hmmm october 16 2011

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THINGS THAT MAKE YOU GO

HmmmA walk around the fringes of nance

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ths somhing happning hWhat it is aint exactly clearths a man wih a gun ov h

tlling m I go o waI think its me we stop, children, whats that soundEverybody look whats going down

Theres bale lines being drawnNobodys right if everybodys wrongYoung popl spaking hi mindsGeng so much resistance from behind

I think its me we stop, hey, whats that soundEverybody look whats going down

What a eld-day for the heatA housand popl in h sSinging songs and carrying signsMostly say, hooray for our sideIts me we stop, hey, whats that sound

Everybody look whats going downPaanoia siks dpInto your life it will creepIt starts when youre always afraidYou step out of line, the man come and take you away

Somethings Happening Here, Bualo Springield(hanks JS)

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2.THINGS THAT MAKE YOU GO Hmmm...

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The Duchy of Grand Fenwick is no more than ve miles long andh mils wid and lis in a fold in h Nohn Alps. I faus

three valleys, a river, and a mountain with an elevaon of 2,000 feet. On thenorthern slopes are 400 acres of vineyards. The hillsides where the groundis less ferle support ocks of sheep that provide meat, dairy products andwool. Most of the inhabitants live in the City of Fenwick that is clustered

around Fenwick Castle, the seat of government. About 2 miles from the Cityof Fenwick is a 500 acre Forest Preserve that features a 20 foot waterfall and at-tracts many birds that the naon claims as its own nave birds.

The Duchy, ruled by Duchess Gloriana XII, is described as bordering Switzerlandand France in the Alps. It retains a pre-industrial economy, based almost enrely on

making wool and Pinot Grand Fenwick wine. It takes its name from its founder, the English knight SirRoger Fenwick who, while employed by France, seled there with his followers in 1370. Thanks to SirRoger, the naonal language is English.

The Duchy of Grand Fenwick is a monarchy led by Duchess Gloriana XII. The naon has two policalpares, the Diluonists, led by David Bentner, and the An-Diluonists, led by Count Mountjoy, thePrime Minister. The names of the pares reect their posions on whether to dilute the wine exportsof the Duchy. The posions of leadership are hereditary.

The Duchy of Grand Fenwick is also completely conal.

Irish author Leonard Wibberly constructed the ny country in the mid-1950s and proceeded to placeit in a series of ludicrous situaons designed to facilitate commentary on the geopolical situaon ofthe day.

Grand Fenwick appeared in ve comedic novels, but the one that introduced the ny Duchy to theworld remains both its most famous oung and has become a popular meme that has endured forover 50 years; The Mouse That Roared.

Wibberlys novel centred around a declaraon of war by the ny Duchy on mighty America overwhat basically boiled down to copyright infringement on Grand Fenwicks chief export - Pinot GrandFenwick. The leaders of the Duchy skipped the trade war and went straight to the next stage, invad-ing New York City - coincidentally arriving in the midst of a city-wide disaster drill which rendered thestreets completely empty.

The scheme was simple: declare war on the USA, be beaten soundly and quickly and then rebuild andrenance the country through the usual American largesse extended to its vanquished foes (Marshall

Plan, anybody?).

Recently, another obscure (but this me all too real) mouse has roared in Europe as Slova-kia this week took the racaon of the expanded EFSF to the very brink before nally vongthrough the moon required to ensure that all 17 members of the Eurozone rubber-stamped theincrease in the size of the war chest at the second aempt.

The failure of the rst aempt to gain the assent required ulmately toppled Prime Minister IvetaRadicovas four-party coalion government as only 55 of 124 lawmakers voted in favour of the origi-nal proposal with 9 vong against and 60 abstaining.

Radicova issued a hearelt plea ahead of the rst vote, the like of which one could only hope to see

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in a European parliamentary seng:

What we are deciding on today is the good name of Slovakia, reliability, where it will belong... or

if we exclude ourselves from the community of the successfulI beg you, trust this government...

the interests and reliability of Slovakia are the most valuable things I know, I have, I oer,.

But Radicovas emove pleas fell on deaf ears amongst members of the leist Smer-SD opposionparty who oered to team up with the outgoing government and rafy the EFSF albeit in exchangefor a snap elecon; a strategy no doubt inspired by another mouse that recently roared in the shapeof Timo Soinis True Finns Party who recently came from nowhere to turn Finnish polics on its headand almost stole a general elecon in the process.

Rafying the EFSF was always going to be a problem for a disparate collecon of 17 vested interestswho were nearly all looking to Germany to pick up the tab. In order to sell the racaon to the Slova-kian people, Radicovas government had to come up with a plausible raonale to explain some highly

implausible dierences and Richard Sulik, leader of the Freedom and Solidarity Party (SaS) whichformed part of the aforemenoned coalion hardly helped maers:

(RT News): The average pension in Slovakia is less than 400 euros, Sulik declared last week. The

average pension in Greece is 1,400 euros three, four mes higher.

Its impossible to explain to a Slovak pensioner that he or she has to contribute in the form of

higher VAT, for example toward Greek pensions, he said. Or toward Italian MPs salaries, the

highest in Europe.

The SaS, it has to be said, had a fairly compelling argument for why they chose to abstain from thevote:

(The Conversaon): The argument by the Freedom and Solidarity Party in Slovakia is that theyhave been penalised for having complied with the rules. You can imagine that argument sounds

very plausible to many Slovak voters because it was quite a painful process for Slovakia to comply

with the Maastricht Treaty criteria that created the common currency no more than 60% debt to

GDP and no more than a 3% decit of GDP in a year.

Greece has consistently violated these condions the Greek government hasnt even lived up to

the condions it accepted a year ago. Greece is a complete mess.

Who believes these policies have worked when Greece is in a worse state now than it was a year

ago?

In an inviw wih D Spigl in the days before the vote, Sulik made a hell of a lot more sense than

prey much any of the other Eurocrats who had been running around shoong o their mouths inthe lead-up to various racaon votes:

SPIEGEL ONLINE: Slovakia has yet to approve the expansion of the euro backstop fund, the Euro-

pean Financial Stability Facility (EFSF), because your Freedom and Solidarity (SaS) party is blocking

the reform. If a majority of Slovak parliamentarians dont support the EFSF expansion, it could

ulmately mean the end of the common currency.

Sulik: The opposite is actually the case. The greatest threat to the euro is the bailout fund itself.

SPIEGEL ONLINE: How so?

Sulik: Its an aempt to use fresh debt to solve the debt crisis. That will never work. But, for me, the
http://www.spiegel.de/international/europe/0,1518,790577,00.htmlhttp://www.spiegel.de/international/europe/0,1518,790577,00.html

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main issue is protecng the money of Slovak taxpayers. Were supposed to contribute the largest

share of the bailout fund measured in terms of economic strength. Thats unacceptable.

Right there, in one short sentence, Sulik hits the nail on the head for every can-kicking policianaround the world who clings to the fanciful noon that increasing the debt load is somehow going tomagically cure the fundamental problem facing the world which is; Too. Much. Debt.

