hmmm 12 aug 2012

7/31/2019 Hmmm 12 Aug 2012

1/25

THINGS THAT MAKE YOU GO

HmmmA walk around the fringes of nance

13 August 2012 1

For AFREE Subscription to Tings Tat Make You Go Hmmm..... clickHERE

Come you back to Mandalay,

Where the old Flotilla lay:Cant you ear their paddles chunkin romRangoon to Mandalay ?

On the road to Mandalay,Where the yin-fshes play,An the dawn comes up like thunder outer

China crost the Bay! RuDYARD KIPLINg, MANDALAY

Be careful about Burma. Most people cannot rememberwhether it was Siam and has become Tailand, or whetherit is now part of Malaysia and should be called Sri Lanka. Alexander Cockburn

The value systems of those with access to power andof those far removed from such access cannot bethe same. The viewpoint of the privileged is unlikethat of the underprivileged Aung San Suu Kyi
http://ethreemail.com/subscribe?g=bdc736behttp://ethreemail.com/subscribe?g=bdc736be

7/31/2019 Hmmm 12 Aug 2012

2/25

2.THINGS THAT MAKE YOU GOHmmm...

13 August 2012 2

odays edition o Things ThatMake You Go Hmmm..... x be longer on histo-

ry than most and will form the background to

a short series of pieces I intend to write about

a country that is potenally on the

verge of the kind of growth the

enre world sorely needs and

yet only Asia seems capable of

providing.

Consequently, if history and

background arent really

your thing, Id recommend

skipping forward to page

10 where youll nd

arcles of a more

topical nature but for

those of you who, like

me, are fascinated by his-

tory and the world around us,

join me on a trip back in me to

a country thateven by Asian stan-

dardshas been one of the bas-

ket cases of history.

That history, though, could wellbe about to change in a profound

way.

he names osuch places as Ran-goon, Mandalay and Ir-

rawaddy evoke memorie of a

bygone era when the once-mighty

Brish Empire included many far-ung outposts

which inspired not only adventure but poetry.

One such outpost was Burma, a country of tre-

mendous strategic importance that was con-

quered by the Brish aer a series of Anglo-Bur-

mese Wars between 1824 and 1885.

With the fall of Mandalay in 1886, Burmas last

monarch, King Thibaw Min, abdicated, seng

the stage for a lile under 60 years of Brish

rule during which me the city of Rangoon was

anointed the countrys capital and grew into an

thriving port along the trade routes between

Calcua and Singapore.

Many of those years were fraught with unrest

as cultures clashed and seemingly insignicant

dierences such as the refusal of the Brish to

break with their own tradion and remove their

shoes when entering pagodas were enough to

cause severe riong and the loss of many lives,

but the quid-pro-quo was that Burma became

the most-developed and wealthiest country in

Southeast Asia under Brish colonial rule.

In April 1937, Burma became a separately ad-

ministered colony of Great Britain and Ba Maw

was installed as the countrys rst Prime Minis-

ter. Amazingly enough, Ba was a very outspoken

opponentof Brish rule in Burma (begging the

queson of how that lile fact escaped those in

Britain conducng the veng process) and, af-

ter strongly opposing Burmese parcipaon in

WWII, he resigned from the legislave assembly

in 1940 and was arrested for sedion.

It was at this me that an exiled Burmese acv-

ist with a family pedigree of resistance (his great

uncle had fought against the Brish annexaonof Burma in 1886) named Aung San formed the

Burma Independence Army from his base, curi-

ously enough, in Japan and these displaced Bur-

mese took up arms against the Allies.

Burma would be decimated by WWII as it be-

came a major baleground due to its geo-

graphical signicance and the richness of its re-

sources. Though many Burmese inially fought

on the side of the invading Japanese army, the

vast majority switched allegiance by 1945 and it

was in the aermath of the war that Aung Sannegoated the Panglong Agreement which guar-

anteed the countrys independence and rmly

established him as the father of modern Burma.

Aung San was tragically assassinated by polical

rivals six months before his dream of an inde-

pendent Burma was nally realised but, despite

this setback, on January 4, 1948, Burma nally

became an independent republic with Sao Shwe

Thaik as its rst President and U Nu as its rst

Prime Minister.

7/31/2019 Hmmm 12 Aug 2012

3/25


13 August 2012 3

The next 14 years were relavely stable and rea-

sonably peaceful aer the turmoil that had gone

before. It was during this me that Burmas UThant became Secretary General of the United

Naons (a posion he would hold for ten years),

akin wih him o New York from hi homeland

a yon woman named An san s Kyi, dah-

er of An san, a

an administrave

aian. thi yon

woman wa laer o

win the Nobel Peace

Prize in 1991 and

play an enormousrole in shaping the

country - but that is

a story half-wrien,

to which we shall re-

rn horly.

In March of 1962,

however, darkne

descended uponBrma when a mili-

tary coup dtat, led

by General Ne Win,overhrew he ov-ernment, plunging the country into decades ofviolent misrule by an oppressive Junta. In 1974,a new constuon of the Socialist Republic ofthe Union of Burma was adopted which instut-ed a one-party socialist system. The good news?It led to the resignaon of the military rulers.The bad news? They connued to rule anyway,through the Burma Socialist Programme Party(BSPP) and decimated the countryturning itinto one of the most impoverished in the world

through a rule based on the toxic combinaonof Soviet-style central planning and supers-ous beliefs. I know, I know... how could such asystem that combined two such brilliant ideas

possiblygo wrong?

Periodic protests during this period wereswily and brutally suppressed, but on the 8thof August, 1988 (in perhaps something of aharbinger for those currently aempng to xEuropepay aenon mesdames et messieurs)it was, of all things, a bizarre piece ofeconomic

mismanagement by Ne Win that would nallylead to his downfall and the installaon of a

new military regime when he abruptly andfoolishly decided to demoneze several large-denominaon kyat bills - a move that instantlyaected Burmas middle class, turning many ofthem into paupers overnight and sparking whatbecame known as the 8888 Uprising (8th ofthe 8th 88). The bloody protests that sprangup across the country were eventually quelledaer yet another military coup in Septemberby the State Law and Order Restoraon Council(SLORC)which imposed even more draconiancondions upon the poor cizens of Burma

han hoe hey had endred nder Ne Win.

But amidst the turmoil it was the formaon,in September 1988, of the Naonal League forDemocracy under the leadership of that younglady who had le her home for New York adecade earlier, Aung San Suu Kyi, that was tomark this upheaval as a crucial turning pointfor Burma as it turned away from Socialism andinched towards a more democrac structure.Inched being very much the operave word.

The following year, the SLORC ocially changedthe countrys English name to The Union ofMyanmar and, in a move that would makethem the laughing stock of repressive regimeseverywhere, they promised that, in 1990, theywould hold free elecons for the rst me in 30

year.

Now, call me old-fashioned, but if Imhandicapping a free elecon between a brutal,

military junta and a democrac party of the peo-

ple, I am concerned with only one variable; arethe elecons truly free? If they are (and I think

its safe to say that such regimes have a fairly

spoy record when it comes to such things),

then Ill happily take the points and back the

democrats. Of course, such elecons are never

truly free (no, Mr. Pun, they are NOT. Weve

discussed this before. Im busy, leave me alone)

and o he mar money alway oe on he rl-

ing party.

But a funny thing happened on the way to the

Burma: The Facts

size: 676,578km2

Populaon: 55 million (2011 est.)

Literacy: 89.9%

Workin Ae

Populaon: 62%

Reion: 7

Ethnic States: 7

Reliion : Buddhist (89%)

Chrisan (4%)

Muslim (4%)

Lanae: Burmese (65%)

Currency: Kyat (870/$)

GDP per capita: US$840 (2011est.)

Myanmar: The Facts

7/31/2019 Hmmm 12 Aug 2012

4/25


13 August 2012 4

ballot boxes asone can only imagineeach

of he rlin eneral amed ha one of he

others was going to x the result and, amaz-ingly, the NLD won an astonishing 80% of theea.

