things that make you go hmmm....mar 4, 2013

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'It's Just Bluesh'

Out of the water! Everyone out of the water!Get out of the water! Tell everyone to get out!

Now! Out of the water!...

Oh my god... What the hell is that idiot doing?...

Out of the water! Now! Everyone!...

Martin! No!...

No! Don't go in! Stay out! Stay clear!

Get out! Get out!...

It's bluesh! It's a school of bluesh! Chief! It's bluesh!

It's just bluesh.

— Dialogue, Jaws 2

' False face must hide what the false

heart doth know.'

— William Shakespeare, Macbeth, I.vii

o learn more about Grant's new investment newsleer,

Bull's Eye Investor, Click here »

THINGS THAT MAKE YOU GO

Hmmm...A walk around the fringes of nance

By Grant Williams

4 MARCH

http://www.mauldineconomics.com/go/bvPsI/TTM

http://www.mauldineconomics.com/go/bvPsI/TTM



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ContentsTHINGS THAT MAKE YOU GO HMMM... ....................................................3

Trade Protectionism Looms Next as Central Banks Exhaust QE ................................16Glencore's Glasenberg Says Mining CEOs 'Screwed Up' ..........................................17

Italy's Prospects Look Grim ..........................................................................18

Stalling for Time: Greek Reform Effort Slows to a Crawl .......................................19

World from Berlin: 'Europe Can't Afford an Ungovernable Italy' ................................20

Syria: The Death of a Country .......................................................................22

French Consumer Recession Is Likely Driven by Job Losses .....................................24

January New Home Sales Bullet Points: The Reality .............................................24

The Investment Case for Gold: Part 2 ..............................................................26

CHARTS THAT MAKE YOU GO HMMM... ..................................................28

WORDS THAT MAKE YOU GO HMMM... ..................................................33

AND FINALLY ................................................................................34



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Things That Make You Go Hmmm...

Anybody who has heard of Tommy Johnson has my undying admiration (and a guaranteed spot inperpetuity on any pub quiz team that I am a member of).

John Thomas Johnson, who sadly passed away inOctober of 2006, was an American orchestral tubaplayer. In all, Johnson played on more than 2,000lm soundtracks and became Hollywood's 'rst-call'tuba player after his debut performance on the scorefor Al Capone in 1958. The list of his lm credits isa veritable treasure trove of classic celluloid: TheGodfather, Back To The Future, The Matrix, theIndiana Jones series, the rst ve Police Academy

movies, and Cats and Dogs, starring Jeff Goldblum andElizabeth Perkins, to name but a few. Johnson alsoplayed his tuba for the TV series The Flintstones.

In 1975, Johnson received a call from John Williams (the composer, not the ShadowStatscompiler, I hasten to add), who asked him if he was available to play on the latest score thatWilliams had composed, for a collaboration with a young director shooting his fth movie — anadaptation of a best-selling novel by Peter Benchley that had been published in February 1974and caused a sensation, remaining rmly entrenched on the bestseller list for 44 weeks.

The rights to the movie had been bought prior to its publication by Richard D. Zanuck and David

Brown, who happened to read a draft version and clearly had an eye for a hit.

The movie was released to great critical acclaim on June 20, 1975; and it marked a watershedin movie history, becoming the rst 'summer blockbuster' and setting the trend for a slew of big'event' movie releases, hyped and built up over months, whose debuts in the world's cinemaswere timed to coincide with the long, lazy days of vacation season.

The young director in question was Steven Spielberg. The movie was Jaws.

According to an interview Johnson gave in 2004 to one of my favourite (though sadly no longeroperational) websites, tubanews.com (the leading tuba news site on the net), on the day he

was slated to record the 'voice' of the shark, he arrived late at the studio and, upon opening hismusic, found himself faced with a strange passage in a high register which he felt seemed moreappropriate for the French horn.

Williams told Johnson that he wanted something that sounded 'a little more threatening' for the'voice' of the shark.

Job done.



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In the nearly 40 years since its release, Jaws has gone on to rake in $470.7 million at the US boxofce alone, which is about the same as the domestic gross of 2012's The Dark Knight Rises;but, as testament to the depreciation of the almighty dollar, the movie is still the 9th-highest-grossing lm of all time, with a massive $1,945,100,000 in ination-adjusted box ofceearnings.

Three years later, with Spielberg opting not to direct, Jaws 2 was released, accompanied by one of the mostfamous taglines of all time:

'Just When You Thought It Was Safe to Go Backin the Water'

Everybody who has seen the original Jaws movieremembers the classic scene when a shell-shockedChief Brody (played by Roy Scheider) backs his way

into Quint's (Robert Shaw's) cockpit after both heand the audience have witnessed the full size of theshark for the rst time, and utters the immortal line,'You're gonna need a bigger boat'; but I dare say veryfew amongst you would be able to recite any of thedialogue from the sequel.

The title of this edition of Things That Make You Go Hmmm..., however, comes from a scene in Jaws 2 that for some strange reason popped into my head during my recent travels.Fortunately, thanks to the miracle of YouTube, I was able to nd the scene, watch it in its

entirety, and transcribe the dialogue for the front cover.The scene takes place on the beach at Amity Island, with an extremely nervous Chief Brody upin his watchtower as holidaymakers frolic in the surf. He is clearly agitated (hardly surprising,since he has been face to face with a huge Great White and has watched it bite Quint in half)as he scans the ocean through his binoculars, looking for trouble.

Seeing an ominous shadow moving beneath the water towards the helpless swimmers, Brodyfrantically rings the warning bell and screams at everyone to get out of the water. When hiscries go unheeded he climbs down the ladder and runs towards the ocean like a man possessed,

yelling at everyone to get out, now.

Still his warning goes unheeded, and so he takes outhis gun and res six shots at the shadow lurking in theocean, and panic ensues amongst the bathers.

Then a man in the crowd (wearing a rather fetchinggreen trucker's cap) blurts out that the shadow isnothing more than a school of bluesh.

Rank TitleWorldwide

Gross

(US$)

Year

1Gone With TheWind

$3.3bn 1939

2 Avatar $2.8bn 2009

3 Star Wars $2.7bn 1977

4 Titanic $2.4bn 1997

5The Sound of Music

$2.3bn 1965

6 E.T. $2.2bn 1982

7The TenCommandments

$2.1bn 1956

8 Doctor Zhivago $2.0bn 1965

9 Jaws $1.9bn 1975

10Snow White &Seven Dwarfs

$1.8bn 1937



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The mayor of Amity Island and several counsellors look on aghast — they can virtually seeBrody's antics sucking away tourist dollars from a town reliant upon them for survival.

The scene ends with a forlorn-looking Brody, a man who has seen the truth of the horrors thatlurk beneath the water's surface, picking up his spent cartridges on the now deserted beach,

helped by his young son.

Of course, as even those amongst you who haven't been fortunate enough to catch Jaws 2 canprobably guess, Brody's fears are later realized when a huge man-eating shark does go on arampage, killing tourists left and right and making everybody fervently wish they had heededthe warnings from the crazy man to stay out of the water.

Now, this is a scene that plays out on a regular basis in the world of nance, I am afraid; and soonce again we nd there are quite a few supposedly crazy people in watchtowers all around theworld screaming at people to get out of all kinds of markets before their capital is devoured.Sadly, and so painfully soon after 2006 and 2007, nobody seems to be listening.