Just to make maers worse, Sulik then goes on to make even MORE sense when asked about the fun-damental underpinnings of Europe and refuses to fan the ames of fear when asked about a possibleconagraon:

SPIEGEL ONLINE: If the euro only causes problems, why doesnt Slovakias government just pull the

country out of the euro zone?

Sulik: I dont see the euro as the problem. It s a good project. Everyone involved can benet from it

-- but only if they sck to the ground rules. And thats exactly what were demanding.SPIEGEL ONLINE: Which ground rules should we be following?

Sulik: We have to observe three points: First, we have to strictly adhere to the exisng rules, such

as not being liable for others debts, just as its spelled out in Arcle 125 of the Lisbon Treaty. Sec-

ond, we have to let Greece go bankrupt and have the banks involved in the debt-restructuring. The

creditors will have to relinquish 50 to perhaps 70 percent of their claims. So far, the agreements

on that have been a joke. Third, we have to be adamant about cost-cung and manage budgets

in a responsible way.

SPIEGEL ONLINE: Many experts fear that a conagraon would break out across Europe should

Greece go bankrupt and that the crisis will spill over into other countries, including Portugal, Spain

and Italy.

Sulik: Policians cant allow themselves to be pressured by the nancial markets. Just because eq-

uity prices fall and the euro loses value against the dollar is no reason for giving in to panic.

And, for the coup de grace, Sulik

SPIEGEL ONLINE: But do you really believe that policians can calm the nancial markets by stub-

bornly scking to their principles?

Sulik: Lets just ignore the markets. Its ridiculous how policians orient themselves based on

whether stock prices rise or fall a few percentage points.

But its not simply the disparity in the levels of pensions that might cause the average Slovakian to

baulk at contribung their 7.7 billion share towards the EFSF. If you dig into the numbers, the scaleof the problem becomes apparent:

(EIU): The queson of bailing out Greece and other free-spending euro-zone members is sensive

in Slovakia, which made considerable sacrices to adopt the single currency at the start of 2009.

In that year its public debt was comfortably below 40% of GDP, which is far lower than all of the

EUs western members bar Luxembourg. By contrast, the Greek and Italian debt raos were near

120%, the French and Portuguese ones were near 80% and even scally-responsible Germanys

rao was comfortably above 70%. Because Slovakia has run a ght ship scally, the issue of bailing

out richer, more proigate EU states is highly sensive domescally.

Slovakias share of the EFSF, at 7.7bln is equal to just over 35% of consolidated budget revenue in

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2009. Whilst the total amount is unlikely (and I stress UNLIKELY) to be de-manded in one tranche, it sll represents a huge burden on a government

that came to oce aempng to trim a budget decit that ballooned to6.8% of GDP in 2009.

A look at the average net wages of the Eurozones 17 members (le) providesyet more grist to the mill of dissent in Slovakia as she sits comfortably at thetop of the list of low earners - just above the proigate PIGS whom she is be-ing expected to support. In fact, the average Greek already earns over twicethat of his (or her) Slovakian counterpart. Hardly seems fair now, does it?

So now the EFSF has nally been raed by the 17 Eurozone members aera lile under six months, what happens now? Will the funds contributed, ashas been rumoured (not to menon posively encouraged by a spendthriTim Geithner) be levered and used to bail out the banks or are we, as I sus-pect, going to nd ourselves trying to gure out exactly how a EuroTARP willwork? Clearly, now Slovakia has nally cleared the EFSF for take-o, Europesbanks are set to take centre stage.

This past week I aended the UBS Pan-Asia Hedge Fund Conferencehere in sunny Singapore and was fortunate enough to listen to a pre-sentaon by Larry Hatheway, UBS chief economist/strategist. In an excellentspeech, Larry Laid out what he termed UBS staon-to-staon expectaonsfor the path Europe was likely to take in recapitalizing the banks.

Larry proposed that each country would ring-fence only its own banks and

recapitalize them to the tune of whatever haircut was required once an or-derly Greek default was enacted. Germany would recapitalize German banks,

France would recapitalize French banks and so on down the chain. The idea is a sound one. The planplausible. The outcome? Who knows? Maybe it works, maybe it doesnt. Unfortunately, I am inclinedo liv i dosn.

There are just way too many conicng interests, conicng moves, conicng naonal personali-es and, perhaps most problemac of all, way too many policians involved - both at the individualcountry level and again at the European level. In fact, the day following Larry Hatheways presenta-on, a Bloomberg arcle laid out in very clear terms just how interdependent the countries of theEurozone and their respecve banking systems are, under the headline Germany Backing Italy Seenas Key to Europes Bank Crisis:

(Bloomberg): European bank stocks have fallen as borrowing costs climbed in recent months amid

rising concern that they may have to take greater losses on debt issued by Greece, Italy, Ireland,

Portugal and Spain. As policy makers seek to make lenders hold more capital to absorb potenal

losses, investors and analysts say the banking crisis cant be solved unless Germany, the regions

richest country, shows its willing to stand behind Italy and Spain, the two biggest debtors of the

ve countries.

What needs to happen as part of this package is that the possibility, the discussion or even re-

mote likelihood of haircuts on Spain and Italy needs to be killed and taken out of the market,

Philippe Bodereau, a porolio manager and global head of nancial instuons credit research

at Pacic Investment Management Co., said in an Oct. 12 interview with Bloomberg Television.
http://www.bloomberg.com/news/2011-10-14/germany-backing-italian-debt-seen-as-key-to-europe-bank-crisis.htmlhttp://www.bloomberg.com/news/2011-10-14/germany-backing-italian-debt-seen-as-key-to-europe-bank-crisis.htmlhttp://www.bloomberg.com/news/2011-10-14/germany-backing-italian-debt-seen-as-key-to-europe-bank-crisis.htmlhttp://www.bloomberg.com/news/2011-10-14/germany-backing-italian-debt-seen-as-key-to-europe-bank-crisis.html

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Bank recapitalizaons are necessary but not su-

cient.... None of the proposed soluons -- whether

they involve the European Central Bank or the 440billion-euro ($606 billion) rescue fund known as

the European Financial Stability Facility -- can work

without Germany, and by proxy the ECB, oering

blanket support to Italy, said former Internaonal

Monetary Fund Chief Economist Simon Johnson.

Europe is far too reliant on Germany and the otherstrong countries for the various individual na-ons to be able to take care of their own problems- parcularly if any localized bank recapitalizaonsare to be in addion to the already pledged EFSF

contribuons by each naon (le). What is farmore likely is some kind of bazooka or shock &awe (to use two red cliches) approach using thenewly-approved EFSF

If France had to recapitalize BNP and Soc Gen tothe tune of 11 billion in addion to its 158 bil-lion stake in the EFSF (as is widely suspected), itcould well kiss goodbye to its AAA rang now thatthe rangs agencies seem to have nally found re-

ligion (Italy & Spain saw downgrades this week) and that, for a country currently running a debt-to-GDP rao of 84%, would NOT be a good thing.

Whether a staon-to-staon plan is in the works or not, it will rely on a nice, orderly procession fromone country to the next and I think it has been made abundantly clear over the last year that EuropeDOESNT do orderly.