Normally that might be a problem for a regime,but not in Myanmar.

The military junta simplyrefused to step down thenquietly set about repressingthe populist NLDimprison-in many of i leader and

placing Aung San Suu Kyinder hoe arre whereshe remained for 16 of thenext 21 years. The SLORCchanged their name to theState Peace and Development Council (SPDC)in 1997 but the old switcheroo failed to foolanybody. Nevertheless, the junta remained inpower unl 2007 under the leadership of Gen-eral Than Shwe, whose claims to fame includebeing ranked No. 4 on Parade Magazines 2009Worlds Worst Dictators list and placing an

impressive No. 2 on Listverses Top Ten WorstLiving Dictators list (seriously). Shwe was de-scribed thus by the Democrac Voice of Burma:

(Democrac Voice of Burma): ...He tends to

be seen as being sullen, humorless and rath-

er withdrawn, a hardliner, skilled manipula-

tor and an opponent of the democrazaon

of Burma.

According to his eHarmony prole he also likedlong walks, 1940s lm noir and labradoodles.

B I dire.

Tere must be something about theheat of August in Myanmar because, aer the

8888 Uprising nineteen years previous, the situ-

aon boiled over once again in August of 2007

and, amazingly enough, despite the repressive

brutality of the regime to that point, it was once

aain economic missteps that nally brought

about an angry revolt amongst the people of

Myanmar (pay aenon, Brussels... pay aen-

on). The course of events was described bril-

liantly by the US Instute of Peaces Priscilla

Clapp in a must-read, November 2007 report en-tled Burmas Long Road To Democracy:

(Priscilla Clapp): On August 15, 2007, Bur-

mas military government announced that

all government subsidies would be removed

from imported diesel and natural gas, which

power the countrys modes of

transportaon and electricity

generaon. The cost of diesel

fuel immediately doubled,

and the cost of natural gas

rose as much as 500 percent,creang a wave of inaon in

other essenal commodies,

such as rice, cooking oil, and

other foodstus. Transporta-

on became so costly that many people, un-

able to aord the commute to work, started

bunking on city streets. Polical acvists who

had been leading small and sporadic urban

demonstraons over the past year to protest

rising prices and poor economic condions

reacted immediately, calling on the govern-ment to engage in dialogue with the people

about such dramac unilateral economic de-

cisions.

By August 19, people were marching in the

hundreds through the streets of Rangoon,

led by acvists from the 88 Students group

and the Naonal League for Democracy

(NLD)... Within two days, the regime arrested

a large number of 88 Students leaders, but

similar marches had already spread to sever-

al other cies around the country, suggesngthe existence of an extensive underground

organizaon. In late August, Buddhist monks

in the western city of Siwe began to join the

marches. On September 5, a group of some

six hundred monks marching in the town of

Pakkoku in central Burma were brutally at-

tacked by Swan Ah Shin (SAS),[ a group of

pro-government street toughs], who ed

several monks to poles and beat and dis-

robed them. When local ocials visited the

monastery to discuss this incident, they were

... He tends to be seen asbeing sullen, humorless andrather withdrawn, a hardliner,

skilled manipulator and anopponent o the democratiza-tion o Burma
http://www.usip.org/publications/burmas-long-road-democracyhttp://www.usip.org/publications/burmas-long-road-democracy

7/31/2019 Hmmm 12 Aug 2012

5/25


13 August 2012 5

taken hostage by the monks, their cars were

burned, and they were given an ulmatum

for the government to deliver an apology bySeptember 17 for the aack on the marching

monks.

Within days, the All Burma Monks Alliance

(ABMA) surfaced for the rst me and de-

manded that the government apologize to

the monks for the Pakkoku incident, reduce

commodity prices, release all polical prison-

ers, and enter into dialogue for naonal rec-

onciliaon with the democrac forces. The

ABMA pledged to boyco the State Peace

and Development Council (SPDC) by refus-ing to accept alms from them (thus keeping

them from earning Buddhist merit) if they did

not meet these demands by September 17.

When no apology was forthcoming, tens of

thousands of monks, surrounded by sympa-

thec cizens, marched through the streets

of several Burmese towns and cies during

the week of September 17, channg bless-

ings for the people. By now it was apparent

that the regime faced a far more organized

opposion that it had imagined.As the monks invited the public to join the

peaceful, disciplined marches during the fol-

lowing week, the crowds burgeoned, and

the regime began to clench its st. Military

reinforcements were sent to Rangoon, and

on September 27, police, army, and USDA

forces began raiding monasteries, prevent-

ing monks from going out, and rounding up

marchers in the streets by force. Thousands

were hauled o to makeshi prisons, and

the Sangha (the Burmese order of Buddhistmonks) was stripped of its polical power.

This me, however, unlike in 1988, the world

witnessed the oppression in great detail via

cell phones, digital cameras, and the Inter-

net.

Long aer the protests were quelled, the re-

gimes security forces, armed with pictures of

marchers found on the Internet, connued to

comb city neighborhoods in the dead of the

night, arresng suspects as they slept and

hauling them o to jail.

In the wake of what became known asthe Saron Revoluon, a constuonal referen-

dum was held in May 2008, which promised a

discipline-ourishing democracy and bestowed

yet another name-change upon the Union of

Myanmar which would henceforth be known as

he Republic of the Union of Myanmar (evoking

Monty Pythons Judean Popular Peoples Front)

but perhaps most importantly it set the stage

for a full and free general elecon in 2010 (the

rst to be held in Myanmar in 20 years) which,

despite being decried as fraudulent by many

Western naons in the wake of a resounding win

for the military ruling party, looks to have poten-ally been the beginning of real reform aer so

many fale dawn.

Aer the 2010 elecon, Myanmars aging mili-

tary rulers began a series of reforms towards a

more liberal democracy and a mixed economy.

Their moves were likely selsh as, aer years

in absolute power, they were wealthy beyond

imaginaon with ospring who wanted to travel

the world (which was prohibited by EU, US and

Swiss sancons) and they had most likely de-

cided that an orderly, self-determined transioninto quiet rerement was innitely preferable

to the alternave. Whatever the reasons, they

maer lile as, if you talk to cizens of Myan-

mar now, the feeling amongst the populaon is

very much that the reforms are both real and

irreversible and the success of the NLD in by-

elecons held on 1st April of this year (I know,

right?) was a graphic illustraon of this as Aung

San Suu Kyis party swept 43 of the 45 constu -

ency seats available and she herself took her

seat in the Pyithu Hluaw (Lower House) of theBurmese parliament represenng the constu-

ency of Kawhmu.

Such events had been inconceivable only

months earlier but, with the visit of Hillary Clin-

ton to Myanmar in December 2011 (the rst visit

by a US Secretary of State in 50 years), the immi-

nent liing of sancons and Myanmars elecon

to the chair of ASEAN in 2014, progress is prov-

ing swi and sweeping. Myanmars prospects

havent looked this good in a generaon.

7/31/2019 Hmmm 12 Aug 2012

6/25


13 August 2012 6

So, ater an unusually lengthy, but con-textually important

hiory leon oday,

we now reach the

stu that will make

you want to reach for

a notebook and jot

down a few facts and

gures because, be-

lieve me, those facts

and gures will de-

niely make yo o

Hmmm.....

Lets start by placing

Myanmar in context

with its neighbours

and fellow members

of ASEAN (Associaon

of sohea Aian Na-

ons); Indonesia, Ma-

laysia, the Philippines,

Singapore, Brunei,

Thailand, Cambodia,

Laos, and Vietnam.

Myanmar is situated

on the west coast of

Indochina and shares

a border with India,

China, Lao and i

chief trading partner, Thailand (see map).

Myanmars coastline stretches for some 3,000km

and, in the Irrawaddy River, its borders enclose

Asias only self-contained river network as the

source, middle course and mouth of this great

waterway are all within Myanmar. The river is

1,550km long and by far the most important wa-

terway in the country.