Take that crazy man Kyle Bass, for example.

Kyle has been ringing the alarm over the perilous state of Japan's nances for several years nowbut has been largely ignored, despite his making a pretty watertight case as to why Japan isabout to implode. In a fantastic interview late last year with Ken Eades of the Univ. of Virginia'sDarden School of Business, Kyle laid out his thesis once more for those idly paddling in the surf:

A lot has happened in Japan in the last 12 months. In fact, in the last two months webelieve Japan has crossed that proverbial Rubicon. We think that you've seen 20 yearsof conjecture regarding Japan's eventual demise. And now we see a point where, in the

last couple months what you see is a continued deterioration in their balance of trade.It's actually running at about negative $100 billion, or close to 10 trillion yen. And wethink given this resurgence of Chinese nationalism over the Senkaku crisis [disputed islands], you're going to see that move another 1.5 to 2 percent or another $100 billion.Put that in perspective. What that means is we could see full current account negativity in Japan in October. That's something nobody is ready for.

Think about it. You have a secular decline in the population, you have a balance of tradethat is literally being rewritten and falling off a cliff, and their GDP is now trackingnegative 3.5 or 4 percent.

So what has to happen in Japan? Now their backs are against the wall. They have a fullcrisis, and they absolutely have to change the manner in which they deal with their currency. And so we think over the last couple of months they have crossed the nalRubicon that turns the whole situation around and weakens the yen from a currency

perspective. Then you are going to start to see, we think, in the next 12-18 months amove in their rates.

Basically Japan is entering its nal checkmate phase of the game.

http://www.youtube.com/watch?v=t7Si3XTl6zQ&feature=player_embedded

http://www.youtube.com/watch?v=t7Si3XTl6zQ&feature=player_embedded



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Was anybody listening? Well, no, not really. Not in the kinds of numbers the situation'sseriousness deserves, anyway.

The election of Shinzo Abe in December of 2012 has brought Kyle's premise closer to realizationbut still hasn't been enough to scare people out of the water, as they willfully ignore the

mathematical implications of a PM promising to generate 2% ination in a country that has thelargest debt relative to GDP anywhere on earth but can, for now at least, borrow money atlevels that will most denitely NOT be available to them should they succeed in their aims.

Case in point, Japanese 5- and 10-year JGBs which, as I write this, have reached mind-numbingyields of 12bp and 66bp respectively. If we go back in time, however, to the last time JapaneseCPI registered above 2% for any sustained period (shaded area), the world looked a LOTdifferent, as can be seen from this chart:

-4

-2

0

2

4

6

8

10

JGB 10yr

Japan CPI

JGB 5yr

2%

5yr & 10-yr JGBs vs. Japan CPI1988 - 2013

1988 1990 1994 1998 2002 2004 2006 2008 2010 20121992 1996 2000

Source: Bloomberg

Yes, in those heady days, both 5- and 10-year JGBs reached yields of a little over 8% —something that, mathematically, Japan cannot presently sustain. In fact, a rate of a bit under3% would be enough to require all of Japan's declining tax revenue to be applied to interestpayments.

This isn't an opinion, folks, it's maths.



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Abe has promised to generate 2% ination in Japan and signicantly weaken the yen, after thecountry has essentially suffered two decades of deation following the bursting of the twinbubbles in Japanese real estate and the Nikkei at the end of 1989. The new strategy has beendubbed 'Abenomics', and it's a pretty good plan ... except for a couple little things.

Japan's gross government debt-to-GDP ratio stands at 240%, whilst its total debt-to-GDP (whichincludes government, nonnancial, and consumer debt) is an astronomical 450%. Abe's intentionis to inate away as much of that debt burden as he can whilst simultaneously providing Japan'sailing export industry with the impetus it needs to reclaim its former glory and, at the sametime, keeping borrowing costs at historical lows.

Let me know how that works out for ya, Shinzo.

But for now, people are ignoring mathematics and surng the Japanese wave.

The chart below shows the recent performance of the Nikkei stock exchange; and, as you

can clearly see, folks have bought into the idea that a much weaker yen will be good for thenominal performance of Japanese equities. So far so good.

8,000

10,000

12,000

Jun 2012 Jul 2012 Aug 2012 Sep 2012 Oct 2012 Nov 2012 Dec 2012 Jan 2013 Feb 2013

+34%

Nikkei 225

June 2012 - February 2013

Source: Bloomberg

The next chart shows just how far the Nikkei has to go before it follows the S&P 500 back to itsnominal high, which it reached on December 29, 1989. Despite the recent surge, the Nikkei sitssome 70% beneath its peak of 38,915:



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5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

-70%

Nikkei 225

Aug 1989 - Feb 2013

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: Bloomberg

Adding to the fun is the huge underweight that many funds have been carrying in Japaneseequities for the last few years after a series of false alarms were sounded that '<insert yearhere> is Japan's year'.

As recently as October 2012, according to JPMorgan, the degree to which investors wereunderweight Japan was at levels that served only to exacerbate the frenetic rush into the assetclass after Abe's election victory:

Source: JPMorgan



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So, to recap, we have some great reasons to buy Japanese equities: the stated policy of yendevaluation, an extremely low Nikkei 225 index relative to its highs, as well as a signicantunderweighting of Japan by investors around the world.

Excellent.

What I don't see amongst those reasons, however, is anything one would traditionally look forwhen evaluating companies in which one is going to invest one's capital — things such as, oh Idon't know, outdated concepts like growth prospects, perhaps? Or good corporate governance,maybe?

The recent results announced by the former powerhouse of Japan's consumer electronicsindustry, Sony, provide stunning evidence as to just how far once-mighty Japan Inc. has fallen,and just how poorly these companies have performed.

Sony published its Q3 results on February 7th, and a worse set of numbers you'd be hard-pushed

to nd. The rm unveiled an 'unexpected' loss of ¥10.8bn (its eighth-straight losing quarter —each of the previous seven was also 'unexpected'),lowered its outlook for sales for the full year, andannounced worse-than-expected performance fromits LCD TV business, its digital camera division (whosesales fell an 'unexpected' 30%), its Playstation consolearm, and its videogame division.

'We cannot be optimistic about the electronicsbusiness. There are many issues that we need to dealwith,' said Masaru Kato, chief nancial ofcer.

Riiiiiight.

In the 40 days prior to the release of that blistering set of results, as Abenomics Fever sweptthe world, Sony stock had doubled.

But this theme of investing in asset classes for the wrong reasons isn't conned to Japan — farfrom it. Thanks to the conscatory policies of the world's central banks and the cancerous ZIRPthey are all pursuing so persistently, it is ubiquitous.

With the risk-free rate (US 3-month treasury bills) currently standing at just 10bp, or 0.10%,

money has been pouring into places it would normally steer well clear of, for the simple reasonthat the desperate search for yield is taking it there.

This is a trend that has nothing at all to do with fundamentals, and it is dragging investorsdeeper into the water than they perhaps ought to go — water where signicant danger lurks.

Take high-yield bonds, for example.

