraced giant engineering projects as a means of projecting national vitality to its subjects, and the outside world. Nonetheless, its rare that those projects are built with an eye to a sustainable future. Sky City may be ostentatious and ill-advised under current real estate market conditions, but as a sustainable technology demonstration project, its the kind of risk-taking that Chinese entrepreneurs and their government feel they need to be taking. Lets just hope it doesnt topple over.
*** BLOOMBERG / LINK

Greek Public Broadcaster Goes Underground

Greek public television channel ERT may have been shut down, but rather than disappear, the station has gone underground. Meanwhile, the government of Antonis Samaras is trying to build up a new broadcaster, free of the patronage that plagued the old. The search for Greece's public broadcaster of the future is a complicated one. Initial clues lead one to the Athens suburb of Paiania, where a studio that used to belong to the private station Mega is located. Is this the origin of the films that Greeks have recently been able to watch on the public broadcaster ERT? Studio employees say that those responsible have already left, on their way to the Greek Press Ministry. There, however, one is told that there is no knowledge of any studio. "Nobody here can tell you anything," says a visibly anxious employee. Finding the old state television station is much easier. The ERT building in downtown Athens, which already stands out, is now covered with posters from employees who have been essentially occupying their employer for more than a month. They refuse to accept that Prime Minister Antonis Samaras unilaterally shut down ERT as a particularly egregious example of public waste. "I turned on my television at home," says a 32-year-old technician, "and I suddenly heard that as of midnight I would no longer have a job." What, then, does the ERT closure represent? Is it an example of decisive action taken in a country that has become notorious for postponing needed reforms? Or is it a particularly horrific example of the arbitrariness of the Greek state?

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Host Fanis Papathanasiou is surprisingly calm when speaking about the loss of his job and those of roughly 2,700 colleagues as he sits in the ERT news studio. As a former war correspondent in Iraq and Afghanistan, the 43-year-old has seen worse. Still, Papathanasiou says, the new working conditions he now faces are challenging. The satellite connection no longer works and they likewise have been cut off from news agencies like Reuters. Not even the telephone system works anymore. "This is my private phone," Papathanasiou, who also once served as the ERT correspondent in New York, says pointing at his mobile device. "We have huge problems." But Papathanasiou and his co-workers are still going nonetheless, hoping that somehow they will be able to avoid closure after all. In the process, ERT has essentially become a private broadcaster that can be reached almost exclusively by Internet. Still, Papathanasiou believes that ERT, which suffered from plunging ratings prior to its closure, has now become more popular. "We are now independent and show a different view," he says. Decisions on what stories they are going to pursue are made by committee. During the recent visit to Athens by German Finance Minister Wolfgang Schuble, for example, they reported on the impending aid shortfall. "That wasn't mentioned on the private channels," Papathanasiou says. Despite the widespread resistance to the closure, the Greek government has shown no indication that it might reverse its decision. In the coming months, Athens plans to build a completely new state broadcaster from the ground up. Just on Monday, 600 temporary positions were announced. Indeed, it is those job announcements that help to clear up the mystery as to where the underground ERT is coming from. The new hires are to be made to bridge the gap between now and when the new public broadcaster is ready to go on air. In other words, they are to do what Papathanasiou and his colleagues are doing now. And on Sunday, Pantelis Kapsis, the deputy minister responsible for public broadcasting, told Greek parliament that the ERT broadcasts are in fact originating from his ministry. He says that secrecy was necessary because "some union members wanted to shut us down and we wanted to prevent that from happening."
*** DER SPIEGEL / LINK

Is the emerging market boom over?

During the last few years, a lot of hype has been heaped on the Brics (Brazil, Russia, India, China, and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world and, in the case of China, the largest of all by as early as 2020. But the Brics, as well as many other emerging-market economies have recently experienced a sharp economic slowdown. So, is the honeymoon over? Brazil's GDP grew by only 1% last year, and may not grow by more than 2% this year, with its potential growth barely above 3%.
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Russia's economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China's economy grew by 10% a year for the last three decades, but slowed to 7.8% last year and risks a hard landing. And South Africa grew by only 2.5% last year and may not grow faster than 2% this year. Many other previously fast-growing emerging-market economies for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe are experiencing a similar slowdown. So, what is ailing the Brics and other emerging markets? First, most emerging-market economies were overheating in 2010-2011, with growth above potential and inflation rising and exceeding targets. Many of them thus tightened monetary policy in 2011, with consequences for growth in 2012 that have carried over into this year. Second, the idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the eurozone, near-recession in the United Kingdom and Japan in 2011-2012, and slow economic growth in the United States were always likely to affect emerging-market performance negatively via trade, financial links, and investor confidence. For example, the ongoing eurozone downturn has hurt Turkey and emerging-market economies in Central and Eastern Europe, owing to trade links. Third, most Brics and a few other emerging markets have moved toward a variant of state capitalism. This implies a slowdown in reforms that increase the private sector's productivity and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, import-substitution industrialisation policies, and imposition of capital controls. This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth. Indeed, China's slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, "unstable, unbalanced, unco-ordinated, and unsustainable," and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa. The risk that China will experience a hard landing in the next two years may further hurt many emerging economies. Fourth, the commodity super-cycle that helped Brazil, Russia, South Africa, and many other commodity-exporting emerging markets may be over. Indeed, a boom would be difficult to sustain, given China's slowdown, higher investment in energy-saving technologies, less emphasis on capital- and resource-oriented growth models around the world, and the delayed increase in supply that high prices induced. The fifth, and most recent, factor is the US Federal Reserve's signals that it might end its policy of quantitative easing earlier than expected, and its hints of an eventual exit from zero interest rates, both of which have caused turbulence in emerging economies' financial markets.