Myanmar is the second-largest country by area

in ASEAN, the h largest by populaon and one

of the richest in terms of the natural resources it

possesses. It is also the poorest.

According to IMF esmates, Myanmars GDP percapita in 2011 is esmated to have been $804.

To put that into perspecve, it is roughly one

sixth that of Thailand and less than one sixeth

of the country I call home, Singapore (chart, be-

low, le).

Amazingly enough, Singapore has basically no

natural resources but has parlayed a crical geo-

graphical locaon, a stable, democrac polical

system, sound nancial management, an ab-

sence of corrupon and an incredibly pro-busi-

ness, low-tax regime into a ranking of third in percapita GDP behind only Qatar and Luxembourg

according to IMF esmates.

What makes this disparity between the two

Asian naons all the more staggering is the

sheer level of natural resources that Myan-

mar possesses. The country produces coal,

mber, lead, copper, zinc, n and limestone

in relave abundance, but it is in teak, oil &

gas and precious stones that Myanmar nds

itself punching a long way above its weight.

Over 75% of the worlds teak is produced in

Myanmar, along with over 90% of the worlds

jade and 90% of the worlds rubies. It has the

worlds 4th-largest proven reserves of natu-

ral gas with 11.4 trillion cubic feet and has

the 65th largest oil reserves on the planet

(Myanmar has been exporng oil since

1853). Amazingly enough, only half of the

countrys land area has been geographically

surveyed so further riches undoubtedly lie

beneath Myanmars ferle soil.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

60,000

ASEAN

Myanmar

Cambodia

Laos

Vietnam

Philippines

Indonesia

Thailand

Malaysia

Brunei

Singapore

50,713

36,532

8,617

5,2813,469

2,2551,362 1,204 912 840

3,476

ASEAN GDP Per Capita (US$)

2011 Estimates (IMF)

SOURCE: IMF

7/31/2019 Hmmm 12 Aug 2012

7/25


13 August 2012 7

The agricultural sector in Myanmar employs

over 60% of the workforce and, along with being

the worlds 7th-largest rice producer, Myanmar

farms over 50 dierent crops as well as being

home to a burgeoning aquaculture industry.

Over the past 10 years, Myanmars GDP has

grown at an astonishing 9.7% CAGR (chart,above), outpacing every one of its ASEAN neigh-

bours and, in fact, if ocial stascs are to be

believed, despite heavy sancons, during the

period 1998-2007, its economy grew at 12.7%

faster than both India and China.

If ocial stascs are to be believed.

Myanmars GDP was US$20bln in 1989 but, af-

ter the abandonment of socialism and a series

of economic reforms in the wake of the 8888

Uprising, it was re-based to US$3bln in 1990. Itook almo weny year for he former level o

be reached but, between 2007 and 2011, GDP

soared 150% to stand at US$50bln in 2011 ac-

cording to the IMF.

It is mouth-watering to imagine the possibili-

es in Myanmar should it be truly freed from

the polical shackles under which it has been

operang for most of its existence and, through

a simple comparison with its closest neighbour

and main trading partner, Thailand, those possi-

bilies become only too clear all-too quickly

as a recent report from UBS highlighted:

The average life expectancy in Thailand

is 10 years longer than Myanmar and in-

fant mortality rates are ve mes lower.

Electricity consumpon and car owner-

ship per capita in Thailand is 20 mes

that of Myanmar.

In Thailand, mobile phone penetraon

exceeds 115%. In Myanmar today it is

just 1%.

Tourist arrivals to Thailand are 40 mesthat to Myanmar. Given the range of at-

tracons in Myanmar (including 100 sq

km of temples in Bagan and several hun-

dred islands in the Andaman Sea), the

growth potenal is signicant.

Tourist arrivals to Myanmar for the whole

of 2011 were only equivalent to arrivals

to Thailand for a single week.

Myanmar has three internaonal air-

ports but 93% of arrivals sll land in Yan-

gon (Rangoon).

There are more hotel rooms in Bangkok

than in the whole of Myanmar

In 2009, Myanmar exports totalled

US$9bln as opposed to Thailands

US$225bln

But thats not all. Want some more? How about

we look at Myanmars property market where

there has been minimal development of any

kind over the past 10 years?

Currently, just one oce building on

Sathorn Road, Bangkok contains more

space than for the whole of Yangon.

The retail space in Central World in Bang-

kok exceeds the total retail space for all

of Yangon.

Yangon only has 740 serviced apart-

ments, compared to 15,000 in Bangkok.

Or the automove market?:

0%

2%

4%

6%

8%

0%

ASEAN

Brunei

Thailand

Philippines

Malaysia

Indonesia

Singapore

Vietnam

Laos

Cambodia

Myanmar

9.7%

7.6%7.5%

7.1%

6.3%

5.5%5.8%

5.1%4.9%

4.5%

1.4%

ASEAN Real GDPCAGR (%) 2001-2011

SOURCE: IMF/UBS

7/31/2019 Hmmm 12 Aug 2012

8/25


13 August 2012 8

Myanmar does not manufacture vehicles

domescally. Rather, they are imported

under permit. The relavely few permitsawarded each year means that the num-

ber of registered vehicles in Myanmar is

very low; approximately 300,000 com-

pared to 5,400,000 in Thailand.

As you can probably imagine, Foreign Direct In-

vestment in Myanmar has soared (chart, below)

aer the new President, Thein Sein declared af-

ter taking oce that, in Myanmar, it was ...no

longer business as usual.

Sein pledged to root out corrupon, boost trade

and aract foreign investmentbut the story

surrounding that is something for next me!

So thats a poed history of Myanmar and a look

at some of the staggering potenal for growth in

a country that once sat astride Asia but, through

a series of disastrous polical choices, foreign

sancons, economic mismanagement and mili-

tary oppression, disintegrated into poverty andchaos. Next me we will take a look at some of

the US$91 billion of infrastructure projects be-

ing developed and hear from a good friend of

mine who moved to Yangon to be in the heart

of perhaps the biggest story to emerge in Asia

in decades.

*******

In this weeks edion of Things ThatMake You Go Hmmm..... we spend some con-

siderable me in Europe (where else?) as things

connue to slowly fall apart just as the elected

heads of the Eurozone return from the beachin me for next weeks Greek repayment to the

ECB (look for some clever tricks to be pulled in

order to get through that date and to the (hope-

ful) racaon of the ESM by the German Con-

stuonal Court on September 12.)

Belgiums nance minister decides not to play

ball as he declares buying Italian and Spanish

debt makes no sense, John Hussman returns

aer a long absence as he takes a look at pro-

jected earnings and nds that cheap is a maer

of debate, former BoE MPC members encourageMervyn King to step on the gas and Nomuras

Alistair Newton coins the

term Brixit .

Germany considers an EU

referendum (but probably

not seriously), we look at

the Chinese Golden Ele-

phant, get a Postcard From

The Edge in Greece and nd

out a lile about Chinas Af-

rican Money Tree.

The euro cannot possibly

survive as it currently ex-

ists (at least according to a

Reuters special report), we

check out US sugar intake,

Chinas African resource grab and look at health-

care costs and the ethanol crush spread in the

wake of he us droh.

Last but not least, we hear from two Nigel Far-

ages, have the US decit explained to us as onlyan accountant can and Bert Dohmen of the ter-

ric Wellington Leer sees tremendous oppor-

tunies in the gold market.

Thats all from me. Unl next me, as they say

in Myanmar:

kyeethu go yothei, ywedu go layza, ngethu

go thana

Google it!!!

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

800

700

600

500

400

300

200

100

0

Foreign Direct Investment (FDI)

Net Inows 1980 - 2010

(US$m)

SOURCE: WORLD BANK/UBS

7/31/2019 Hmmm 12 Aug 2012

9/25


13 August 2012 9

Contents 13 A 2012

Buying Spain And Italys Debt Makes No Sense

Germany Considers Holding EU Referendum

Postcard From The Edge

Chinas Answer To Subprime Bets: The Golden Elephant

Why The Eurozone Cannot Possibly Survive Intact

It Starts: First Asian Bank Mulls Brish Exit From The EU

Chinas African Money Tree

No Clue Bank Of England Urged To Drop Anguished Religious Ethics Over QE

Begging For Trouble

On GRExit, SPAilout, And Draghis White Knight

Charts That Make You Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally.....