500

1000

1500

2000

November 2012 December 2012 January 2013 February 2013

+93%

40 Days

Sony (6758) Equity Price

November 2012-March 2013



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Is it just me, or does anyone else have a problem with a junk bond benchmark index in today'suncertain world yielding less than 6% (lower than at any time since its launch 16 years ago)?Well, that is exactly where the BAML High Yield Master II Index stands, as you can see from thefollowing chart:

5

10

15

20

25

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

BAML High Yield

Master II Index

1997 - 2013

Source: St. Louis Fed

How about Spanish government debt?

Does anyone really believe that borrowing costs should be falling for the Kingdom of Spain,a nation with unemployment greater than that seen in the United States during the Great

Depression (one in two under-25s out of work), industrial production that has been slipping fora year, and an ongoing corruption scandal that could topple the government?

Two weeks ago Spain announced its latest debt-prole report, which was, frankly, horrendous:

(Mish): The Government and the Bank of Spain debt gures are chilling. Governmentdebt broke records in 2012. In the rst year of the Government of Mariano Rajoy, debtskyrocketed to €882 billion, a one-year increase of €146 Billion. Never in the economichistory of Spain's general government had debt increased so much in a single year. In

ve years, the debt has increased by €500 Billion....

The increase in public debt in 2012 is the equivalent of more than 14 percentage pointsof gross domestic product (GDP). €882 billion is equivalent to between 83.5% and 84% of GDP. The government had forecast a ratio of 79.8% for the 2012 budget last July, but hassince revised the gure upwards. In relative terms, debt-to-GDP is at the highest debtlevel in more than a century, particularly since 1910, when the Spanish debt stood at88% of GDP, according to historical IMF data.

Despite cuts and tax increases, the government of Mariano Rajoy has been unable tosignicantly reduce the gap in the public accounts.



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Outstanding liabilities will probably exceed 100% of GDP at the end of the year, and there are more than €100 billion of government debt in the hands of others (SocialSecurity mainly). The €882 billion gure also does not include about €60 billion of debtowed by public enterprises.

Source: El Pais

Meanwhile, against that background, Spanish borrowing costs continue to fall:

4

5

6

7

8

%

Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 12 Feb 12

Spain: 10-Year Sovereign Bond Yield

Mar 2012 - Mar 2013

Source: Bloomberg

But it's not the fact that they're falling that's so troubling, it's why that's the issue.



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Investors are snapping up Spanish sovereign bonds simply because they know that Mario Draghiand the ECB have their backs. Period.

It has absolutely nothing to do with fundamentals.

Fundamental: Foundation of reality; the state of things as they actually exist, rather

than as they may appear or might be imagined.

But don't take my word for it. Far wiser men than I have been up in the towers screaming atinvestors to get out of these waters.

Regular readers will be well aware of the high regard in which I hold Bill Fleckenstein. Havingbeen fortunate enough to have dinner with him recently, I can conrm that the admiration iswell-placed. He recently opined on what he termed 'pure fantasy':

What has caused the stock and bond markets to levitate is nothing short of anextraordinary amount of worldwide money printing that thus far has not resulted

in 'enough' ination for people to recognize it as such. (Most likely, the fear of adeationary accident still lingers, even though that is receding into the background.)How long folks will remain in denial (delusional) is not knowable in advance, just as itwasn't possible to know when the equity and real estate bubbles would end. What isknowable, as it was with the prior two bubbles, is that it will end, and end very badly.Once central banks cannot monetize government debt, we will have a variation of thescare we saw over the last couple of years involving European governments, this time

focusing most likely on Japan, Great Britain, and the U.S., as well as Europe.

In other words, we are in the nal misallocation of capital. As I have noted before,we can't really call it a bond bubble, since we don't have the euphoria and behavior-changing aspects that normally accompany bubbles; but the warping that has beencaused during this go-round is no less signicant, and the ramications will be evenmore powerful, simply because the scale of the abuse is so gargantuan.

(Incidentally, readers can avail themselves of Bill's daily thoughts by clicking HERE and subscribing. I have been a subscriber for many years and can honestly say that, in my opinion,the $120 annual charge is the best value for money you will nd anywhere.)

But it's not just Bill who, like me, is scratching his head.

John Hussman, a renowned thinker with an extremely practical approach to investing, also sees

trouble looming:

(FT): These conditions represent a syndrome of overvalued, overbought, overbullish,rising yield conditions that has emerged near the most signicant market peaks — and

preceded the most severe market declines — in history:

1. S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average

https://www.fleckensteincapital.com/index.aspx

https://www.fleckensteincapital.com/index.aspx



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of ination-adjusted earnings) greater than 18. The present multiple is actually 22.6.

2. S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing,at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2standard deviations above the 20-period moving average) at daily, weekly, and monthly

resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.3. Investor sentiment overbullish (Investors Intelligence), with the 2-week average of

advisory bulls greater than 52% and bearishness below 28%. The most recent weekly gures were 54.3% vs. 22.3%. The sentiment gures we use for 1929 are imputed usingthe extent and volatility of prior market movements, which explains a signicantamount of variation in investor sentiment over time.

4. Yields rising, with the 10-year Treasury yield higher than 6 months earlier.

I have chosen a few examples of disconnected assets that are most certainly not performing,

based on fundamentals, but there are many others. In fact, the corruption of the risk-freerate by ZIRP and QE has managed to render every traditional price signal ineffective, andthat in turn has led to the mispricing of just about every kind of risk asset anywhere in theworld (the single exception being the marketplace where private capital meets private desirefor investment, i.e., the only market that, in effect, excludes governmental and politicalinterference).

This will end very badly.

Maybe not yet, maybe not for a while; but the swimmers are loath to get out of the water, andend badly it surely will.

There is no growth to speak of and Europe is mired in recession, as are the UK and Japan. Theofcial statistics may not quite say so, but I am willing to bet that in time we will discover thatthe US is in similar straits. The world is awash in debt, and central bankers seem to think thatmore debt is the solution. Currencies are being debased as fast as possible against each otherin an oh-so-quiet race to the bottom that, while denied by those involved, is plain to see forall who are willing to look at the evidence and make up their own minds instead of listeningto 'ofcials'. And, as the 'unexpected' election result in Italy demonstrates, people are growingtired of austerity and are ready to vote accordingly.

However, amazingly enough, rather than pay heed to the folks in the watchtowers screaming at

them, investors would far rather listen to the 'mayors' of picturesque investment locales tellingthem not to worry, that the water is safe, and that they have made quite sure that nothingdangerous will happen.

In short, everything is, once again, 'contained'.



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Nobody embodies the mayoral role better than our genial friend Ben Bernanke, chairman ofthe Federal Reserve Board and owner of the most soothing voice in town, who this past weekgave his Humphrey Hawkins testimony to a noticeably fractious audience. Bernanke hintedthat the famous Fed 'exit strategy' was, perhaps, actually to do nothing and allow things to sortthemselves out:

First, we can simply allow securities on our balance sheet to run off and not replacethem as we currently are doing. Secondly, we have a number of tools that can be used to drain reserves from the system, such as reverse repos.

Thirdly, we can raise interest rates even without reducing our balance sheet, by raisingthe interest rate we pay on excess reserves, which will in turn translate into higher interest rates in money markets. And fourth and nally ... eventually we can sell thesecurities back into the market in a slow, predictable way....

Each of the elements is something that we have tested, that we have seen other

countries use, so we think we understand it pretty well....

Again, as I said earlier, we are quite comfortable that we can exit in a way that is bothsmooth and in which we provide lots of information to markets in advance so they willknow what's coming and be able to anticipate it.