There is absolutely no way that the Eurocrats can stop the markets turning their collecve eyes to-wards the next domino in the line at every point in the process. As they struggle to x the Greek situ-aon, the markets have already done it for them and Greek 1-year bonds now yield 166%. Job done.Next up? Whether the architects of a soluon are ready for it or not, its Spain and Italy... and France.

SOURCE: NATIXIS

SOURCE: THOMPSONREUTERS

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The fatal 6% level came close to being meaningfully breached by both Italian and Spanish 10-year bonds in July, prior to the ECBs emergency purchase program which calmed things downto an extent (although it cost them in excess of 86 billion) in repower to do so but the real problemcould turn out to be the sheer weight of renancing that needs to be undertaken by both Spain ANDItaly through the rest of 2011 and into 2012.

Spains total of maturing debt for 2011 (60 billion as of August 3) is dwarfed by the 116.6 billionit needs to rollover in 2012 and Italy is worse sll with a massive 137 billion maturing in the last 5months of 2011 being augmented by 260 billion in 2012 (and another 147 billion in 2013). ShouldItalys famously-reliable domesc buyers connue to strike then things will get very ugly indeed.

But dont take my word for it, listen to the incoming head of the ECB; Italian, Mario Draghi:

(UK Daily Telegraph): We must act fast. The sorts of interest rate rises seen over the last three

months, if protracted, could lead to an uncontrollable spiral, said Mario Draghi, who takes over

as head of the European Central Bank next month.

Mr Draghi said austerity measures must be enacted immediately and warned that Italys 54bn

austerity package is not enough... Mr Draghi hinted that ECB help is nearing its polical limits,

evoking Italys atavisc temptaon of waing for an army to cross the Alps to sort out its prob-

lems.

Doesnt sound to me as though an every man

for himself approach is going to work.A look at the charts (above and le) shows justhow insignicant the problems of Portugal, Ire-land and Greece really are in the wider schemeof things and yet the spectre of a Greek default -orderly or otherwise - has paralysed Europe andthe rest of the world for months now. If the rereally DOES jump the road to Spain and Italy inany meaningful way, the game is over. If Francecatches light too...well, by that stage it wont re-ally maer.

CLICK TO ENLARGE CLICK TO ENLARGESOURCE: BLOOMBERG/DER SPIEGEL SOURCE: BLOOMBERG/DER SPIEGEL

SOURCE: BLOOMBERG/DER SPIEGELCLICK TO ENLARGE
http://www.spiegel.de/fotostrecke/fotostrecke-71636-3.htmlhttp://www.spiegel.de/fotostrecke/fotostrecke-71636-7.htmlhttp://www.spiegel.de/fotostrecke/fotostrecke-71636-8.html

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(Bloomberg): Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS, have about 2.9 tril-

lion euros of government bonds outstanding, according to data compiled by Bloomberg. Italy, the

third-largest issuer of debt aer the U.S. and Japan, accounts for more than half, or 1.59 trillioneuros, the data show.

About 413 billion euros of GIIPS debt is held by 38 of Europes largest lenders, according to an

analysis of the stress-test results by Alberto Gallo, a strategist at RBS in London. Those holdings

equal almost 40 percent of the banks 1.1 trillion euros of equity, according to Gallo.

European banks, having agreed to a voluntary loss of about 21 percent, are bracing for further

writedowns on Greeces 288 billion euros of government bonds, which carry Moodys second- low-

est rang of Ca and an equivalent CC by Standard & Poors. European ocials are considering

writedowns of as much as 50 percent on Greek bonds as part of a revamped strategy to combat

the crisis, people familiar with the discussions said.

This week, Credit Suisse published a report that suggested the NEXT round of European Bankstress tests would value government bonds more closely than in the July stress tests - beggingthe queson What is the POINT of a stress test if it DOESNT place realisc marks on the very liabili-es being stress-tested? But then, we already know the answer to THAT queson, dont we?

The report suggests a 220 billion shorall at 66 of the parcipang banks (cing RBS, Deutsche Bankand BNP as being most endangered) and predicts that two-thirds of the regions banks would fail thetest - a far cry from the most recent stress tests, conducted three months ago, which gave Dexia aclean bill of health...

So if we assume the Credit Suisse numbers are correct and the recapitalizaon of European banks

will require 220 billion (which is, coincidentally, exactly half of the size of the expanded EFSF) then itstands to reason that a much bigger amount is going to be required to in order to ring-fence the nextdominos in line and that means good, old-fashioned leverage. Yes. The source of the enre problemwill now be used to solve it. Its really quite beauful if you think about it.

Look for an announcement out of this weekends G-20 meengs that will menon some kind of mul-trillion Euro pledge to make absolutely certain that everything is xed and nobody needs to worryabout anything anymore.

Me? I remain skepcal - aer all, we have just seen how the murine roar of lile Slovakia very nearlyderailed a polical process that had taken six months to coordinate, and that process was requiredin order to approve a 440 billion bailout fund. Now, it is likely a fresh round of approvals will be re-quired to increase it to several trillion and the largest contributor to those pledges will undoubtedlybe Germany; The same Germany whose Constuonal Court ruling last month gave the BundestagsBudget Commiee an eecve veto over future acvaon of the EFSF, and reinforced German cons-tuonal restricons on the introducon of Eurobonds.

This isnt over people - not by a LONG shot.

This weeks content, once again, contains plenty on the Eurozone as we hear how the ECB has sug-gested to Belgium that in NOT backstop Dexias interbank deposits, Germanys leaders have begunto call for changes to the EU treaes and none other than UBS Stephane Deo puts the kibosh on thelas euopan ailou plan.

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Over in China, as worries about a hard landing intensify, we look at the burgeoning loan shark industryand see how rising food prices are far more important to the Chinese government than a moderang

headline inaon number.

In the Ukraine, we nd polical skullduggery afoot as the former Prime Minister is jailed for sevenyears, ZeroHedge looks at foreign acvity in the Treasury market and comes up with a worrying stas-c, Je Clark looks at the disparity between gold and gold stocks and, in the two busiest ports in theUnited States, the usual Christmas retailing rush looks like lile more than a pipe dream.

Michael Lewis heads to California and dodges the trac on an early morning bike ride with the ex-Governator, we take a look at the US budget decit and long-term interest rates in graphical form, thestrange dichotomy between retail sales and consumer condence has us scratching our heads andChinas black market for lending gains a bigger piece of the pie.

Talking of China and her lending issues, in our interviews secon, we hear from Jim Chanos on why

he sll thinks there is BIG trouble in lile China and, for those of you fascinated by Bill Ackermansrecent HKD trade, we hear from John Greenwood - one of the original architects of the HK dollar peg.

Marn Armstrong is back talking to Eric King about a whole bunch of interesng stu and, if you havethe me, there is even a link to an interview I gave to Al Korelin in which we discussed the OccupyWall Street movement (a situaon that has taken a disnct turn for the worse since Al and I spokeearlier in the week) as well as the likely path gold will take from here.