7/31/2019 Hmmm 12 Aug 2012

10/25


13 August 2012 10

Te European Central Bankshould not buy Spanish and Italian debt because

it makes no sense and will take away the pres-

sure on policians to act, Belgiums central bank

overnor ha aid.

Luc Coene told Belgian newspapers De Tijd and

LEcho that buying the bonds of these countries

would only serve to weaken the ECB and do

nothing to resolve underlying issues of compe-

veness.

It makes no sense for the ECB to start nanc-

ing those countries, said Mr Coene, It would

only lead to the ECB taking on the whole publicdebt of Spain and Italy onto its balance sheet,

he aid.

That would in turn weaken the ECB and do

nothing to resolve the underlying problems.

Mr Coene also said that the

central banks eorts to calm

marke la mmer wih

around 135bn of addional

debt purchases on the sec-

ondary market via its Secu-ries Markets programme

took away the pressure on

policians to act.

We havent forgoen what

happened in August of last year: We bought Ital-

ian bonds and right aer that the Italian govern-

ment reneged on its pledges, he said.

The conclusion is clear: When you take away

the market pressure, you take away the pressure

on policians to act.

Spanish and Italian borrowing costs edged up on

Friday, following a week of steady falls on hopes

that Spanish PM Mariano Rajoy would make a

formal request for EU aid, which would then trig-

ger acon from the ECB.

President Mario Draghi inially disappointed

markets at his monthly press conference by re-

iterang that the ECB cannot replace govern-

ments, and that countries would have to re-

quest assistance from the European Financial

Stability Facility (EFSF) before the ECB could step

in.

Even if we were ready to act now, there would

not be the grounds for doing so, he said.

O O O UK DAILY TELEGRAPH / LINK

A bottle oliquor and a half-empty glassstand on the table next to Angela Merkel, who is

studying a condenal document with a sullen

expression. How to Break Up the Euro, is the

tle.

That, at least, is how Britains Economist imag-

ines the chancellors predicament these days.Tempted, Angela? is the headline on the cover

of the current issue.

Indeed, the chancellor is in a tricky posion at

the moment, as she fails to get the euro crisis

under control. Of course,

the Economists noon of a

secret plan to break up the

euro zone is purely cous.

But it ts into the current de-

bate, where more and more

policians from Germanys

coalion government are

talking about radical steps to

solve the euro crisis.

Ocially, though, Merkels line is that she wants

more Europe, not less. In the chancellors bid to

save the common currency, she is willing to go

to the very limits of what is permissible under

the German constuon. That was made clear

by her support for the permanent euro rescue

fund, the European Stability Mechanism (ESM),

and her pet project, the scal pact. But Merkel

sll wants more. We need a polical union,

she recently said on German public television

staon ARD. That means we have to give up

further competencies to Europe, step by step, in

an ongoing process.

But that will probably not work, given the lim-

its of the German constuon, something that

members of the opposion have been poinng

out for some me. In the meanme, more and

... It makes no sense or theECB to start nancing thosecountries, said Mr Coene, It

would only lead to the ECB

taking on the whole publicdebt o Spain and Italy ontoits balance sheet
http://www.telegraph.co.uk/finance/financialcrisis/9468862/Debt-crisis-ECB-buying-Spanish-and-Italian-debt-makes-no-sense-says-Belgian-bank-governor.html

7/31/2019 Hmmm 12 Aug 2012

11/25


13 August 2012 11

more people within the governing pares have

been talking about holding a referendum in Ger-

many on the European Union. Rainer Brderle,the oor leader of the business-friendly Free

Democrats, Merkels junior coalion partner,

said on Friday that there could come a point

when a referendum on Europe becomes neces-

sary.

Horst Seehofer, head of the Chrisan Social Union

(CSU), the Bavarian sister party to Merkels Chris-

an Democrac Union (CDU), has even called for

several referendums. Finance Minister Wolfgang

Schuble has also talked about holding a naon-

al vote on the EU.

Such a vote could indeed be a way to get the

much needed legimacy for a transfer of naon-

al competences to Brussels. But how would it

actually work in pracce? SPIEGEL ONLINE pres-

ents an overview of some possibilies.

There are three conceivable opons for a refer-

endm:

1. The Voluntary Way

The German constuon, ocially known asthe Basic Law, does not make much menon of

direct democracy. Referendums are only speci-

cally foreseen for the case of a reorganizaon of

germany erriory and for he even ha he

Basic Law, which was originally supposed to be

temporary, is superseded

by a new constuon.

There have been repeated

calls to give the popula-

on a greater say beyond

ordinary elecons, espe-

cially from the opposion.In contrast to the CDU, the

CSU and FDP are open to

he idea.

Crics say that quesons about transfers of com-

petence or measures to save the euro are too

complex. But CSU leader Seehofer considers

those objecons to be pure arrogance towards

the people. In the newspaper Die Welt, Seehofer

listed three areas where people should have

more say. They include: the transfer of signi-

cant competencies to Brussels; the enlargement

of the European Union through new member

states; and German nancial support for otherEU states.

Wha i rikin here i ha he Csu wold an-

swer no to all of these quesons. And the par-

ty believes that an increasingly euroskepc Ger-

man populaon would also say the same. But

not even Seehofer himself appears to believe

that the constuon would really be amended

to include his proposed referendums.

2. The Forced Way

Even more likely than opening up the constu-on for referendums is that it comes up for dis-

cussion as a consequence of European integra-

on. And this, of course, would require Germans

to decide on a new constuon. Arcle 146 of

the constuon spulates that the current con-

stuon shall cease to apply on the day on

which a constuon freely adopted by the Ger-

man people takes eect....

O O O DER SPIEGEL / LINK

Te woman was from Patmos. Herhusband had lost his job and come back to the is-

land to be with their two children and nd work.

Aer he failed and she fell ill with cancer, they

ran out of money. The bank seized their house;

they could not pay the electricity bill. She was

ahamed, he old Lazaro

Papageorgiou, of Artos-

Drassi, a charity in Athens

that feeds the poor. Six

monh ao he wold nev-

er have dream he woldcome to depend on charity,

but today she needed help.

Under the brilliant blue

Ahenian ky, aner ha

iven way o wearine and loom. Oide

Greeces parliament, in Syntagma Square,

marchers once braved tear-gas and protesters

thronged a tented city. But it is quiet now. Sum-

mer ha lred greek wih money o he iland

and the beaches; the growing numbers who are

... Greece will have to slashits budget decit by a total o11.5 billion in 2013 and 2014.Failure would mean being cut ofrom European unds, leavingthe government with no choicebut to print its own currency
http://www.spiegel.de/international/europe/germany-considers-holding-eu-referendum-a-849441.html

7/31/2019 Hmmm 12 Aug 2012

12/25


13 August 2012 12

without it have gone home instead. On Passion

Avenue, about 20 minutes away, shop aer shop

is barred. Nobody knows how many of them willopen again when Athenians return.

The only certainty is that life will get harder. Last

week the troika was in town. Represenng the

IMF, the European Central Bank and the Euro-

pean Commission, it must judge whether Greece

should receive the next 31.5 billion ($39 bil-

lion) of rescue funds, which the government will

mostly spend on recapitalising the banks and

paying debt interest. To qualify, Greece will have

to slash its budget decit by a total of 11.5 bil -

lion in 2013 and 2014. Failure would mean beingcut o from European funds, leaving the govern-

ment with no choice but to print its own cur-

rency. In eect, Greece would be out of the euro.

The troika le

Ahen on A-

gust 5th report-

ing good prog-

ress and saying

that it would be

back in Septem-

ber to nish itswork. A bond

payment falling

due before then

will be covered

by short-term

debt.