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Even before the Fed's signals, emerging-market equities and commodities had underperformed this year, owing to China's slowdown. Since then, emerging-market currencies and fixed-income securities (government and corporate bonds) have taken a hit. The era of cheap or zerointerest money that led to a wall of liquidity chasing high yields and assets equities, bonds, currencies, and commodities in emerging markets is drawing to a close. Finally, while many emerging-market economies tend to run current-account surpluses, a growing number of them including Turkey, South Africa, Brazil, and India are running deficits. And these deficits are now being financed in riskier ways: more debt than equity; more short-term debt than long-term debt; more foreign-currency debt than local-currency debt; and more financing from fickle cross-border interbank flows.
*** NOURIEL ROUBINI / LINK

This is the most feeble recovery in our history

[C]onsider that we remain locked in the most feeble economic recovery in our history. While other leading Western nations like Germany and the US have more than recovered the GDP losses sustained during the sub-prime crisis, the British economy, even after this latest growth flicker, is still 3.3pc smaller than at the time of its pre-Lehman peak. Beyond the headline numbers, real wages continue to shrink as inflation which has been above the Bank of Englands 2pc target for more than three and a half years now, despite extremely weak growth continues to erode purchasing power. Including population growth, British GDP per head is actually some 7pc below its 2007 peak. There has been no sign, either, of the "rebalancing" away from consumption and towards exports and investment that the Coalition said it wanted. Back in 2010, Osborne declared his confidence in "a march of the makers", claiming that manufacturers would power growth via a surge in exports. It hasnt happened. Despite the pound falling some 20pc against our main trading partners in recent years, UK exports have slumped, doing nothing to foster growth, improve our national accounts nor tackle the chronic job insecurity felt by millions. Last year, UK exports were worth 310bn compared to 420bn of imports, landing us with an absolutely massive trade deficit, second only to America in absolute terms. Despite our matchless trading heritage, Britains external sector remains a drag on net growth, adding to our ever-deepening indebtedness. This weak export performance is a big reason why manufacturing output remains more than 10pc below where it was prior to the credit crunch.

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And for all the governments rhetoric about the UK being "in a global race" and our exports "reconfiguring towards the fast-growing markets of the East", the sale of British goods in the largest emerging markets Brazil, Russia, India and China amounted to just 27bn in 2012. Thats 5.2pc of total exports, or less than we sell to Belgium. Britains construction sector has also failed to deliver. The 0.9pc growth registered between March and June was only compared with a deep decline the quarter before. Accounting for a chunky 6pc of our economy, the building industry remains 16pc smaller than it was prior to the credit crunch. It shouldnt be the governments job to export on behalf of British companies or to subsidise the construction sector. But it is the case that the Coalition has shirked some tough decisions that could have bolstered manufacturing, exporting and construction activity in terms of cutting red tape, easing our still ridiculously prescriptive planning laws and, above all, fixing the banking sector in order that it may once again provide a steady stream of finance to responsible and credit-worthy businesses and households, so facilitating the growth the UK economy and our public finances so desperately need. Taking such decision requires vision, grit and a fierce determination to take on entrenched vested interests be they public sector administrators or land-banking property developers. In so many parts of our economy, despite our free-market image, the UK remains in the grip of anti-competitive cartels, driven only to strive for self-preservation through lobbying and legislation not least in our financial sector. The 2008 crash, despite the undoubted human suffering, was an incredible opportunity for reform. Yet we created in its aftermath a financial services industry that, previously hooked on private sector credit, is now addicted to central bank largesse.
*** LIAM HALLIGAN / LINK

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Charts That Make You Go Hmmm...

It's been a while since my buddy Barry Ritholtz has graced these pages, but my thanks
to him for this series of charts that show the $ value of mortgages at risk from natural hazards (tornados and hurricane winds) by state readers in Florida and Texas, buckle up!

Source: Corelogic (via The Big Picture)

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What? You thought you'd get away without a gold chart this week? Not a chance.
Frank Holmes of US Global Investors is another who has forgotten more about the gold market than many will ever know. Here is his take on how far gold is off course: Gold has been in extremely oversold territory lately despite drivers for the metal remaining in place. Heres a different way to look at how far gold has been off course. The chart below tracks the correlation of the price of an ounce of gold to global liquidity, with global liquidity defined as the sum of the U.S. monetary base and the foreign holdings of U.S. Treasuries. Since June 2000, as the U.S.s monetary base and foreign holdings increased, so did the price of gold. The correlation suggests the current level of liquidity supports a gold price of $1,780 per ounce, well above the current spot price around $1,300.

Source: US Global Investors

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Detroit Bankruptcy A Little Perspective

Source: New York Post

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Words That Make You Go Hmmm...

Whilst Max Keiser's bombastic
style isn't my cup of tea, he does invite some interesting guests onto his show, and this week Alasdair Mcleod has some startling calculations on the Bank of England's gold leasing program worth paying attention to in light of the GOFO activity covered recently in these pages... CLICK TO WATCH

Egon von Greyerz

is a charming man. He also happens to be one of the smartest minds in the gold market. In this interview with Eric King he discusses the shortage of gold bullion and what could happen if things got ever so slightly out of control... CLICK TO LISTEN

This weekend,

I had a fascinating conversation with Mike Maloney of Goldsilver. com about the fractional reserve gold lending markets. Mike took my recent chart of gold in the wake of the Bundesbank repatriation request to the next level. The outcome, in my opinion, adds a lot of fuel to an already raging fire...

CLICK TO WATCH

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and finally...
OK, so it's been around awhile and already has over 5,000,000 YouTube hits, but how could
I not include this as this week's and finally...?

CLICK HERE TO WATCH

Hmmm...

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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 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.

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