Now its me to turn it over to the G-20...Late Note:Since penning this editorial on Saturday, it seems as though there has been some informaon ema-nang from the G-20 Finance Ministers meengs in Paris, to whit:

Germany and France are spearheading a mul-trillion dollar shock and awe programme ex-

pected to be agreed next weekend and presented the following week at the G20 summit in Cannes.

Hmmm.....That arcle seems to conrm that there is a plan about having a plan to discuss a plan tobe presented in Cannes. Responsibility for solving the Eurozone crisis has now ocially been turnedov o Danny Kaye.

Unl next week when, no doubt, everything will have changed again

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..... mayreect 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
http://www.youtube.com/watch?v=NzM8MgJxcEYhttp://www.youtube.com/watch?v=NzM8MgJxcEY

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Contents 16 October 2011

califonia And bus

ecb tlls blgium No to Guaan Dxias Inank Dposis

UBS Kills Latest European Bailout Proposal

China Inaon Dips But Food Costs Remain High

Foreigners Dump $74 Billion In Treasurys In 6 Consecuve Weeks

German Policians Call For Changes To EU Treaes

In Cooling China, Loan Sharks Come Knocking

Is It Time To Load Up On Gold Stocks?

Cargo Surge Takes A Holiday At L.A., Long Beach Ports

Yulia Tymoshenkos Trials

Europe In 2 Trillion Rescue Bid

More Quesons Over Alleged Iranian PlotCharts That Make You Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally.....

The Gonnie, Gonnie Banks

# Bank Assets ($m) Deposits ($m) Cost ($m)

77 Piedmont Community Bank, Gray, GA 201.7 181.4 71.6

78 Blue Ridge Savings Bank, Inc., Asheville, NC 161.0 158.7 38.0

79 First State Bank, Cranford, NJ 204.4 201.2 45.8

80 Country Bank, Aledo, IL 190.6 167.5 66.3

Total Cost to FDIC Deposit Insurance Fund 221.7

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On August 5, 2011, moments aer the U.S. government watched a rang agency lower itscredit rang for the rst me in American history, the market for U.S. Treasury bonds soared.

Four days later, the interest rates paid by the U.S. government on its new 10-year bonds were plum-meng on their way to record lows. The price of gold rose right alongside the price of U.S. Treasurybonds, but the prices of virtually all stocks and other bonds in rich Western countries went into a freefall. The net eect of a major U.S. rang agencys saying that the U.S. government was less likely thanbefore to repay its debts was to lower the cost of borrowing for the U.S. government and to raise itfor everyone else. This told you a lot of what you needed to know about the ability of the U.S. govern-ment to live beyond its means: it had, for the moment, a blank check. The shakier the United Statesgovernment appeared, up to some faraway point, the more cheaply it would be able to borrow. Itwasnt exposed yet to the same vicious cycle that threatened the nancial life of European countries:a moment of doubt leads to higher borrowing costs, which leads to greater doubt and even higherborrowing costs, and so on unl you become Greece. The fear that the United States might actually

not pay back the money it had borrowed was sll unreal.On December 14, 2010, the television news program 60 Minutes aired a 14-minute piece about U.S.state and local nances. Correspondent Steve Kro interviewed a private Wall Street analyst namedMeredith Whitney, who, back in 2007, had gone from being obscure to famous when she correctly

suggested that Cigroups losses in U.S. subprime bonds were far big-ger than anyone imagined, and predicted the bank would be forced tocut its dividend. The 60 Minutes segment noted that U.S. state and lo-cal governments faced a collecve annual decit of roughly half a tril-lion dollars, adding that another trillion-dollar gap existed betweenwhat the governments owed rered workers and the money they hadon hand to pay them. Whitney pointed out that even these numbers

were unreliable, and probably opmisc, as the states did a poor jobof providing informaon about their nances to the public. New Jerseygovernor Chris Chrise concurred with her and added, At this point, ifits worse, whats the dierence? The bill owed by American states torered American workers was so large that it couldnt be paid, whatever

the amount. At the end of the piece, Kro asked Whitney what she thought about the ability andwillingness of the American states to repay their debts. She didnt see a real risk that the states woulddefault, because the states had the ability to push their problems down to counes and cies. But atthese lower levels of government, where American life was lived, she thought there would be seriousproblems. You could see 50 to a hundred sizable defaults, [maybe] more, she said. A minute laterKro returned to her to ask when people should start worrying about a crisis in local nances. Itll besomething to worry about within the next 12 months, she said...

Whatever else she had done, Meredith Whitney had found the pressure point in American nance:the fear that American cies would not pay back the money they had borrowed. The market formunicipal bonds, unlike the market for U.S. government bonds, spooked easily. American cies andstates were suscepble to the same cycle of doom that had forced Greece to seek help from the Inter-naonal Monetary Fund. All it took to create doubt and raise borrowing costs for states and cies wasfor a woman with no standing in the municipal-bond market to uer a few sentences on television.

O O O MICHAEL LEWIS / LINK

The European Central Bank advised Belgium not to backstop Dexia SAs interbank deposits andto avoid providing guarantees on debt maturing within three months because it risks interfer-

ing with the central banks monetary policy.

... Te net eect o a major U.S.rating agencys saying that theU.S. government was less likelythan beore to repay its debts wasto lower the cost o borrowing or

the U.S. government and to raiseit or everyone else...it had, or themoment, a blank check...
http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111

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The ECB also said the planned debt guarantees for Dexia may last as long as 20 years, which is incon-sistent with European Union guidelines for naonal support measures to be temporary in nature,

according to a statement published on the Frankfurt- based central banks website and dated Oct.13. Belgium sought the ECBs opinion on dra legislaon that would grant state guarantees on Dexialoans.

Guarantees on interbank deposits could entail substanal distoron in the various naonal segmentsof the euro-area money market by potenally increasing short-term debt issuance acvity acrossmember states, the ECB said in the statement. It could also aect the transmission of monetarypolicy decisions.

Dexia obtained a pledge from the governments of France, Belgium and Luxembourg last week tobackstop as much as 90 billion euros ($125 billion) of interbank and bond funding with maturies ofas much as 10 years unl 2021. The French-Belgian municipal lender, which is being broken up aerconcern over its European sovereign debt holdings caused short-term funding to evaporate, soughtstate guarantees to nance long-term assets including 95 billion euros of bonds with an average ma-turity of almost 13 years at the end of June.

Three years ago, Dexia received as much as 150 billion euros of debt guarantees from France, Belgiumand Luxembourg, of which it tapped a maximum of about 96 billion euros in May 2009. Those back-stops also included interbank deposits.

The bank stopped issuing government-backed debt in June 2010 and sll had 29 billion euros out-standing yesterday, according to data from the Belgian central bank.