It's hard to fathom how such a vaunted cadre of intellectuals as the Federal Reserve Boardcan be so naive as to think that they (and only they) will be the arbiters of how they exit theirbet. The simple truth is that the market will eventually decide what the right interest rate is,and I'm willing to go on the record and state that it will not be a rate that the Fed and the USgovernment likes or has the means to pay.

Funnily enough, recently, a few more high-prole voices have been heard squawking from thewatchtowers, including none other than former Bernanke right-hand man and star of Inside Job,Frederic Mishkin:

(UK Daily Telegraph): A new paper for the US Monetary Policy Forum and published by the Fed warns that the institution's capital base could be wiped out 'several times' onceborrowing costs start to rise in earnest.

A mere whiff of ination or more likely stagation would cause a bond market rout,leaving the Fed nursing escalating losses on its $2.9 trillion holdings. This portfolio is

rising by $85bn each month under QE3. The longer it goes on, the greater the risk. Exitwill become much harder by 2014.

Such losses would lead to a political storm on Capitol Hill and risk a crisis of condence.The paper — 'Crunch Time: Fiscal Crises and the Role of Monetary Policy' — is co-writtenby former Fed governor Frederic Mishkin, Ben Bernanke's former right-hand man.



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It argues the Fed is acutely vulnerable because it has stretched the average maturity of its bond holdings to 11 years, and the longer the date, the bigger the losses when yieldsrise. The Bank of Japan has kept below three years.

Trouble could start by mid-decade and then compound at an alarming pace, with yieldsspiking up to double-digit rates by the late 2020s. By then Fed will be forced to nance

spending to avert the greater evil of default. 'Sovereign risk remains alive and well inthe U.S, and could intensify.'

'Feedback effects of higher rates can lead to a more dramatic deterioration in long-rundebt sustainability in the US than is captured in ofcial estimates,' it said.

Another warning came late in February, when Britain lost its AAA rating (something it hasproudly held since 1978) after Moody's became the latest observer to see through the coalitiongovernment's 'Fauxsterity' program:

(EU Observer): Rating agency Moody's stripped the UK of its coveted AAA credit rating on

Friday (22 February), rounding off a day of economic gloom in the EU.

In a statement released shortly before the closure of the markets, Moody's said thatthe downgrade was the result of 'continuing weakness in the UK's medium-term growthoutlook, with a period of sluggish growth which Moody's now expects will extend intothe second half of the decade'.

It is the rst time Moody's has downgraded the UK's creditworthiness since its ratingssystem was set up in 1978. Meanwhile, the two other big rating agencies — Standard & Poor's and Fitch — are yet to cast their verdict ahead of the country's next annualbudget on March 20.

The downgrade leaves just six EU countries — Denmark, Finland, Germany, Luxembourg,the Netherlands and Sweden — with AAA ratings.

I'm sorry, but reducing the rate at which you spend more than you take in, doesn't qualify asausterity.

It doesn't.

And so, as investors continue to willfully disregard the evidence staring them in the face and,thanks to the complete absence of any kind of 'safe' return, pile into the shark-infested waters

in search of yield, spare a thought for the Chief Brodys of the world, desperately trying to warnpeople about the dangers lurking beneath the surface, but ignored because everybody is havingsuch a damned good time.

If you listen very carefully, you can hear Tommy Johnson's ominous tuba playing quietly in thebackground. It may not be perceptible to most just yet, but it is unmistakably there.

I can only hope that the shadow I and many others see in the water is just bluesh.

*******



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In this week's edition of Things That Make You Go Hmmm... we travel to Greece, wherethe reform effort appears to be stalling; Italy, where the recent election threatens potentiallydangerous upheaval in Europe; and France, where job losses appear to be driving a seriousconsumer recession.

The Economist takes an in-depth look at the tragic ongoing war in Syria; Ambrose Evans-Pritchard fears a wave of protectionism as QE's effectiveness wanes; Mark Hanson picks apartthe recent new home sales numbers in the USA; and, in precious metals, Ivan Glasberg takesmining CEOs to task for their poor performance, and the doyen of PM fund managers, JohnHathaway, lays out part 2 of his 'Investment Case for Gold'.

We have charts on silver, the sequester, and nancial repression as well as the loss of interest ininvesting, the risk-on/risk-off markets, and something Mike Shedlock calls the 'wage recession';and in our interviews section Ben Davies talks gold and silver and Rick Santelli talks paper vs.physical, but the star turn is by Stan Druckenmiller, who talks truth.

Druckenmiller's interview is, I think, an extremely important one, and I urge each and everyone of you to nd the time to watch it.

That's all from me for another week. I will hopefully be back next week, as long as thehorrendous cold I have picked up on my travels abates.

Until Next Time.

*******

Housekeeping: My thanks to those of you who journeyed to Indian Wells and

the Cambridge House California Resource Investment Conference last weekend. It wasa great pleasure to meet so many of you. My next speaking engagements will be atCommodity Investment World Asia, here in Singapore on March 13, and then Mines and Money in Hong Kong on March 18-22.

*******

Trade protectionism looms next as central banks exhaust QEOfcials at the US Federal Reserve may be more worried than they have let on about the

treacherous task of extricating America from quantitative easing. This is an unsettling twist,with global implications.

A new paper for the US Monetary Policy Forum and published by the Fed warns that theinstitution's capital base could be wiped out 'several times' once borrowing costs start to rise inearnest.



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4 MARCH 2013

A mere whiff of ination or more likely stagation would cause a bond market rout, leaving theFed nursing escalating losses on its $2.9 trillion holdings. This portfolio is rising by $85bn eachmonth under QE3. The longer it goes on, the greater the risk. Exit will become much harder by2014.

Such losses would lead to a political storm on Capitol Hill and risk a crisis of condence. Thepaper — 'Crunch Time: Fiscal Crises and the Role of Monetary Policy' — is co-written by formerFed governor Frederic Mishkin, Ben Bernanke's former right-hand man.

It argues the Fed is acutely vulnerable because it has stretched the average maturity of itsbond holdings to 11 years, and the longer the date, the bigger the losses when yields rise. TheBank of Japan has kept below three years.

Trouble could start by mid-decade and then compound at an alarming pace, with yields spikingup to double-digit rates by the late 2020s. By then Fed will be forced to nance spending toavert the greater evil of default.'Sovereign risk remains alive and well in the U.S, and could

intensify. Feedback effects of higher rates can lead to a more dramatic deterioration in long-run debt sustainability in the US than is captured in ofcial estimates,' it said.

Europe has its own 'QE' travails. The paper said the ECB's purchase of Club Med bond amountsto 'monetisation' of public debt in countries shut out of global markets, whatever the claims ofMario Draghi.

'We see at least a risk that the eurozone is on a path to become more like Argentina (which ofcourse is why German central bankers are most concerned). The provinces overspend and arealways bailed out by the central government. The result is a permanent scal imbalance for thecentral government, which then results in monetization of the debt by the central bank and

high ination,' it said.

In America, the Fed would face huge pressure to hold onto its bonds rather than crystalizelosses as yields rise — in other words, to recoil from unwinding QE at the proper moment. Theauthors argue that it would be tantamount to throwing in the towel on ination, the start ofdebt monetisation, or 'scal dominance'. Markets would be merciless. Bond vigilantes wouldsoon price in a very different world.

