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THINGS THAT MAKE YOU GO

A walk around the fringes of finance

By Grant Williams

To learn more about Grant's new investment newsletter, Bull's Eye Investor, Click here

03 SEPTEMBER 2013

A Barrel of Monkeys
"If you look at the monkeys, you can learn many things about the men; if you look at the men, you can learn many things about the madness!" Mehmet Murat ildan "He didn't know what was defeating him, but he sensed it was something he could not cope with, something that was far beyond his power to control or even at this point in time comprehend." Hubert Selby, Jr., Requiem for a Dream "He seemed unaware of the messiness of the arrangement." J.D. Salinger, Franny and Zooey "Manipulation, fueled with good intent, can be a blessing. But when used wickedly, it is the beginning of a magician's karmic calamity." T.F. Hodge, From Within I Rise... "How dreadful...to be caught up in a game and have no idea of the rules." Caroline Stevermer, Sorcery & Cecelia or The Enchanted Chocolate Pot
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

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Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
The EU Budget Is a Disaster That Cannot Save Greece ..........................................18 Plunging Currencies Crimp Asian Companies ......................................................19 Codename "Apalachee": How America Spies on Europe and the UN ...........................21 Why Wall Street Wants Larry Summers (and Why the Rest of Us Should Not) ................22 The Day Everbright Had to Pull Power Plugs to Stop Erroneous Trading ......................24 A Five-Star Problem ...................................................................................26 What Syria Teaches Us About Hyperinflation ......................................................27 Beware the Ides of September: A Turbulent Month for the Economy .........................29

CHARTS THAT MAKE YOU GO HMMM... ..................................................31 WORDS THAT MAKE YOU GO HMMM... ...................................................34 AND FINALLY ................................................................................35

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"What's more fun than a Barrel of Monkeys? Nothing!" Not my words, but those of the Milton Bradley Co., which still produces under license a game first created by a gentleman named Leonard Marks, who sold the rights to his simple but addictive game to Lakeside Toys in 1965. It would be difficult to imagine a simpler premise for a game than that of Barrel of Monkeys. The rules of the game, printed on the bottom of the plastic barrel in which the monkeys are contained, are simplicity itself: Dump monkeys onto table. Pick up one monkey by an arm. Hook other arm through a second monkey's arm. Continue making a chain. Your turn is over when a monkey is dropped. Easy! Each barrel contains 12 monkeys but can accommodate, at a push, 24, which makes the game so much more enjoyable. What could be better than assembling a long chain of tangled monkeys, each reliant on those either side of it for purchase, with just the one person holding onto a single monkey's arm at the top end of the chain, responsible for all those monkeys dangling from his fingers. Of course, with great power comes great responsibility; and that lone hand at the top of the chain of monkeys has to be careful any slight mistake and the monkeys will tumble, and that, I am afraid, is the end of your turn. You don't get to go again because you screwed it up and the monkeys came crashing down. On May 22nd of this year, Ben Bernanke's game of Barrel of Monkeys was in full swing. It had been his turn for several years, and he looked as though he'd be picking up monkeys for a long time to come. The chain of monkeys hanging from his hand was so long that he had no real idea where it ended. That day, in prepared testimony before the Joint Economic Committee of Congress in Washington, DC, Bernanke stated that the Fed could increase or decrease its asset purchases depending on the weakness or strength of data: The program relates the flow of asset purchases to the economic outlook. As the economic outlook and particularly the outlook for the labor market improves in a real and sustainable way, the committee will gradually reduce the flow of purchases.

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To assuage any lingering doubt, he continued: I want to be very clear that a step to reduce the flow of purchases would not be an automatic, mechanistic process of ending the program. Rather, any change in the flow of purchases would depend on the incoming data and our assessment of how the labor market and inflation are evolving. Markets fluttered a little as they tend to do around these carefully stage-managed performances, but remained largely sanguine. However, in the Q&A session that followed his prepared remarks, Bernanke, in response to a fairly innocuous question, went a little offpiste, straying into some improv, making a suggestion that, within minutes, had given rise to a phenomenon which by the end of the day had earned its very own soubriquet: the "Taper Tantrum": If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward. The statement contained the usual bit about the Fed being open to both decreasing OR increasing bond purchases; but it added one, as it turned out vital, piece of information: "... we could in the next few meetings ... take a step down in our pace of purchases." Boom! That's all it took. The monkeys began to shiver, shake, and screech. Now, I have been saying for the longest time that these days nothing matters to anybody until it matters to everybody, and that is largely down to the Fed themselves (and their peers across the various oceans and borders who are complicit in this era of free money). The proof of my statement is seen in the fact that as soon as Bernanke mentioned that the "taper" which, let's face it, EVERYBODY knows has to happen sooner or later would possibly begin before the end of 2013, markets began to crumble. The S&P 500 dropped a quick 6% on the outlandish idea that free money by the trillion wasn't going to continue forever, and this came as something of a shock to investors who had watched the index levitate relentlessly as the stimulus being applied by the Fed to the tune of $85bn a month did its job and by "did its job" I wish I were talking about lowering unemployment and stimulating growth; but, alas, I'm talking about bolstering bank balance sheets and driving equity prices to unsustainable and unfairly valued levels. As you can see from the chart below, the market turned around and recovered its losses pretty quickly as a seemingly endless procession of Fed governors and "friendly" journalists were rolled out to explain in increasingly panicked tones that everything was OK and that the esteemed Chairman didn't actually say they would definitely be cutting off the easy money.