O O O BLOOMBERG / LINK

UBSStephane Deo has rapidly become of one of the most vocal, and luckily most erudite, crit-

ics of the veritable rumor-a-palooza that Europe has become: a connent that is now desper-ately throwing anything and everything at the wall in hopes it will sck and generate another intradayEURUSD short covering squeeze to perpetuate the illusion that Europe is viable for at least one moreday. His note today eecvely puts an end to the most current approach whereby Greece will see a50% haircut on its debt (the 21% haircut proposal from July 21 is now dead and buried as we had sug-gested back then). With that, he forces Europe back to the drawing table to come up with a plan thatis endorsed by the market, with just 9 short days unl the Eurogroup Summit on October 23 at which

point kicking the can into the future will no longer be toler-ated and the market will nally judge Europe not for prom-ises, rumors, lies, innuendo and hyperbole, not necessarily

in that order, but on actual decisions and policies. Alas, ifthe 50% haircut idea, which is now proposed by Germany(in diametrical contrast to a month ago), and staunchly op-posed by France whose banks, unlike Deutsche Bank, havenot been able to dispose of legacy exposure, is killed beforeit is even implemented, look for a spike in panic in Europewhich will now have to redo everything from scratch.

As to why Herman Van Rompuy should be panicking, hereis Deos summary:

For more than a year we have argued that Greece will not

be able to avoid a default. In this piece, we look at how

CLICK TO ENLARGE SOURCE: BLOOMBERG/IMF/UBS
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/CS%20DEO%201.jpghttp://www.businessweek.com/news/2011-10-14/ecb-tells-belgium-not-to-guarantee-dexia-s-interbank-deposits.html

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this could be done. We think a 50% haircut makes lile sense: if we take into account the lenders

that cannot parcipate in the haircut (IMF, bilateral loans) and the bank recapitalisaon it would

trigger in Greece, we nd that a 50% haircut would actually reduce the stock of debt by only 22%.Rather, we think a large restructuring of the debt (i.e. a super PSI) is the soluon. It would reduce

the nancial needs of Greece, postponing for decades the redempon of bonds. It would also cut

the decit if coupon payments were reduced suciently. This would come with manageable needs

for bank recapitalisaon. Finally, such a step would remove the need to default, or rather, it would

be akin to the default we expect.

He connues:

why a 50% haircut does not work At the me of wring, Greece has total debts of 346.4bn. About

a third of this debt is in public hands (34.8% is aributable to the IMF, ECB and European govern-

ments), roughly another third is in Greek hands (28.8%, essenally for banks) with the remainder

(36.4%) held by non-Greek private investors.

O O O ZEROHEDGE / LINK

Chinas closely watched inaon rate dipped slightly in September, but analysts said it wasunlikely to ease ght credit policies on fears surging prices may cause social unrest.The 6.1pc year-on-year rise in the consumer price index (CPI) for September marks only a marginalslowdown from 6.2pc in August.

Stubbornly high inaon has persisted despite government moves torein in soaring food and housing prices, which ocials fear could causesocial unrest as cizens grow angry at higher costs.

Inaon peaked in July, hing a more than three-year high of 6.5pc, ac-cording to gures released by the Naonal Bureau of Stascs.

In August, thousands of taxi drivers went on strike in the eastern tourismhub of Hangzhou to protest high fuel costs and other grievances.

China has already implemented a number of policies over the past yearto try to slow the rise in prices, including restricng the amount of money banks can lend and hikinginterest rates ve mes since October last year.

This conrms inaon will follow a downward trend in the fourth quarter. But in the long term, ina-on will stay at high levels, Zhang Zhiwei, Hong Kong-based economist with Nomura Securies, told

AFP.The slight slowdown in inaon in September is unlikely to convince the government to radicallyloosen its ght credit policy, at least in the short-term, analysts said.

Tightening of monetary policy and growth moderaon have ensured that inaon is now in retreat,Alistair Thornton, China analyst at Global Economics, said in a report.

But he added: For the moment, we remain in policy stasis - no more ghtening, but no real loosen-ing.

The key food component of inaon rose 13.4pc year-on-year in September, unchanged from theAugust level, the stascs bureau said.

... Stubbornly high ination haspersisted despite government

moves to rein in soaring ood andhousing prices, which ofcialsear could cause social unrestas citizens grow angry at highercosts.
http://www.zerohedge.com/news/ubs-kills-latest-european-bailout-proposal-why-50-haircut-greek-debt-will-not-work

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Chinese Premier Wen Jiabao said just last month that he cannot relax due to soaring prices in Chinathat have led to steep rises in the cost of food, as he vowed to step up the ght against inaon.

Food prices are of parcular concern, as they aect the daily lives of everyone in the country, withfoodstus accounng for more than one-third of the monthly spending of the average Chinese con-sum.

O O O UK DAILY TELEGRAPH / LINK

Over the weekend, we observed the perplexing sell o of $56 billion in US Treasurys courtesyof weekly disclosure in the Feds custodial account (source: H.4.1) and speculated if this maybe due to an asset rotaon, under duress or otherwise, out of bonds and into stocks, to prevent thecollapse of the global ponzi (because when the BRICs tell the IMF to boost its bailout capacity youknow it is global). We also proposed a far simpler theory: the dreaded D-day in which foreign ocial

and private investors nally start ooading their $2.7 trillion in Treasurys with impunity (although notwith the element of surprise - China has made it abundantly clear it will sell its Treasury holdings, theonly queson is when), has nally arrived. In hindsight the Occams Razor should have been applied.

Lile did we know 5 short days ago just how violent the reacon by China would be (both post andpre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know- in the week ended October 12, a further $17.7 billion was removed from the Feds custodial Trea-

sury account, meaning that someone, somewhere is very displeased with US paper, and, far moreimportantly, what it represents, and wants to make their displeasure heard loud and clear. Whether itis China - we do not know: we may have a beer view in two months when the September/OctoberTIC data hits, but even then it will be full of errors, as Direct Bidder purchases by the UK usually end upbeing assigned to China at the yearly TIC audit. And the sellers know this all too well. What they alsoknow is that over the next few days (or weeks - ZH tends to be a lile aggressive in its esmates forpopular uptake), as soon as the broader populaon understands what has transpired, concerns aboutthe reserve status of the greenback will start to resurface, precisely as many have been warning. Andwhat has happened is that in six consecuve weeks, foreigners have sold $74 billion, or more govern-ment bonds in a sequenal period of me than ever before.

CLICK TO ENLARGE SOURCE: ZEROHEDGE
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/UST%20Custodial%202_0.jpghttp://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/UST%20Custodial%201.jpghttp://www.telegraph.co.uk/finance/china-business/8826286/China-inflation-dips-but-food-costs-remain-high.html

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So... perhaps it is me to reevaluate US intenons for a trade war with any of its evil mercanlist,UST-recycling partners. Unless, of course, they want $74 billion to become $740 billion, and to force

the Fed to have no choice but to intervene, only this me not with a duraon sterilized procedure, butone where the Fed has to buy everything that China et al are selling.

On the other hand, judging by the tradional reacon of various precious metals to this kind of atsuicide, perhaps it is not such a bad idea aer all...

O O O ZEROHEDGE / LINK

Anew idea to solve the euro crisis has suddenly become popular among Germanys policalpares. People from all sides of the polical spectrum are falling over themselves to call fora new European convenon in a bid to x the crisis that is pung the whole future of the EuropeanUnion at risk.