However, the re-

ality is as bleak

as the communi-

qu is bland. True, the economy is rebalancing.

Basic wages in Greece have fallen by 22%, therehas been scal consolidaon and the private-

sector labour market has been reformed. Yet the

public sector has not shed any of the 100,000

jobs it gained in a splurge of spending before the

crunch. The target for privasaon this year has

been cut from 3 billion to 300m. Unemploy-

ment is over 22% and climbing month by miser-

able month. And the economy, which has seen

only one quarters growth since the end of 2008,

is expected to shrink by more than 7% in 2012.

The glimmer of good news is that the mercu-

rial prime minister, Antonis Samaras, who has at

mes rejected the austerity deal with the rest ofthe euro zone, now seems fully behind it. As if

pinned to the spot by his impaired vision, the re-

sult of a detached rena, he seems to recognise

that his future is now based on Greece staying

in the euro. That means convincing a scepcal

euro zone that Greece really wants to change.

We will prove that we mean business, that we

are dedicated and mean to implement our plan,

he declares.

Credibility depends in turn on the nance min-

ister, Yannis Stournaras, a respected economist,whose technical experse might just alloy with

Mr Samarass polical guile to create a machine

that can get things done. The two men under-

stand that not a euro of fresh money is to be had

right nowindeed, they must know that plenty

of euro-zone countries would like nothing more

than to throw Greece out.

O O O ECONOMIST / LINK

Te Chinese investment vehi-cle known as Golden Elephant No. 38 promisesbuyers a 7.2 percent return per year. Thats more

than double the rate oered on savings accounts

naonally.

Absent from the products prospectus is any in-

dicaon of the asset underpinning Golden Ele-

phant: a near-empty housing project in the rural

town of Taihe, at the end of a dirt path amid rice

elds in one of Chinas poorest provinces.

They havent even built a proper road here,

said Li Chun, a car repairman, who said he livesin the project. The local government is holding

onto the ats and only wants to sell them when

prices go up.

Golden Elephant No. 38 is one of thousands of

wealth-management products, instruments

aimed at monied investors, which have shown

phenomenal growth over the last ve years.

Sales of them soared 43 percent in the rst half

of 2012 to 12.14 trillion yuan ($1.90 trillion),

according to a report by CN Benet, a Chinese

wealth-management consultancy.

SOURCE: EUROSTAT/ECONOMIST
http://www.economist.com/node/21560312

7/31/2019 Hmmm 12 Aug 2012

13/25


13 August 2012 13

They are usually created in Chinas shadow

banking system - non-banking instuons that

are not subject to the same regulaons as banks- which has grown to account for around a h

of all new nancing in China.

Like the subprime-debt lending spree in the

United States that helped spark the 2008 nan-

cial crisis, the products are oen opaque, and

usually dependent on high-risk underlying as-

sets, such as the Taihe housing project.

Financial instability in the worlds second-largest

economy could have global ramicaons, and

warning bells have begun to sound about the

way these products are marketed in China.

It has become a mammoth industry, comprising

an array of nancial products. Analysts have dif-

ferent ways of measuring the size of the sector.

Barclays esmates some 22 trillion yuan worth

of wealh manaemen

products will be issued this

year. Fitch Rangs says Chi-

nas banks had about 10.4

rillion yan in wealh man-

agement product liability athe end of Jne hi year

Reuters reviewed more than 50 wealth-manage-

ment and trust loan products, available online

and at bank branches in China, with the aim of

tracking, for the rst me in certain cases, where

investors money in these products ends up.

All, except two, failed to explain or even display

the underlying asset behind the product.

the China Bankin Relaory Commiion,

which oversees banking products, said morethan 20,000 wealth management products were

now in circulaon, from a few hundred just ve

year ao.

In an email response to the quesons raised in

this story, the regulator told Reuters new bank-

ing regulaons require more transparency about

these products.

It is uncommon to nd wealth management

products that fail to clearly specify the underly-

ing securized assets, it said, adding that a reg-

ulaon issued last year clearly states that WMP

prospectuses must indicate how the money isbeing used, and the percentage of money that is

being put into each asset class.

The commission is looking into further strength-

ening the regulatory framework over these prod-

ucts, and will connue to encourage the wealth

management industrys growth under the princi-

ples of transparency and sucient risk control.

Aer a ve-year bonanza in sales of these prod-

ucts, signs of trouble are building. China Cred-

it Trust Co, one of the countrys biggest trust

companies, has disclosed that one of its wealth

funds, Jinkai #1, is at risk of default because of

money it lent to coal company Zhenfu energy

Group. Zhenfus boss has been arrested, amid

reports he owed a total of 500 million yuan.

O O O REUTERS / LINK

Last week the Fi-nancial Times had an edi-

torial, Polics is adding to

Spanish woes, which theyended wih he followin:

While they wait, Madrid should sck with the

policies it is pursuing but intensify its work on

the banking sector. If high yields persist, Spain

can bear it for a while no one should buy the

kabbalism according to which a certain level of

yields marks the entrance to a black hole. The

eurozone needs to convince investors it will be

able to act if panic persists, which it can best do

by giving the new rescue fund a banking license.

But the best remedy against panic is reassur-

ance. A greater sense of polical competence in

Madrid and of decisiveness in Brussels would do

wonder.

I see it very dierently. Policy is certainly adding

to the problems in Spain, but I dont think it is

because, as the editorial claims, Prime Minister

Mariano Rajoy has mismanaged the polical

process, and I am not sure that greater polical

competence in Madrid, or decisiveness in Brus-

... Chinas shadow bankingsystem... has grown to accountor around a th o all newnancing in China
http://www.reuters.com/article/2012/08/06/us-china-banks-idUSBRE87501T20120806

7/31/2019 Hmmm 12 Aug 2012

14/25


13 August 2012 14

sels (!), will do anything at all, let alone wonders.

The problem, I think, is much more serious than

Rajoys unking hard choices, and I dont think

there was anything he could do to increase the

countrys credibility in a signicant way. We have

long passed that stage.

Why? Because, as I have

been suggesng for the last

six to twelve months, Spain

ha already ared on i

downward spiral and there

is almost nothing Rajoy or

anyone else can do to pre-

vent all parts of the economy

workers, small businesses,

large businesses, creditors,

depositors, and yes, policy-

makers from acng each

in their own way to increase

the debt burden, increase economic uncertainty,

make the balance sheet more fragile, and reduce

growth. These dierent economic agents by now

are simply behaving raonally in response to de-

clining credibility, and unless we expect from

them a huge burst of irraonal cheer, there is noreason to expect them to change their behavior.

All of their acons, of course, reduce credibility

further, and as credibility drops it simply rein-

forces the adverse behavior of all the raonally

misbehaving economic agents. This is the dread-

ed self-reinforcing loop typical of countries in

the nightmare stage of a debt crisis.

We have seen this process many mes before

in the history of sovereign debt crises, and it is

mind-numbingly mechanical. No maer howwell Rajoy implements scal austerity (assum-

ing that this is indeed the right thing to do),

no maer how many mes policymakers plead

with markets to give them me to implement

reforms, no maer how oen the government

begs workers and businesses to have more con-

dence, at this point it is going to be incredibly

dicult for Spain to escape from this cycle.

The problem is arithmec, not condence. Ba-

sic balance of payments math tells us that in or-

der to repay its external debt Spain must run a

large trade surplus. If it ends up however with

a trade surplus caused simply by a collapse indomesc demand and soaring unemployment,

which is the current path, domesc polics will

become unmanageable and Spain will eventu-

ally be forced to leave the

euro in order to regain com-

peveness in a less painful

way. One of he ood hin

about a well-funconing

democracy is that it simply

wont permit a debt crisis to

be resolved by forcing an un-

acceptable burden onto the

working populaon.

the reqiremen for a rade

surplus is the key point.