Investors have of course been fretting about this for some time. Scott Minerd from GuggenheimPartners thinks the Fed is already trapped and may have to talk up gold to $10,000 an ounce toensure that its own bullion reserves cover mounting liabilities.

*** UK DAILY TELEGRAPH / LINK

Glencore's Glasenberg says mining CEOs 'screwed up'Ivan Glasenberg, head of commodity giant Glencore, has launched an extraordinary broadsideagainst fellow chief executives, condemning mining's record as 'catastrophic'.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9891082/Trade-protectionism-looms-next-as-central-banks-exhaust-QE.html

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9891082/Trade-protectionism-looms-next-as-central-banks-exhaust-QE.html



18


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4 MARCH 2013

The outspoken trader-turned-billionaire CEO said the mining companies had erred in chasinggrowth, and made the case for keeping supply tight and prices high.

'The big guys really screwed up,' he said. 'We’ve always been wanting to keep building and keepputting the cash which we generate into new assets.

'That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand andsupply.'

He spoke as the major miners undergo a change of leadership in the face of a worseningenvironment, with Anglo American’s Cynthia Carroll, BHP Billiton’s Marius Kloppers and RioTinto’s Tom Albanese all announcing their exits in recent months.

'Now we have a new generation of CEOs; I hope CEOs have learnt their lesson,' Mr Glasenbergsaid. 'They built, they didn’t get the returns for their shareholders. It’s time to stop building.

'I hope we are in a new paradigm in the mining industry,' he added. 'It’s really, I believe,catastrophic what we’ve done in this industry.'

In comments likely to raise eyebrows among Glencore’s customers, Mr Glasenberg arguedthat putting off the development of new mines will help keep prices high for commodities,supporting dividends for investors.

'What we’ve got to do, when the markets do get stronger, no need to keep building a new assetand let’s keep the market tight for a while,' he said.

'Not that we’re here to create an anti-competitive nature, but we’ve got to get returns. You theinvestors want to get returns on our assets and it’s easily done if we just use our brains.'

*** UK DAILY TELEGRAPH / LINK

Italy's prospects look grimFrom political stalemate to the loss of manufacturing strength and the lack of youth protest,two Italian academics nd little joy in their country's current predicament.

Talking to Roberto D'Alimonte, professor of political science at Rome's Luiss Guido Carli

university, and his colleague Giuseppe Ragusa, a professor of econometrics, makes for a fewlaughs, but little joy.

D'Alimonte says he's been on the phone this morning and heard tell of several differentoutcomes following inconclusive parliamentary elections.

Pier Luigi Bersani, leader of the social democrat bloc, is attempting to woo the 20 senators heneeds to form a majority government. Where from? His target is the large number of left-of-centre elected ofcials in Beppe Grillo's Five Star Movement.

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/9895298/Glencores-Glasenberg-says-mining-CEOs-screwed-up.html

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/9895298/Glencores-Glasenberg-says-mining-CEOs-screwed-up.html



19


Hmmm...

4 MARCH 2013

Grillo, meanwhile, is leaning towards those who believe the president, Giorgio Napolitano,should resign and make himself available to be prime minister. A Napolitano cabinet would takea more robust attitude to reforms than Mario Monti, but in the same vein.

Then there is Monti, who, as the third choice of most people, becomes the least worst option,

again.

Ragusa says the British press have misunderstood Grillo's appeal. It is not a vote againstausterity, it is a vote against the establishment and corruption. Starting as a left movement,Grillo has brought together a hotchpotch of environmentalists and social reforms as much as hehas corralled Eurosceptics.

Ragusa is pessimistic about the outcome, saying the vote has shown a deeply divided Italy —along regional lines and the generations.

'We need a social compact that binds the winners and losers from economic reforms. And the

losers, who should be the older generation, need to accept the deal because the winners aretheir sons and daughters,' he said.

He is also worried that the engine of Italian wealth, its vast manufacturing base in the north,has lost the battle to badge its own goods and instead is a supplier to BMW and Mercedes andother well-known brands. It is also being lured abroad — even to the US — by tax breaks thatmean the country will continue to haemorrhage jobs.

D'Alimonte reects on the lack of protest by Italy's youth. There are few demonstrations tomatch los indignados in Madrid. He muses that maybe the Italian middle class is so wealthy,with savings based on 50 years of accumulated income, that it can cushion the blow of austerity

unlike Spanish families, which were working in a largely agrarian economy until the 1970s andFranco's death.

Ragusa points out that everyone in senior political positions is over 60. Contrast this situationwith the period when Monti started his career. 'He was a professor at 27 and was entirelyunpublished, he had nothing standing in front of him — no barriers — something that is unheardof now.'

*** UK GUARDIAN / LINK

Stalling for Time: Greek Reform Effort Slows to a CrawlThe troika is back in Athens this week and with all eyes on Italy, Greece feels it has little tofear. But important reforms have stalled and the government's belt-tightening efforts seemparalyzed. Politicians are playing for time and hoping for fresh money.

http://www.guardian.co.uk/business/economics-blog/2013/mar/01/italy-prospects-grim-politics-manufacturing

http://www.guardian.co.uk/business/economics-blog/2013/mar/01/italy-prospects-grim-politics-manufacturing



20


Hmmm...

4 MARCH 2013

The troika mission has returned to Greece, but this time things are different. No front pageheadlines are warning about new painful demands made by Greece's international creditors, nogovernment ofcials are pleading for unity in the three-party coalition in support of unpopularmeasures. And there is no overhanging fear of a long drawn-out process of evaluation, full of

innuendos about a catastrophic default or euro-zone exit.For the moment, Europe is watching developments in Italy. Following the election debaclethere, concerns have reawakened that the euro crisis might return. The Greek government, onthe other hand, is condent that the inspection started on Monday by the troika — comprisedof ofcials from the European Central Bank (ECB), the European Union and the InternationalMonetary Fund (IMF) — will be over by March 10 and will approve the release of the next twotranches of bailout aid — €2.8 billion in March and a further €6 billion in April. No one seems tofear a repetition of the drama of the previous troika inspection, which lasted a full ve months.

On the contrary, the government in Athens is going on the offensive this time, presenting its

own list of demands. The Greek government is determined to push lenders to agree on a listof concessions it hopes will help to alleviate the crisis. They include a lower VAT, or sales tax,for restaurants, the allocation of EU funds to combat unemployment and a new law aimed atmaking life easier for indebted households.

But such complacency seems unfounded given the situation on the ground. The Greek economyremains mired in recession, and is expected to contract by another 4.5 percent of grossdomestic product in 2013. The latest statistics show that 27 percent of Greeks are unemployed,and among those under the age of 24, that gure is 62 percent. Many are already fearful of the'Bulgarian syndrome,' a reference to the street violence and anti-austerity protests that haveshaken the government in Greece's northern neighbor.

Furthermore, it has become increasingly clear that the government in Athens is failing toimplement promised reforms....

*** DER SPIEGEL / LINK

World from Berlin: 'Europe Can't Afford an Ungovernable

Italy'European leaders are nervous Rome might out economic reforms and reignite the euro crisis asa result of the political stalemate which emerged from Italian elections. German commentatorssuggest that now might be a good time to consider policy changes on both sides.