According to the proposal, the convenon -- which would be composed of representaves of naonalparliaments and governments, the European Parliament and the European Commission -- would re-vise the current European treaes as quickly as possible. There is a widespread belief in Germany thatthe euro crisis, which has long since become a crisis of the European Union, cannot be solved in thelong term without fundamental changes to the treaes.

Chancellor Angela Merkel has said as much. When Merkel, together with French President NicolasSarkozy, recently announced they had come up with a comprehensive packageof measures to solve the crisis, the chancellor said it would include changes tothe treaes. A dra posion paper on European policy for the party congress ofMerkels conservave Chrisan Democrats in November says that such changesare in the interest of a Europe that is capable of taking acon, transparent anddemocrac.

There is no way around it, wrote Foreign Minister Guido Westerwelle, the for-mer leader of the business-friendly Free Democrac Party (FDP), in a guest editorial for the Berlinnewspaper Tagesspiegel. A change to the treaes is necessary for there to be an eecve change inthe stability rules, he added, referring to the euro-zone debt and decit rules laid down in the Maas-tricht Treaty.

The Greens are of the same opinion. Like the CDU, the Greens are also devong a moon to Europeat their naonal congress in a few weeks me. They want to open a new chapter and make it clearwhy we need more, not less, Europe.

We need a new treaty between Brussels and its cizens in order to discuss the necessary far-reachingreforms and get the process in moon, says Green Party co-leader Cem zdemir. Germanys MarnSchulz, head of the Social Democrats group in the European Parliament, took a similar posion inremarks to the public radio staon Deutschlandfunk: We need to change the treaes, he said.

It seems that the race toward a new Europe has begun -- and the Germans want to be at the front ofthe pack. The only problem is that the whole of the EU has to share the same goal. And some Euro-pean leaders have lile desire to follow Merkels lead.

O O O DER SPIEGEL / LINK

The 300 employees of Aomi Fluid Equipment here were delighted recently when the owneroered an all-expenses-paid, two-day trip to a mountain resort three hours away.

... It seems that the racetoward a new Europe hasbegun -- and the Germans

want to be at the ront othe pack
http://www.spiegel.de/international/europe/0,1518,791914,00.htmlhttp://www.zerohedge.com/news/foreigners-dump-74-billion-treasurys-6-consecutive-weeks-biggest-sequential-outflow-history

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Except Boss Sun.

When the employees returned from their holiday, they found that the factory had been stripped of itsequipment and that Boss Sun had ed town. It was enrely empty, Li Heying, a former Aomi worker,said of the factory. It was like what happens in warme.

The boss, as it turned out, was millions of dollars in debt to loan sharks underground lenders of thesort that many private businesses in China rounely use because the government-run banks typicallylend only to big state-run corporaons.

As Chinas economy has begun to slow slightly, more and more entrepreneurs are nding themselvesin Mr. Suns straits unable to meet debt payments on which interest rates oen run as high as 70percent in this naons thriving unregulated, underground loan system. Such illegal lending amountsto about $630 billion a year, or the equivalent of about 10 percent of Chinas gross domesc product,according to esmates by the investment bank UBS.

In recent months, at least 90 business execuves from this coastal city, a one-hour ight south ofShanghai, have disappeared because of mounng debts and impending bankruptcies, according to alocal government report.

Whether out of fear of maa-style loan enforcers kidnappings and broken kneecaps are commontaccs or the family dishonor that is its own harsh penalty in China, some of the Wenzhou missinghave gone into hiding or ed overseas.

And in the last few weeks, at least three have tried to commit suicide by jumping o high-rises in thecity, according to the state-run news agency, Xinhua, which reported that two of them died and theoh suvivd wih a okn lg.

That tycoons in a city known for its savvy entrepreneurs are running scared has raised concerns thatprivate business, a vibrant part of Chinas economy, may be losing steam while exposing the high-risk, unregulated nancial system on which so many of the naons small and medium-size businesseshave come to depend.

There have always been people running away because they couldnt pay their debts, said WangYuecai, general manager at Wenzhou Yinfeng Investment & Guarantee, which guarantees state bankloans when small businesses are lucky enough to get them. But recently, the situaon here has got-ten much worse.

O O O NY TIMES / LINK

Byalmost any measure, gold stocks are underval-

ued. Should we load up?

Aer compleng my research on this queson, Im con-vinced more than ever that we at Casey Research are inthe right place. See if you agree

Lets rst get a handle on the degree of undervaluaon.The more undervalued, the lower the buying risk. Afairly valued stock, on the other hand, requires addedcauon.

Gold accelerated higher last month, peaking around

SOURCE: CASEY RESEARCH
http://www.nytimes.com/2011/10/14/business/global/as-chinas-economy-cools-loan-sharks-come-knocking.html?_r=1&ref=Mish

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$1,900/ounce, while gold stocks lagged. Heres a chart of the HUI-to-gold rao (HGR). In a rising goldenvironment, a climbing HGR indicates that gold stocks are outperforming the metal; a falling HGR

means theyre trailing gold.

Todays 0.33 HGR means gold stocks as a group have not been this cheap, relave to their underlyingmetal, since January 2010. And a lower rao hasnt been seen since February 2009, when recoveringfom h 2008 gloal mldown.

Also consider that the GDX (Gold Miners ETF) is about the same price as last December, while gold isup 30%.

I think theres a more compelling situaon that demonstrates the undervalued nature of gold stocks.Its hard to read a mining companys quarterly report these days without hearing about growing mar-gins. The gold price has risen faster than operang costs across our industry and lied prot marginsof the beer-run producers.

Higher margins are key to growing earnings and cash ow, which in turn lead to rising stock prices.Have gold mining equies kept pace with ever-increasing margins?

Gold mining companies are earning record margins, averaging a whopping $1,268 per ounce lastquarter. In both nominal dollars and percentage above costs, margins have never been this high forthe gold producers. Stock prices, however, have not responded in similar fashion.

O O O JEFF CLARK/ LINK

A

t the ports of Los Angeles and Long Beach, 2011 is shaping up to be the year that Santa forgot.The surge in holiday cargo headed to retailers shelves, which usually begins no later than Au-

gust, is sll nowhere to be seen, ocials say.The news is especially grim given that prognoscators for the Naonal Retail Federaon had declared

as recently as last month that the summer-long downturn of trade at thenaons largest seaports was over. September was supposed to have beena banner month, with an increase of nearly 12% in imports to the U.S. com-pared with last year, they said.

But the opmism appears to have been badly misplaced.

The world economic recovery has slowed. The risk of a new recession is rising, said economist PaulBingham of Wilbur Smith Associates. Although the U.S. economy is sll technically expanding, its notreected in the trade numbers, especially in big volume items like furniture and appliances.

Internaonal trade is one of Southern Californias most important sources of relavely high-wageblue-collar employment. More than half the states 1.1 million cargo-related jobs are located in theregion, where a boost in cargo would have had an immediate eect on the amount of work availableto dockworkers, truck drivers, warehouse and distribuon center sta, railroad workers and others.

Instead, cargo trac through the Port of Los Angeles showed a slight overall decline in September,down 0.8% to 705,623 cargo containers, compared with 711,613 a year earlier. Imports through thenaons largest container port were down 0.2% to 372,655 containers. The only bright spot was in U.S.exports through Los Angeles, which connued on a course toward a new record, up 26.6% to 176,954containers.