Even if there were no capital

ight, and assuming we are

unlikely to see large investment-driven private

inows into Spain for many years a prey safe

bet, I would think Spain must run a large trade

surplus in order to repay foreign debt holders

(technically Spain must actually run a current ac-count surplus, but in pracce this means a trade

surplus). Of course capital ight, which is already

large and rising, as I will discuss later, means that

Spain must run an even larger trade surplus than

otherwise if it is going to repay external debt.

O O O MICHAEL PETTIS (VIA MISH) / LINK

Expectaons of a new asset purchase program

by the Fed connue to persist as various pundits

ancipate its unveiled at the Jackson Hole gath-

erin.

CNBC: - Ebullient stock markets are increas-

ingly pricing in the possibility that the Feder-

al Reserve will soon unveil another round of

monetary smulus, Pimco Managing Direc-

tor Neel Kashkari told CNBC Wednesday.

The Fed is really in a box right now, said

Kashkari, who was an architect of the Trou-

bled Asset Relief Program that bailed out

major banks during the 2008 nancial crisis.

Inaon expectaons and stocks are at levels

... Spain has already startedon its downward spiral andthere is almost nothing Rajoyor anyone else can do to preventall parts o the economy...rom

acting each in their own wayto increase the debt burden,increase economic uncertainty,make the balance sheet moreragile, and reduce growth
http://globaleconomicanalysis.blogspot.sg/2012/08/problem-in-europe-is-arithmetic-not.html

7/31/2019 Hmmm 12 Aug 2012

15/25


13 August 2012 15

that appear to be assuming imminent Fed ac-

on, he told CNBCs Squawk Box.

Those indicators have already priced in that

the Fed should act, Kashkari said. As a result,

the fund manager suggested Fed Chairman Ben

Bernankes hands appear to be ed ahead of

a closely watched speech on the economic out-

look later this month in Jackson Hole, Wyo.

Market parcipants are looking for a x, a repeat

of the high Bernanke delivered at Jackson Hole

in 2010 when QE2 was introduced. Markets how-

ever are in for a major disappointment because

no outright asset purchases will be announced.

There are mulple reasons for this, including the

fact that real rates are now deep in the negave

territory (as discussed here) and the policy as

expressed in long-term real rates is far more ac-

commodave than it was in 2010.

But what makes 2012 enrely dierent is that

the key concern that pushed the Fed into asset

purchases in 2010 no longer exists. The summer

of 2010 was marked by renewed fears of dea-

on driven by credit contracon. The Fed was

afraid of Japan-style deaonary pressures thatare extremely dicult to arrest as bank lending

shuts down. In the months preceding the 2010

Jackson Hole speech, credit was contracng

sharply with banks steadily shrinking balance

sheets. As discussed before, just the opposite

is true in 2012 - credit is expanding at a decent

pace. The chart below compares the trends now

and in 2010.

So what should we expect from Bernanke this

me around? It will likely be more of the same

things weve already heard recently:

1. US economic growth has lost some momen-

tum. Growth in employment has been slow and

the unemployment rate remains elevated.

2. Europe poses downside risks. A slowdown in

emerging markets is also a concern.

3. The Fed will remain vigilant and expects tomaintain a highly accommodave stance for

monetary policy.

4. The Fed is to connue with Maturity Extension

Program (Twist) and Reinvestment Policy (rein-

vesng in MBS to maintain constant balances).

Thats basically it. If the markets are pricing in

more from Jackson Hole - which the recent equi-

ty rally suggests may be the case - we are seng

up for a sharp sello in risk assets.

CNBC: - If he doesnt deliver in Jackson Hole youll see these risk markets react and fall

back, Kashkari said. Investors clamoring for

more quantave easing suggests theres

downside risk from here if the Fed doesnt

move,

O O O SOBERLOOK / LINK

So we have a new erm: BRIXIt.Japans biggest bank Nomura has issued an 11-

page study evaluang the likelihood that the UKwill leave the European Union enrely or partly.

Events could accelerate as soon as this autumn if

eurozone woes force the Government to commit

to a rm date for a BRIXIT referendum.

The eect a looser relaonship with the EU

would have on the UK economy in general and

on the nancial services sector in the UK in par-

cular is not clear at this me, even though Brit-

ish euroscepcs argue that being freed from EU

regulaon would be a booster. However, theSOURCE: SOBERLOOK
http://soberlook.com/2012/08/the-jackson-hole-fix-is-not-coming.html

7/31/2019 Hmmm 12 Aug 2012

16/25


13 August 2012 16

prospect is, in our view, bound to raise concerns

indeed, is doing so already in the City.

The core point is that the eurozone may have to

take drasc steps in integraon (scal union, etc)

to save the euro, making it nigh impossible for a

fully sovereign state to remain part of the Proj-

ect.

In other words, it is not so much Britain leaving

the EU as the EU leaving the treaty-based club of

sovereign states it was supposed to be.

The report is part of the banks Issues which

keep me awake at night series.

I doe no ake ide.

Here are a few extracts, wrien by Alastair New-

ton (an ex-Brish diplomat, former head to Tony

Blairs G7 team, and intel-

ligence co-ordinator in the

rst Gulf War). Unfortunate-

ly, we cannot post the whole

report online because of

Nomuras compliance rules.

The bank emphasises that

this is his personal opinion.A deepening of the euro-

zone crisis in the immediate future remains

a real possibility despite the recent eorts of

the ECB in parcular to calm markets. This,

in turn, could spur acceleraon in integraon

in order to try to prevent the collapse of the

eurozone, thereby advancing projects which

are likely to prove dicult for the Brish gov-

ernment.

One thing which is clear is that (assuming

the eurozone does not collapse completely) it

is only a maer of me, in our view, before

crisis-related steps are agreed which necessi-

tate treaty changes. In those circumstances,

the Brish government will almost certainly

demand treaty change for treaty change in

an eort to repatriate powers, ie be looking

to win repatriaon of powers to London for

every concession on treaty reform sought by

the eurozone on a one-for-one basis. Howev-

er, in so doing the UK would likely be looking

to repatriate powers which EU partners may

be unwilling to concede within he context of

the single market.

Third, and nally, we do not rule out the pos-

sibility of a serious schism between the EU nd

the UK developing over non-crisis-related is-

sues, with the 2014-20 EU budget an obvious

potenal bone of contenon.

In the event of either the second or the third

of these scenarios occurring, Mr Cameron

could nd himself in a very dicult posion

indeed, ie, under even more intense pressure

from within the ranks of his own party to call

an immediate referendum but knowing that,

if he were to agree, this could be a bridge too

far for the pro-EU LibDems who would try to

force an early elecon rather than support

the legislaon necessary to

hold a referendum. Thus, if

there is to be a referendum

in the UK on EU member-

ship, it does indeed look like-

ly to be aer the next elec-

on, rather than before; but

this could be at the price ofthe elecon being brought

forward.

O O O AMBROSE EVANS-PRITCHARD/ LINK

Arican countries maynever feela hard pull on no strings aached loans from

China. Thats because for the past few decades,

aid has been tethered to infrastructure projects,

which experts say are only going to grow.

Since the rst Forum on ChinaAfrica Coopera-on (FOCAC) was held in 2000, China has oered

hundreds of billions of yuan to African coun-

tries in the form of interest-free and preferenal

loan.

On the h ministerial meeng of FOCAC on

July 19 in Beijing, the Ministry of Commerce an-

nounced that China had wrien o 391 overdue

loans owed by the most heavily indebted and

least-developed naons globally by the end of

2011. Of these, 14 debts of nine African coun-

... assuming the eurozone doesnot collapse completely it isonly a matter o time, in our

view, beore crisis-related stepsare agreed which necessitate

treaty changes
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100019397/asian-banks-prepare-for-british-exit-from-the-eu/

7/31/2019 Hmmm 12 Aug 2012

17/25


13 August 2012 17

tries were included.

At the 2006 FOCAC, China announced that it

would provide a total of US$ 5 billion to African

naons in the subsequent three years. By 2009,

the pledge was doubled to US$ 10 billion. China

followed hroh on he aranee and ha

now promised US$ 20 billion in so loans be-

tween 2012 and 2015.