With Italy facing political deadlock after this week's election, European leaders are on edgeabout what are likely to be negative effects on the currency union.

http://www.spiegel.de/international/europe/reforms-stall-in-athens-as-troika-considers-next-aid-tranche-for-greece-a-885723.html

http://www.spiegel.de/international/europe/reforms-stall-in-athens-as-troika-considers-next-aid-tranche-for-greece-a-885723.html



21


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4 MARCH 2013

Financial markets and ratings agencies, the everyday harbingers of economic turmoil, havereacted negatively to concerns that despite a deep recession, much-needed reforms will notcontinue in the euro-zone's third-largest economy.

Though reform-minded Democratic Party head Pier Luigi Bersani's center-left camp managed

a slim majority in Italian parliament, they were unable to gain the upper hand in the Senatedidn't gain an edge against the center-right, led by anti-austerity comedian Beppe Grillo's FiveStar Movement and populist Silvio Berlusconi and his followers. Meanwhile Brussels-backedtechnocrat and former Prime Minister Mario Monti garnered only about 10 percent of the vote.

With the center-left and center-right now pitted against each other, there is little to indicatethat economic progress will be made in Italy. But that hasn't stopped appeals from Europeanleaders for politicians to consider the consequences for the euro crisis, which many fear couldnow return.

German Finance Minister Wolfgang Schäuble said that 'the onus is now on political leaders in

Italy to … do what the country needs, namely form a stable government that continues on thesuccessful path of reform.'

His Dutch counterpart Jeroen Dijsselbloem, who is also head of the Euro Group, said thatregardless of who runs Rome, he expects them to honor Italy's commitments to Europe. 'A stablegovernment is important to the euro zone. To pull Europe from an economic quagmire, stablepolitics are required, also in Italy,' he added.

European Commission President Jose Manuel Barroso urged Italy not to give in to populism. 'Weshould be serious when we discuss economic policy and not give in to immediate political orparty considerations,' he said.

German commentators on Wednesday once again lamented the election result, and many say itdoesn't bode well for efforts to end the euro crisis.

Conservative daily Frankfurter Allgemeine Zeitung writes:

Governments that want to break down the state, economy and society to implementreforms incur the wrath of voters and must watch as their legitimacy crumbles.Instead, either radical forces or populists with irresponsible promises and no regard

for consequences gain power. Austerity is unpopular. Even if drawing that conclusion isbanal, it also has negative economic ramications. Demands for an end to the austerity

measures were to be expected, as was the renewed debate about euro bonds and debtunion.

This much is clear: European economies will continue drifting apart and their ability tocompete will not equalize at a good level. … Great uncertainty weighs on this currency union once again.

*** DER SPIEGEL / LINK

http://www.spiegel.de/international/europe/german-press-urges-italian-politicians-to-think-of-euro-zone-a-885889.html

http://www.spiegel.de/international/europe/german-press-urges-italian-politicians-to-think-of-euro-zone-a-885889.html



22


Hmmm...

4 MARCH 2013

Syria: The death of a country After the rst world war Syria was hacked from the carcass of the Ottoman empire. Afterthe second, it won its independence. After the ghting that is raging today it could cease tofunction as a state.

As the world looks on (or away), the country jammed between Turkey, Lebanon, Jordan, Iraqand Israel is disintegrating. Perhaps the regime of Bashar Assad, Syria’s president, will collapsein chaos; for some time it could well ght on from a fortied enclave, the biggest militia ina land of militias. Either way, Syria looks increasingly likely to fall prey to feuding warlords,Islamists and gangs—a new Somalia rotting in the heart of the Levant.

If that happens, millions of lives will be ruined. A fragmented Syria would also feed global jihadand stoke the Middle East’s violent rivalries. Mr Assad’s chemical weapons, still secure for now,would always be at risk of falling into dangerous hands.

This catastrophe would make itself felt across the Middle East and beyond. And yet the outsideworld, including America, is doing almost nothing to help.

Part of the reason for the West’s hesitancy is that, from the start of the uprising in 2011, MrAssad has embraced a strategy of violence. By attacking the Arab spring with tanks andgunships, he turned peaceful demonstrators into armed militias. By shelling cities he uprootedhis people. By getting his Alawite brethren to massacre the Sunni majority, he has drawn injihadists and convinced Syrians from other sects to stick with him for fear that his own fall willlead to terrible vengeance.

Syrian blood now ows freely and sectarian hatred is

smouldering (see article). The ght could last years.Rebel groups have lately been capturing militarybases. They control chunks of the north and east andare ghting in the big cities. But the rebels are rivalsas well as allies: they are beginning to target eachother, as well as the government’s troops.

Even if Mr Assad cannot control his country, he hasevery reason to ght on. He still enjoys the cultlikedevotion of some of his Alawite sect and the grudging

support of other Syrians who fear what might come next.He commands 50,000 or so loyal, well-armed troops — and tens of thousands more, albeitless trained and less loyal. He is backed by Russia, Iran and Iraq, which between them supplymoney, weapons, advice and manpower. Hizbullah, Lebanon’s toughest militia, is sending in itsghters, too. Mr Assad almost certainly cannot win this war; but, barring an unexpected strokeof fate, he is still a long way from losing it.



23


Hmmm...

4 MARCH 2013

So far the ghting has claimed 70,000 or more lives; tens of thousands are missing. The regimehas locked up 150,000-200,000 people. More than 2m are homeless inside Syria, struggling tond food and shelter. Almost 1m more are living in squalor over the border.

Suffering on such a scale is unconscionable. That was the lesson from the genocides and civilwars that scarred the last half of the past century. Yet President Barack Obama has suggestedthat saving lives alone is not a sufcient ground for military action. Having learnt in Afghanistanand Iraq how hard it is to impose peace, America is fearful of being sucked into the chaos thatMr Assad has created. Mr Obama was elected to win economic battles at home. He believes thata weary America should stay clear of yet another foreign disaster.

That conclusion, however understandable, is mistaken. As the world’s superpower, America islikely to be sucked into Syria eventually.

Even if the president can resist humanitarian arguments, he will nd it hard to ignore hiscountry’s interests.

If the ght drags on, Syria will degenerate into a patchwork of warring efs. Almost everythingAmerica wants to achieve in the Middle East will become harder. Containing terrorism, ensuringthe supply of energy and preventing the spread of weapons of mass destruction: unlike, say, the15-year civil war in Lebanon, Syria’s disintegration threatens them all.

About a fth of the rebels—and some of the best organised—are jihadists. They pose athreat to moderate Syrians, including Sunnis, and they could use lawless territory as a basefor international terror. If they menace Israel across the Golan Heights, Israel will protectitself ercely, which is sure to iname Arab opinion. A divided Syria could tear Lebanonapart, because the Assads will stir up their supporters there. Jordan, poor and fragile, will

be destabilised by refugees and Islamists. Oil-rich, Shia-majority Iraq can barely hold itselftogether; as Iraqi Sunnis are drawn into the fray, divisions there will only deepen. Coping withthe fallout from Syria, including Mr Assad’s arsenal of chemical weapons, could complicate theaim of preventing Iran from obtaining a nuclear bomb. Mr Obama wanted to avoid Syria, butSyria will come and get him.