We were hoping to see more of a spike in the numbers in September, but it now looks like we may

... Although the U.S. economyis still technically expanding,its not reected in the tradenumbers
http://%20www.caseyresearch.com/editorial.php?page=articles/it-time-load-gold-stocks&ppref=GRA419ED1011E

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16 OctOber 2011 18

have reached a plateau and the tradional peak season has not materialized, said Phillip Saneld,spokesman for the Port of Los Angeles. Through September, Los Angeles is running just 0.3% ahead of

its 2010 pace, having handled about 5.9 million cargo containers.

Cargo movement also has slowed in the neighboring Port of Long Beach, although there was an im-portant caveat with the naons No. 2 container port. Long Beach has been running with six terminaloperators this year instead of the usual seven. It lost about 10% of its business to the Port of Los An-geles when the Hyundai terminal vacated its Long Beach facilies as that port embarks on its massive$1.2-billion Middle Harbor renovaon and expansion project.

Long Beach port ocials were sll tallying its September numbers Thursday, but preliminary resultsshowed that import-lled container trac would be down 5% to 8% for the month compared with thesame month last year. Exports are expected to post a similarly weak showing.

For a tradional peak season month like September, the numbers are not good, said Art Wong, a

spokesman for the Port of Long Beach.O O O LA TIMES / LINK

Seven years ago Yulia Tymoshenko, a populist polician dressed in orange, climbed onto a stagein a snow-covered Kiev and galvanised 150,000 protesters against the rigged victory of ViktorYanukovych in the 2004 presidenal elecon. She sustained the energy of the crowd for days andushered Viktor Yushchenko to victory, pledging retribuon for those who stood in his way. Glory toUkraine, she hailed; the crowd shouted Yulia.

Close to the orange revoluons seventh anniversary, she made headlines again. This me the formerprime minister, wearing grey, sat in court to hear a nervous judge reading out a sentence of seven

years jail, a three-year ban on public oce and a ne of $190m as purported compensaon for dam-age allegedly caused when she struck a gas deal with Russia in 2009.The term was symbolic: a year in jail for every one that has passedsince the orange revoluon.

Ever since Ms Tymoshenko was detained in jail on August 5th, the out-come has been predictable. It would have been out of character forMr Yanukovych, now Ukraines thuggishly vindicve president, to lethis bier rival, who has oen humiliated and poked him with his owncriminal past, to go free. It would be against Ms Tymoshenkos naturenot to turn her show trial into polical theatre. Even before the judge

had nished reading the sentence, she turned to the cameras: This is an authoritarian regimeI will

not stop my struggle. As she was led out of court she called on her supporters to overthrow the re-gime, again channg glory to Ukraine.

Outside, a few thousand supporters were pushed around by riot police, but this was a poor echo ofthe crowd seven years ago. Most Ukrainians see the trial as polical, but they are too disillusionedto trust opposion leaders. In the past few months Ms Tymoshenkos modest popularity rang hasbarely budged even as Mr Yanukovychs has slid downwards.

The signicance of the verdict goes far beyond Ms Tymoshenko and Mr Yanukovych. It will determinethe countrys future direcon. By locking up Ms Tymoshenko, Mr Yanukovych has crossed a line sepa-rang the chaoc and corrupt but pluralist country that Ukraine was from the Pun-style kleptocracyit is becoming.

... By locking up Ms ymoshenko,Mr Yanukovych has crossed a lineseparating the chaotic and corruptbut pluralist country that Ukraine

was rom the Putin-style kleptoc-racy it is becoming
http://www.latimes.com/business/la-fi-ports-20111014,0,1856648.story

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Since being elected president in February 2010, Mr Yanukovych has moved in two direcons, con-solidang his personal power but also pursuing economic integraon with the European Union. His

democrac failings were oset in the eyes of some Western leaders by a contrast with the infuriat-ingly ineecve Mr Yushchenko. Aer 18 months of Mr Yanukovych, Ukraine looks more like Russia;but it is closer to a trade and associaon agreement with the EU.

O O O THE ECONOMIST / LINK

George Osborne has admied for the rst me that Britain may have to provide billions ofpounds more to bail out the eurozone as part of 2 trillion internaonal eorts to shore up thesingle currency bloc and revitalise the agging global recovery.

G20 nance ministers, including the US Treasury Secretary Tim Geithner, agreed in Paris during theweekend that the Internaonal Monetary Fund (IMF) should consider using its resources to backstop

a massive eurozone-led rescue eort. Under the terms of its membership, the UK will be liable for4.2pc of any funds provided by the IMF. The IMF has $390bn available.

Britain has currently a maximum $20bn commitment to the IMF, and has pledged about 10bn tosupport the eurozone through the IMF and a bi-lateral loan to Ireland.

Germany and France are spearheading a mul-trillion dollar shockand awe programme expected to be agreed next weekend andpsnd h following wk a h G20 summi in canns.

The internaonal community may provide further support aer theG20 agreed that the IMF should consider new ways to provide ona case by case basis short-term liquidity to countries facing systemic

shocks. The IMF will report back on what measures it would oera h summi in canns.

Britain and the US were keen to stress that unconvenonal IMF as-sistance should not be used as a substute for a European plan. George Osborne said: We haveindicated our willingness to consider our posion on resources for the IMF. Addional IMF resourcesmust not be a substute for the eurozone comming its resources to supporng its own currency.

Pouring cold water on oers from the IMFs emerging naon members to provide extra funding, MrGeithner added: The IMF has a substanal arsenal of nancial resources and we would supportfurther use of those exisng resources to supplement a well-designed European strategy alongside amore substanal commitment of European resources.

He was speaking aer what appeared to be signicant progress in Europes aempts to ring-fence thesovereign debt crisis around Greece. Germany and France have now agreed the principles of a 2 tril-lion to 3 trillion rescue plan. Mr Osborne said they had just seven days to come up with somethingquite impressive.

Details will be thrashed out this week but there now appears to be consensus around the core mea-sures to increase the repower of the eurozone bail-out fund (EFSF) from 440bn to around 2 tril-lion, to recapitalise the banks with 100bn-200bn, and to devise a credible programme for Greece,including losses for private sector creditors of as much as 50pc.

In addion, there will be a new push to boost compeveness among weaker economies and longer-term proposals to ghten economic governance across the single currency bloc.

... Indicating the progress made, theG20 communique spoke o work tomaximise the impact o the EFSFand decisively addressing the currentchallenges through a comprehensiveplan
http://www.economist.com/node/21532290

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Indicang the progress made, the G20 communique spoke of work to maximise the impact of theEFSF and decisively addressing the current challenges through a comprehensive plan. Countries

will also ensure banks are adequately capitalised, the statement said.O O O UK DAILY TELEGRAPH / LINK

The alleged Iranian plot to kill Saudi Ambassador to the United States Adel al-Jubeir on U.S.soil has been dismissed by most commentators as being too far-fetched to be true. Indeed, theplan the U.S. government is accusing the Islamic Revoluonary Guard Corps (IRGC) of coordinang iswell outside the organizaons tradional sphere.