Yet at home, crics say spending abroad has ne-

glected nancing for far more pressing domesc

need.

In response to such observaons, assistant Min-

ister of Commerce Zhang Lijin said at this yearsforum that Chinas aid to Africa is simply doing

the best it can, and that in proporon to GDP,

aid amon are marinal.

Chinas aid programs to Africa began in the

1950s through construc-

on projects in the explicit

promoon of an ideological

program. Support from Afri-

can countries in the United

Naons General Assembly

led to a crucial turning pointin China andin on he

global stage two decades

later a permanent seat on

the UN Security Council.

It is our African brothers that carried us into the

United Naons, Mao Zedong once remarked.

With the excepon of recognizing the one Chi-

na policy, the outcomes that Chinese foreign

aid disbursements seek to realize remain unof-

cially acknowledged, given almost zero condi-onalies for aid provision.

Unlike other countries that distribute foreign aid

through foreign aairs ministries or relief agen-

cies, the Ministry of Commerce is chiey respon-

sible for foreign aid funds.

But lile is known about the total amount of for-

eign aid that China has spent in Africa.

In April 2011, China released its rst white pa-

per on foreign aid. The paper stated that in 2009,

China provided a total of 256.3 billion yuan in aid

globally.

The white paper described three principal forms

of aid: non-reimbursable donaons, interest-

free loans and so loans. The former two are

provided by the Ministry of Finance, while the

laer is issued by the policy bank, Export-Import

Bank of China.

According to ocial data, by the end of 2009,

approximately 40 percent of Chinas foreign aid

was in the form of non-reimbursable donaons,

the majority of which were used for small- and

medium-scale social construcon projects such

as hospitals, schools, wells and aordable hous-

in.

O O O CAIXIN / LINK

Outgoing rate setter Adam Poenhas said the Bank of England

should drop its anguished

religious ethics over how

to smulate the economy,

while former MPC member

Danny Blanchower said ithas no clue about where

the economy is going.

Mr Posen, who for over a

year was alone in calling for more quantave

easing, said the BoE should not limit its asset

purchases to government bonds.

I personally view the teeth-gnashing and gar-

ment-rending about whats scal and monetary

as too much drama for too lile content, the

Financial Times quoted him as saying in an in-

erview.

Many central bankers believe only elected gov-

ernment can buy private sector assets.

Mr Posen said that provided the BoE did not buy

debt direct from the government, he didnt think

it maered that much what assets the central

bank acts on.

The Bank of England launched a third round of

quantave easing asset purchases in July tak-

... In April 2011, China re-leased its rst white paper onoreign aid. Te paper statedthat in 2009, China provideda total o 256.3 billion yuan inaid globally
http://english.caixin.com/2012-08-10/100422486.html

7/31/2019 Hmmm 12 Aug 2012

18/25


13 August 2012 18

ing it to 375bn in an aempt to smulate the

economy. It is buying the debt on the second-

ary market, that is debt that has already beenied.

I have no queson in my mind that what were

doing with QE is prevenng things from geng

much worse, but that doesnt mean you couldnt

have an addional or beer instrument, he said.

Mr Posen also said austerity measures to tackle

Britains biggest peaceme debt has had a great-

er brake on recovery than the BoE and the gov-

ernment expected.

He felt the outlook for the economy could havebeen improved if the BoE has acted faster and

more decisively to signs of a slowdown.

Mr Blanchower echoed his view in the Inde-

pendent, wring: It is blindingly apparent that

the MPC should have done

much more monetary sm-

ulus a while ago, including

unconvenonal asset pur-

chases, as suggested by my

old friend Adam Posen.

He said the MPCs new

growth forecast with a central projecon of

growth of 2pc by 2013 and beyond with only a

slim prospect of zero or negave growth look

broadly similar to the one from May 2011 and

looks equally unlikely to be correct.

Mr Blanchower writes: The MPC didnt know

where the economy had been, didnt know

where it was when they made the forecast, and

had no clue where it was going and sll doesnt.

O O O UK DAILY TELEGRAPH / LINK

With the daily focus on Europeancrisis and the hope of central bank interven-

on, one of the essenal features of the invest-

ment climate at least for long-term investors

is easy to lose in the shue. That feature is

valuaon. Its an easy concern to overlook, be-

cause with corporate prot margins close to

70% above historical norms (largely because of

unsustainably large government decits coupled

with low private savings rates see Too Lile to

Lock In), Wall Street is quite happy to look at the

rao of prices to near-term earnings esmatesand conclude that valuaons are sasfactory.

But stocks are not a claim on one year of earn-

ings. They are a claim on a very long stream of

cash ows that will actually be delivered into the

hands of investors. Unfortunately, the conclu-

sion that stocks are appropriately valued rests

on the implicit assumpon that prot margins

will remain elevated into the indenite future.

We presently esmate a projected 10-year total

(nominal) return for the S&P 500 of less than

4.6% annually. Nothing in recent years, muchless the past decade, indicates any material

change in the relaonship between actual mar-

ket returns and expected market returns as we

esmate them using a range of fundamentals

including normalized earn-

ings. Indeed, the 5.1% total

return of the S&P 500 over

the most recent 10-year pe-

riod has been right on target

(see also my July 7, 2002

comment). Its notable thateven without compelling

valuaons a decade ago, we

lied 70% of our hedges several months later in

early 2003, at what turned out to be the start of

the next bull market something to remember

for hoe who minderand or wo-daa e

issue of 2009-early 2010 and assume that well

never li our hedges unl the market is deeply

ndervaled.

I ancipate that a decade from now, the S&P

500 will have achieved a total return that is veryweak from a long-term perspecve. Remember

also that you dont lock in a 10-year return.

You ride it out. I connue to expect that inves-

tors will have numerous opportunies to accept

risk in the coming years in expectaon of much

beer prospecve returns than are presently

likely.

Of course, with the yield on the 10-year Treasury

bond at just 1.6%, one might argue that a pro-

specve 10-year return of nearly 4.6% on stocks

... It is blindingly apparentthat the MPC should have donemuch more monetary stimulusa while ago, including uncon-

ventional asset purchases
http://www.telegraph.co.uk/finance/economics/9471703/No-clue-Bank-of-England-urged-to-drop-anguished-religious-ethics-over-QE.html

7/31/2019 Hmmm 12 Aug 2012

19/25


13 August 2012 19

is sll very good by comparison, and should be

enough to prevent any substanal adjustment

to lower prices and higher prospecve returns.

to inform ha armen, Ive added he 10-

year Treasury bond yield to our standard chart

[above]. Note that the correlaon between 10-

year S&P 500 returns and 10-year Treasury bond

yields (which reect both expected and actual10-year returns, provided no default occurs) is

just 0.1. There is virtually no relaonship at all,

with the excepon of the early-1980s, when the

prospecve and actual returns were quite high

for both as a result of inaon shocks.

While the simultaneous rally in both stocks and

bonds from the early 1980s through the late-

1990s gave the illusion that the 10-year bond

yields and forward operang earnings yields had

a precise point-for-point relaonship, spawning

an unfortunate lile coage industry of adher-ents to the Fed Model, this model is based en -

rely on the relaonship between stock yields

and bond yields during a specic 16-year period

of sustained disinaon, and there is no evi-

dence or even sound theory supporng that

spurious one-to-one correlaon more generally.

Why arent the 10-year returns of stocks and

bonds (prospecve or actual) more closely relat-

ed? The reason is simple, really. 10-year bonds

have an eecve duraon of only about 7-8

years, depending on the coupon, which means

that your ending wealth is nearly completely de-

termined within that horizon. In contrast, stocks

are very long-term assets, with an eecveduraon roughly equal to the price/dividend

rao*, which means that changes in valuaon

dramacally aect the terminal value of your in-

vestment even for horizons out to 30-40 years,

and somemes longer when valuaons are rich

and yield are low.