*** THE ECONOMIST / LINK

http://www.economist.com/news/leaders/21572193-syria-disintegrates-it-threatens-entire-middle-east-outside-world-needs-act

http://www.economist.com/news/leaders/21572193-syria-disintegrates-it-threatens-entire-middle-east-outside-world-needs-act



24


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4 MARCH 2013

French consumer recession is likely driven by job lossesRecent retail numbers from France are showing an ongoing consumer recession in spite of signsof improvement in condence elsewhere in the EU. In fact the EU economic sentiment numberstoday beat expectations to the upside - nothing to write home about, but there are signs of

stabilization (for now). French Retail PMI on the other hand shows highly stressed consumersgenerating the sharpest fall in retail sales in six months. French retail PMI materially draggeddown the Eurozone's overall PMI.

Markit: - The French retail sector was caught ina deepening downturn during February. Sales fellsharply on both a monthly and annual basis, whilethere was a survey-record shortfall versus previously set plans. Retailers’ gross margins continued to besqueezed by a combination of higher purchasing costs

and strong competitive pressures.Job losses in France are likely the culprit, as Frenchjobless claims hit a 15-year high last month.

Reuters: - The number of people out of work inFrance shot up again in January after a smaller rise in December, piling new pressure onSocialist President Francois Hollande who has made tackling joblessness his top priority.

The number of jobseekers in mainland France jumped by 43,900 or 1.4 percent, signalling a return to therapid pace of increase seen over 19 straight monthsto December - although half of the rise was due to achange in methodology in January.

Until job losses are under control, it is hard to imagineconsumer sentiment and spending improving. And aswe've seen in the US, the time period from job marketimprovements to pickup in consumer spending can befairly long.

*** SOBER LOOK / LINK

January New Home Sales Bullet Points: The Reality Will have client detail report out later that clearly shows that stimulus and headlines have oncesharply overstated this data set.

http://soberlook.com/2013/02/french-consumer-recession-is-likely.html

http://soberlook.com/2013/02/french-consumer-recession-is-likely.html



25


Hmmm...

4 MARCH 2013

Bottom line, this morning’s headline number of 437k was juiced by an unacknowledged shortterm-event … the year-end cap gains changes. We saw this same thing happen in CA ExistingSales for in Jan…'the cap gains effect ' has been boosting sales volume since Sept but ultimatelywill lead to a hangover near-term.

In short, in January ALL of the 4k MoM increase in New Home Sales came from the 'WesternRegion' greatly supporting the cap-gains theory. So does the fact that the Northeast — a higherend region — saw a 1k jump in sales (which is 50% due to such low volume in that region) andthe South and MidWest regions showed zero sales gains, as there are so few houses there thatwould be hit with cap gains. Lastly, in this morning’s 'surprise' consumer condence beat thesubset housing data showed the expectations to buy a new home in the next 6 months droppedto near a 3 year now.

When a single region outperforms and is responsible for mostly all the gains or losses in amonthly data series go digging because something is not right. And paying attention to headlineseasonally adjusted annualized numbers can lead to confusion and malinvestment. The realstory always lies beneath the headlines as bulleted below.

• The Jan New Home Sales headline SAAR blow out of 437k is a case of seasonally adjusting stimulus. This sets up for disappointment near-term.

• Jan 2013 New Home sales higher by 3k to 4k NSA (can’t tell exact amount due to CensusBureau rounding) sales. Most — if not all — of this increase is due to homeowners thatsold their houses for cap gains and rebought in Jan. We saw this in the CA and nationalresale numbers for Jan as well. The cap gains effect also supported New and ExistingHome Sales in ALL of Q4, which means there is a pull forward effect in play, whichalways ends with a hangover. Some cap gains sellers will probably rebuy in Feb as well.

Think about this…the entirety of this morning’s MoM gain in Jan New Home Sales wason 3k to 4k houses, or 1% of the volume of Existing Home Sales sold in January. Bottomline, it’s a rounding error to macro housing and GDP that means nothing until cap gainscredit sellers get done rebuying, which will happen soon. Feb cap gains incrementalbuyer volume will probably be halved.

• The FULL 4k MoM gain in New Home Sales came from the Western Region supporting thetheory it was mostly cap gains sellers/rebuyers who will not be there for long.

• Dec 12 sales revised higher by ONE THOUSAND sales to 27k NSA. But Nov revised LOWERby one thousand sales to 29k. So, net-net wash.

With sales only in the mid-to-high 20k’s per month a couple of thousand sales in a trough monthcan produce some pretty amazing headlines when you annualize the number and then throw ontop some seasonal adjustment hot sauce. Just like they did in 2010 during the homebuyer taxcredit period when 'record high' sales were going through and everybody then thought we werein a 'durable' housing market recovery with 'escape velocity'.



26


Hmmm...

4 MARCH 2013

Shortly thereafter, Existing Sales took a 30% MoM collapse on the tax credit sunset andeverybody all at once realized that massive stimulus really does 'activate' certain demandcohorts all at once, steals from the future, and leads to severe disappointment when thestimulus is removed.

*** MARK HANSON (VIA BARRY RITHOLTZ) / LINK

The Investment Case for Gold: Part 2Those who seek to nd the rationale for owning gold in the growth of the Fed and other centralbank balance sheets, future ination, the prospects for a deationary collapse, the ight tosafety or other macroeconomic themes only touch on ephemeral aspects of the forces thatdrive the bull market in gold. The narrative for gold has evolved several times since the bullmarket began in 1999. At rst, central bank selling and producer hedging was the focus of most

commentary. The attack of 9/11/01 added a geopolitical dimension. In 2006 and 2007 a thirstfor 'hard assets' premised on emerging market growth co-opted the investment thesis. The crashof gold during 2008 was explained by the specter of deation. The dollar price of gold rose fromits bear market low of $250 in 1999 to more than $700 according to several different narrativesas voiced by conventional wisdom.

Post the 2008 meltdown, media commentary on gold ourished. High prole investorsproclaimed the merits. Quantitative easing with implications for future ination dominatedinvestment thinking. The sovereign debt crisis in euro land and the 2011 showdown over thedebt ceiling in Congress culminated the frenzy. The bull market, unnoticed by most for theprevious eight years, became front page and hostage to popular perceptions.

To be caught up in a debate dictated by the explanations of mainstream commentary is, in ouropinion, a waste of time. The rationale for further advances is destined to change. What needsto be addressed, as in any investment analysis, is not what is on the tip of everybody’s tongue,but rather what is it that has not been articulated; positive or negative.

The DNA of the bull market in gold is bad money, which in turn is evidenced by negative realrates of interest. In our view, one only needs to return to the notion of an overvalued and overabundant dollar for a starting point. Is the dollar less over valued and in less oversupply than itwas ten years ago? Will it become more or less so during the coming decade?

Gold at roughly $1575 most certainly reects the negative evolution of dollar fundamentalssince 2000. Gold’s advance suggests that the dollar is worth substantially less, but in terms ofwhat? The dollar buys 80% less gold than it did ten years ago. It buys 25% less of the DXY basketof foreign exchange than ten years ago. Because however reported, ination remains tame andmost do not seem to grasp or feel the dollar’s loss of value.

http://www.ritholtz.com/blog/2013/02/january-new-home-sales-reality/

http://www.ritholtz.com/blog/2013/02/january-new-home-sales-reality/



27


Hmmm...