However, Washingtons condence in its accusaon is notable, as is the possibility for other, unre-leased evidence. If the plot was real, it says much about the Iranian intelligence services scope, ambi-ons and capabilies.

The IRGC and its elite Quds Force generally have notbeen responsible for covert operaons that do notinvolve proxy groups or that are far abroad. Theymostly stay in the Middle East and South Asia (witha notable appearance in Venezuela in 2010), work-ing to establish es with insurgent groups they canuse as proxies in volale areas such as Hezbollahin Lebanon, the Jaish-al-Mahdi brigades in Iraq andparts of the Afghan Taliban. Tradionally, the IRGCings mms of hs goups o Ian fo ain-

ing. The Quds Force is thought of as a corollary to special operaons forces that train foreign militaries

and carry out clandesne military operaons. Irans Ministry of Intelligence and Security (MOIS), onthe other hand, is generally responsible for operaons in Europe and the United States, including aseries of assassinaons carried out in the 1980s. MOIS is a known operator in the United States andwould likely have the resources and experience to carry out a clandesne operaon there.

This was not the case in the recent incident. Manssor Arbabsiar, the man charged in the plot, alleg-edly met with an informant for the U.S. Drug Enforcement Administraon (DEA) who was posing as amember of a Mexican cartel. This informant never went to Iran, and there is no indicaon the IRGC isinvolved in training or arming cartels. It is also odd that the IRGC would use Arbabsiar, a U.S. cizenwith both Iranian and U.S. passports who has no apparent connecon to the IRGC other than, alleg-edly, a cousin in the Quds Force. Typically, a trained intelligence ocer would be the one to contact apotenal proxy group for development, not a new recruit.

There also is the queson of why al-Jubeir was targeted. It would be much easier for Iranian forces,parcularly the IRGC, to kill a Saudi ocial in the Middle East. Moreover, assassinang al-Jubeir in theUnited States would likely have serious consequences for Iran -- perhaps even in the form of a U.S.military response.

The dubiousness of the alleged plot did not stop U.S. ocials from blaming it on the IRGC, somethingthey would be unlikely to do without substanal evidence. U.S. President Barack Obama rearmedcondence in the evidence against Iran when speaking Oct. 13. In any criminal prosecuon in espio-nage maers, informaon is oen le out for fear of exposing sources and methods. It is possible-- though not veriable -- that this is the case in the recent alleged plot.

O O O STRATFOR / LINK

... Te alleged Iranian plot to kill Saudi Ambassadorto the United States Adel al-Jubeir on U.S. soil hasbeen dismissed by most commentators as being tooar-etched to be true. Indeed, the plan the U.S.government is accusing the Islamic RevolutionaryGuard Corps (IRGC) o coordinating is well out-side the organizations traditional sphere
http://www.stratfor.com/http://www.telegraph.co.uk/finance/financialcrisis/8829413/Europe-in-2-trillion-rescue-bid.html

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21.CHARTS THAT MAKE YOU GO Hmmm...

16 OctOber 2011 21

Agraphical look at the orig-inal Operaon Twist from

1961 to see how it aected thecurve 50 years ago.

I am willing to bet that the eectsin 2011 are signicantly dierenthan hos dmonsad in h

chart (le).

Bernanke & Co. are hardly likelyto just assume that things wouldfollow the same script as theydid in the 1960s, surely? I mean,its not as though they are just abunch of academics with no real-world experience now, is it?

thanks ba!

Something is sorely amiss here. One things for certain, those two lines are coming togetheragain at some point. Lower retail sales or higher consumer condence? Place your bets...

CLICK TO ENLARGE

SOURCE: NOW AND FUTURES

SOURCE: JOHN LOHMAN VIA ZEROHEDGE

CLICK TO ENLARGE
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/Sentiment.pnghttp://www.nowandfutures.com/images/operation_twist.png

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A

bove: a graphical look at the gap between US revenues and expenditures that puts both thedecit and the chances of closing it into perspecve.

Below: A look at US interest rates going back to 1919. Doesnt seem to be much room for themo had low fom h o m...

CLICK TO ENLARGE

CLICK TO ENLARGE

SOURCE: US GOVERNMENT/DER SPIEGEL

SOURCE: WSJ/REUTERS/CREDIT SUISSE
http://s.wsj.net/public/resources/images/OB-QC128_LongTe_K_20111013104251.jpghttp://www.spiegel.de/fotostrecke/fotostrecke-71636-14.html

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16 OctOber 2011 23

There a signs ha fa is spading o chinasRMB1415 trillion ($US2.22.4 trillion) shadow bank-ing sector or the growing number of nancial instuonsthat play a crical role in lending business money, which So-cit Gnrale China economist Wei Yao meanwhile esmatescould now be contribung to an larger share of property de-velopment funding than tradional bank loans, yet which doesnot enjoy government scruny, regulaon or protecon.

The Sa Of Wok-ing America takes afascinang look at where insociety the benets of grow-

ing income accrue. Click onthe map (le) to see a verycool interacve graphic thatshows just how much meshave changed in the last 30years... (via Barry Ritholtz)

SOURCE: SOC GEN/PBOC/CEIC

SOURCE: STATEOFWORKINGAMERICA
http://www.ritholtz.com/blog/2011/10/income-gain-distribution-1917-81-82-2000-2001-08/http://www.stateofworkingamerica.org/pages/interactive#/http://www.ritholtz.com/blog/2011/10/income-gain-distribution-1917-81-82-2000-2001-08/

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24.

16 OctOber 2011 24

WORDS TH AT MAKE YOU GO Hmmm...

John Greenwood, chief economist at Invesco AssetManagement and architect of Hong Kongs xed-ex-change-rate system, talks about the outlook for the localcurrencys peg to the U.S. dollar. Greenwood also discussesChinas yuan policy and Europes debt problems.

Jim chanos has n on of h moshigh-visibility China bears for several yearsnow and here he discusses the move thisweek by the Chinese SWF to buy shares in theig chins anks as wll as h al sa

market oh, and the fact that hes never been

o china.....

On the le is Marn Armstrong who, aer last weeks fascinat-ing interview with Eric King is backagain to discuss some lessons learnedfrom the crash of 1987, what he sees hap-pening from here, the potenal for conta-gion and shas a fw houghs on gold.

On the right is your humble scribe. If you have me aer lis-ning o h oh inviws on his pag and would lik olisten in as I discuss gold, gold stocks and the OWS movement with AlKorelin, just click on the mugshot...

CLICK TO WATCH

CLICK TO WATCH

CLICK TO LISTEN

CLICK TO LISTEN
http://www.kereport.com/2011/10/15/occupy-wall-street-movement-gold-introto-technical-analysis/http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/10/15_Martin_A._Armstrong_files/Martin%20Armstrong%2010%3A15%3A2011.mp3http://www.bloomberg.com/video/77291424/http://www.bloomberg.com/video/77417752/

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SOURCE: ANTHONY FREDA (VIA BARRY RITHOLTZ)

GRANT WILLIAMS 2011
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hmmm october 16 2011

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