O O O JOHN HUSSMAN/ LINK

In March, the last gures that are avail-able, the Spanish banks lost $66 billion of capital

as the cizens of Spain moved their money tosafer havens. What the LTRO gave the populace

took away and the situaon is unsustainable.

Spain will soon be forced into a full-edged bail-

out in my opinion which will require money for

the regions and for the banks. My best surmise is

about $350-400 billion that will be required and

while it may come in tranches; that will be the

total. This will then shi the focus to Italy in the

short run and then onto France and Germany

and just how much can be aorded in this rush

into nancial imprudence dictated by trying tomaintain a Union that can no longer stand under

its own weight or naonal interests. The debts in

Europe are no longer trivial and someone has to

pay in the end. Free money, even printed money,

is never really free and always has consequences

which would be the downgrades of Germany and

France in the short term and all of the increased

costs of funding that would come with it.

I hink wha amaze me he mo i ha o many

people have the honest opinion that Sir Draghi

is going to come charging out from the roundtable, from the gilded gates of the ECB and

save Europe. That White Knight is subject to the

whim of germany and he re and all of he alk

of independence and the separaon of Church

and State is just that; talk. I fear these people

are hitching their wagon to some shoong star

ha won hoo. Blizen, Donner and he oher

reindeer are sll out in the pasture faening up

for their Christmas ride and are not available to

bring presents this early in the year.

O O O ZEROHEDGE / LINK

SOURCE: HUSSMAN FUNDS
http://www.zerohedge.com/news/grexit-spailout-and-draghis-white-knighthttp://www.hussmanfunds.com/wmc/wmc120813.htm

7/31/2019 Hmmm 12 Aug 2012

20/25

20.CHARTS THAT MAKE YOU GO Hmmm...

13 August 2012 20

Healthcare costs inFrance (red line) and the USA (blue

line). Sheesh.

Te so-called ethanol crush spread is calculated as follows:Crush Spread = (Ethanol price per gallon x 2.8) - Corn price per bushel

This decline in spread means that ethanol prices are suciently scky and will not rise in proporon

to corn prices. And the 3% expected reducon in ethanol prices will simply reduce ethanol exports.

EIA does not expect the current situaon in corn markets to have a signicant eect on the pump

price of gasoline. Given the year-to-date ethanol supply and the availability of banked renewable

idencaon number (RIN) credits, the current re-

laonship between the prices of ethanol and petro-

leum-based gasoline components, and the relavely

modest share of ethanol in the overall gasoline pool

[10%], we expect gasoline prices will connue to be

driven by crude oil prices and rening margins. The

impact of the forecasted decline in domesc ethanolproducon should be primarily reected in reduced

ethanol exports.

So when policians begin taking credit for reducing

gasoline prices by pressuring the EPA to relax the

ethanol rules, its nothing more than polical games-

manship. Changing the mixing rules will do lile to

impact the cost of gasoline because its not ethanol

but crude oil prices that determine how much we

pay at the pump.

O O O SOBERLOOK / LINK

CLICK TO ENLARGE SOURCE: FRED/JESSE/BUSINESS INSIDER

SOURCE: EIA/SOBER LOOK
http://soberlook.com/2012/08/is-ethanol-really-impacting-gasoline.htmlhttp://jessescrossroadscafe.blogspot.sg/

7/31/2019 Hmmm 12 Aug 2012

21/25


13 August 2012 21

CLICK TO ENLARGE
http://www.onlinenursingprograms.com/nursing-your-sweet-tooth/

7/31/2019 Hmmm 12 Aug 2012

22/25


13 August 2012 22

Chinas thirst or raw materials (and diversicaon from dollars into hard assets) is out-lined beaufully in this great graphic from Straor which details investment oers made by Chinese

rms since 2010.

Dont expect this to slow down any me soon.

(thanks Barry)

CLICK TO ENLARGE SOURCE: STRATFOR (VIA BARRY RITHOLTZ)
http://www.stratfor.com/sites/default/files/main/images/Africa_china_investments_v2.jpg

7/31/2019 Hmmm 12 Aug 2012

23/25

23.

13 August 2012 23

WORDS TH AT MAKE YOU GO Hmmm...

Hes back. wice.

Two doses of Nigel Farage for you this week as he take on an extremely con-frontaonal interviewer on the BBCs HardTalk programme an, in an interview

with Eric King, lays out, amongst other things, the extent of his feelings towards

Franois Hollande. As always, Nigel pulls no punches and leaves us in no doubt

a to where he stands on just about every issue.

Click either side of Nigel to listen to the interview of your choice...

Hal Mason is an accountant... ohBOY, is Hal Mason an accountant. Here in this

short video, Hal demonstrates why the US bud-

e cannotbe balanced.

I dont think this will come as a shock to any-

body who has been paying aenon, but when

it is laid out in such stark simplicity it becomes

even more sobering.

One day, this problem, that currently seems tomaer to nobody, will maer to everybody.

(courtesy of Tim Iacono)

Bert Dohmen believes that we are coming up on a tremendousbuying opportunity in the gold market as he sees much higher prices longer term.He also believes the general market is very dicult to short, as the risk-on, risk-o

trades, and increased volality make shorng very dicult.

Here, he talks to Jim Puplava about these and other thoughts. An excellent inter -

view.

HARDTALK

KWN

CLICK TO WATCH

CLICK EITHER TO LISTEN

CLICK TO LISTEN
http://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/8/11_MEP_Nigel_Farage_files/Nigel%20Farage%208%3A11%3A2012.mp3http://www.financialsensenewshour.com/broadcast/fsn2012-0811-1.mp3http://www.youtube.com/watch?v=EW5IdwltaAc&feature=player_embeddedhttp://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/8/11_MEP_Nigel_Farage_files/Nigel%20Farage%208%3A11%3A2012.mp3

7/31/2019 Hmmm 12 Aug 2012

24/25

SUBSCRIBE UNSUBSCRIBE COMMENTS

and fnally

13 August 2012 24

Hmmm

THING S THAT MAKE YOU GO HMMM..... 2012
http://ethreemail.com/subscribe?g=bdc736behttp://ethreemail.com/unsubscribe?g=bdc736bemailto:TTMYGH%40me.com?subject=Hmmm.....%20Feedbackmailto:TTMYGH%40me.com?subject=Hmmm.....%20Feedbackhttp://ethreemail.com/unsubscribe?g=bdc736behttp://ethreemail.com/subscribe?g=bdc736be

7/31/2019 Hmmm 12 Aug 2012

25/25


As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from me-to-me,

the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm..... may

reect the posioning of one or all of the Vulpes funds - though I will not be making any specic recommenda-

ons in this publicaon.

Grant

www.vulpesinvest.com

Grant Williams

Grant Williams is a portfolio and strategyadvisor to Vulpes Investment Managementin Singapore - a hedge fund running over$250million of largely partners capitalacross multiple strategies.

The high level of capital committed by theVulpes partners ensures the strongest possi-ble alignment between us and our investors.

In Q4 2012 we will be launching the VulpesAgricultural Land Investment Company(VALIC), a globally-diversied agricultural land vehicle which will provide truly diver-sied exposure to the agricultural sector through a global portfolio of physical farm-land assets.

Grant has 26 years of experience in nance 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 Twier: @TTMYGH

YouTube Video Channel: hp://www.youtube.com/user/GWTTMYGH

California Investment Conference 2012 Presentaon: Simplicity: Par I : Par II
http://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdfhttp://www.vulpesinvest.com/https://twitter.com/ttmygh/http://www.youtube.com/user/GWTTMYGHhttp://www.youtube.com/watch?v=Ri6rIF40iSA&feature=plcphttp://www.youtube.com/watch?v=xoMAYAKHQqU&feature=plcphttp://www.youtube.com/watch?v=xoMAYAKHQqU&feature=plcphttp://www.youtube.com/watch?v=Ri6rIF40iSA&feature=plcphttp://www.youtube.com/user/GWTTMYGHhttps://twitter.com/ttmygh/http://www.vulpesinvest.com/http://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdf

hmmm 12 aug 2012

Documents