4 MARCH 2013

Source: Tocqueville

In addition to reecting history, the dollar-gold price also discounts the future. The dollar’sdecline versus gold is, in our opinion, a market expression of uncertainty as to its futurepurchasing power. In this sense, the dollar’s crash in gold terms is similar to a previously highlyvalued equity that investors have soured on. The multiple has contracted. Former cheerleadersare forced to become value players. The facts have to be reconsidered. We believe the rise ofgold should be considered a warning....

*** JOHN HATHAWAY / LINK

http://tocqueville.com/insights/investment-case-gold-part2

http://tocqueville.com/insights/investment-case-gold-part2



28


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4 MARCH 2013

Charts That Make You Go Hmmm...

Source: Demonocracy (via Zerohedge)

The historical cumulative Gold-to-Silver production ratio is 1:10.7; the priceratio of Silver-to-Gold is currently around 1:50. Demonocracy enables us to visualize the1.411 million tonnes of Silver that has been mined in history and compares that to the worldgovernment reserve holdings (and gold).

*** ZEROHEDGE / LINK

http://demonocracy.info/infographics/world/silver/silver.html

http://www.zerohedge.com/news/2013-03-01/visualizing-all-silver-world

http://www.zerohedge.com/news/2013-03-01/visualizing-all-silver-world

http://demonocracy.info/infographics/world/silver/silver.html



29


Hmmm...

4 MARCH 2013

The Sequester: A look at the 20 districts that receive the most in defense contracts

Source: Bloomberg (via Barry Ritholtz)

http://www.businessweek.com/articles/2013-02-21/the-geography-of-defense-cuts

http://www.businessweek.com/articles/2013-02-21/the-geography-of-defense-cuts



30


Hmmm...

4 MARCH 2013

This slide from my recent presentation in Indian Wells drew a few gasps, so I thought I'dinclude it here this week. It shows the true extent of the conscatory policies of the Fed (aswell as many of the world's other central banks).

Still confused about the rush into riskier assets that offer a return?

Source: Tings Tat Make You Go Hmmm...



31


Hmmm...

4 MARCH 2013

Fascinating chart from Kevin Lane of FusionIQ

Kev created a Risk On/Risk Off chart by plotting High Beta, High Yield and Emerging Marketsversus Consumer Staples, Health Care and Low Beta names. When risk appetites are higher, it isreected in the ratio moving higher. When fear levels rise, and sector rotation switches to thedefensive names, the ratio heads lower.…

*** THE BIG PICTURE / LINK

Since 2004, interest in 'stocks' and 'bonds' has plunged by more than 50%. Despite arenaissance for bonds in 2008, and stocks in 2009, the 'Great Rotation' appears to be 'outof investing'. Google Trends also shows that, as expected, 'Bonds' have been more popular

than 'Stocks' since the crash - a development the Fed is so desperately trying to reverse, byimposing ever stricter central planning, ironically the reason why most have 'just said no' to anauthoritarian, inefcient, and farcical policy instrument formerly known as the market. Is it anywonder so many retail brokerages, commission-takers, and asset-gatherers are advertising day-in, day-out and constantly reassuring with the 'it'll all be ok in the long-run meme'?

*** ZEROHEDGE / LINK

http://www.scribd.com/doc/127789459/FusionIQ-Strategy-Session-Slides-for-February-27-2013

http://www.zerohedge.com/news/2013-03-01/presenting-great-rotation-out-investing

http://www.zerohedge.com/news/2013-03-01/presenting-great-rotation-out-investing

http://www.scribd.com/doc/127789459/FusionIQ-Strategy-Session-Slides-for-February-27-2013



32


Hmmm...

4 MARCH 2013

Mike Shedlock offers some reections on the wage recession this week. Below aretwo charts from his piece, but I recommend reading it in its entirety, which you can do byclicking the link below.

*** MIKE SHEDLOCK (VIA DOUG SHORT) / LINK

http://advisorperspectives.com/dshort/guest/Shedlock-130301-Reflections-on-Wage-Recession.php

http://advisorperspectives.com/dshort/guest/Shedlock-130301-Reflections-on-Wage-Recession.php



33


Hmmm...

4 MARCH 2013

Words That Make You Go Hmmm...

Stan Druckenmiller is a man you

should listen to.

If you do nothing else this weekend, watchthis interview.

More evidence that clear-headed thinking isthe single best tool one can possess in thecurrent environment.

The truth hurts.

CLICK TO WATCH

Rick Santelli gets it.Yet more evidence of the dumbing down ofthe investment process.

Don't buy the metal — it's too hard. Buy apiece of paper with the click of a mouse.

It's not about conspiracy theories; it's aboutunderstanding the reasons for buying gold inthe rst place.

CLICK TO WATCH

Ben Davies has been absent fromthese pages for quite some time, and it's goodto see him back again. Here he talks to EricKing about the recent weakness in preciousmetals and the structure of the market, as

well as the performance of mining stocks.

As always, Ben's clear-headed approach is abeacon in a world of hyperbole.

CLICK TO LISTEN

http://www.bloomberg.com/video/druckenmiller-i-see-storm-coming-bigger-than-2008-Pu~cwiXcRle8XEcPKIbXJw.html

http://www.zerohedge.com/news/2013-02-27/santelli-securitization-gold

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/2/26_Ben_Davies.html

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/2/26_Ben_Davies.html

http://www.zerohedge.com/news/2013-02-27/santelli-securitization-gold

http://www.bloomberg.com/video/druckenmiller-i-see-storm-coming-bigger-than-2008-Pu~cwiXcRle8XEcPKIbXJw.html



34


Hmmm...

4 MARCH 2013

and fnally...Just three pictures from National Geographic's 'Photo of the Day' collection. If youhaven't already bookmarked it, you should. Amazing images from all around the world.

CLICK HERE TO VIEW

Hmmm...

http://photography.nationalgeographic.com/photography/photo-of-the-day/

http://photography.nationalgeographic.com/photography/photo-of-the-day/



35


Hmmm...

4 MARCH 2013

Grant Williams

Grant Williams is a portfolio and strategy advisor toVulpes Investment Management in Singapore—a hedgefund running over $250 million of largely partners’capital across multiple strategies.

The high level of capital committed by the Vulpespartners ensures the strongest possible alignmentbetween us and our investors.

In Q1 2013, we will be closing the Vulpes AgriculturalLand Investment Company (VALIC), a globallydiversied agricultural land vehicle that will providetruly diversied exposure to the agricultural sector

through a global portfolio of physical farmland assets.Grant has 26 years of experience in nance on the Asian, Australian, European and US marketsand 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

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Fall 2012 Presentation: 'Extraordinary Popular Delusions & the Madness of Markets':

California Investment Conference 2012 Presentation: 'Simplicity': Part I : Part II

As a result of my role at Vulpes Investment Management, it falls uponme to disclose that, from time to time, the views I express and/or thecommentary I write in the pages of Things That Make You Go Hmmm... mayreect the positioning of one or all of the Vulpes funds—though I will not be

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http://www.youtube.com/watch?v=b4zOAHoncF0

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http://www.youtube.com/watch?v=Ri6rIF40iSA&feature=plcp

http://www.youtube.com/watch?v=b4zOAHoncF0

http://www.youtube.com/user/GWTTMYGH

https://twitter.com/ttmygh/

http://www.vulpesinvest.com/




Hmmm...

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