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3 2 1 0

% Change in S&P500 After Bernanke Q&A Comments

-1 -2 -3 -4 -5 -6 May 22 June 22 July 22 August 22

Source: Bloomberg

In his own prepared remarks the following morning, Fed mouthpiece and Wall Street Journal reporter Jon Hilsenrath was quick to soothe: (WSJ): The next step by the Fed could be especially tricky. One worry at the central bank is that a single small step to shrink the size of the program could be interpreted by investors as the first in a larger move to end it altogether. [Yesterday] Mr. Bernanke sought to dispel that view, part of a broader effort by Fed officials to manage market expectations. If the Fed takes one step to reduce the bond buying, it won't mean the Fed is "automatically aiming towards a complete wind-down," Mr. Bernanke said. "Rather we would be looking beyond that to seeing how the economy evolves and we could either raise or lower our pace of purchases going forward. Again that is dependent on the data," he said. It's OK, folks. Ben's got this. Calm down. After the scrambling was over and the 6% air pocket was safely navigated, the S&P 500 first regained and then surpassed its previous high. At this point, the Punditocracy (as my buddy Scott calls it) declared that any "taper" had now been priced in. And there the story should have ended. Nothing to see here folks, get back to your couches. But of course it didn't end.

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It was Hilsenrath who had first floated the idea of a withdrawal of stimulus, before the term taper appeared (quite coincidentally, we may be sure) in Bernanke's remarks a few days later. On May 11th he wrote: (WSJ): Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy an effort to preserve flexibility and manage highly unpredictable market expectations. Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated. At the time, Scotiabank published a nonexhaustive list of reasons why they believed it would make sense that the Fed might want to leak hints of an impending taper, and the list began with this little nugget: (Zerohedge): 1) On Monday morning of this week, the RBNZ (New Zealand) and BoK (Korea) intervened in the currency market to try to dull the strength of their currencies. Soon afterward, Sweden and Chile announced they might have to intervene as well. Poland cuts rates to weaken the Zloty. These actions and comments show that the external ramifications of QE will no longer be tolerated passively. These moves represent a tacit protest against QE. It could be argued that if QE policies do not subside soon, other governments are now willing to retaliate with counter-measures (currency wars, "a race to the bottom", protectionism). Ah yes those pesky "other countries". Forgotten in the localized euphoria over the S&P's remarkable resilience was the fact that we live in an ever-shrinking world and that there are lots of other monkeys on the long chain dangling from Bernanke's hand. Moves the Federal Reserve makes have repercussions far and wide. Like in Jakarta, for example. After Bernanke's off-the-cuff remarks, the Jakarta Composite Index like the S&P 500 began to tumble. Only, unlike the S&P, it kept on falling after its counterparts in the USA bounced. And then it fell some more. As fears of an early taper swirled around the markets, the strength of the dollar caused foreign capital to flee Indonesia, and the rupiah collapsed, sparking fears of a replay of the Asian currency crisis of 1997-98, which began in similar circumstances when the Thai baht tumbled. Over the month of August, the slide in the Indonesian equity market was exacerbated by the steepening fall of the rupiah, as the chart below shows. Amidst all the commentary in the USA concerning the resilience of the S&P 500, Indonesia's slide was little noted.
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5

Jakarta Stock Exchange Composite Index (JCI)

May 22-August 29 2013

-5

-10

-15

-20

-25

IDR Value USD Value

-30

-35

May 22

June 22

July 22

August 22

Source: Bloomberg

Currently, in USD terms, the JCI has fallen 30% since May 22. In an interview with CNBC, Indonesia's Finance Minister, Chatib Basri, explained that everything was OK and that there was absolutely no chance of capital controls being introduced: (CNBC): Despite the exodus of foreign capital from Indonesia that has sent its currency tumbling in the recent weeks, Finance Minister Chatib Basri says Southeast Asia's largest economy is not in a state of crisis. Basri told CNBC on Thursday that the country "has no intention" of implementing capital controls to stem the plunge in its currency, and is "not at all" in need of a bailout package as seen in 1997. "We do not have any intention to use capital controls," he said. When asked whether the country has been in talks with the International Monetary Fund regarding a possible bailout, he said, "Not at all. The budget deficit will come in at about 2.4 percent of GDP, but the realization of the deficit until July was only 1 percent. There's still fiscal space." Note that, technically speaking, what he actually said was that they had no intention of introducing capital controls. Bookmark that one, folks. The CNBC anchor then followed up with this question: Can you categorically say to us that we are not going to see a repeat of what happened in 1997 with the Asian Crisis?
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Basri was unequivocal in his answer: Yes! And had he stopped there, things would have been fine but he continued: "I ... I'm pretty sure about it because the situation is quite different." This chart of the Indonesian rupiah, courtesy of my friend Greg Weldon, shows just how quickly emerging-market currencies can move when there is a race to own US dollars:

Source: Greg Weldon

(I've said it before, but Greg's work is absolutely sensational and covers every corner of the financial markets. For a free trial of his phenomenal service, click HERE). Sigh... But wait ... there's more! It's not just Indonesia that is scrambling in the dash for dollars in expectation of tapering by Bernanke's Fed. The Philippines, one of the best-performing equity markets in the world during the first five months of the year, also suddenly turned ice-cold after May 22, as you can see from the chart below:

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Philippine Composite Index (PCOMP)

May 22 - August 29, 2013

-5

-10

-15

-20

-25

Philippine Peso Value US Dollar Value

-30

Source: Bloomberg

The PCOMP Index has recovered from its lows but has fallen an alarming 25% since May 22 in dollar terms. Once again it was capital outflows that did the damage; and, of course, the genesis of those outflows was our old friend in the Marriner S. Eccles Building, Ben Bernanke: (Bloomberg): The PSE index has fallen 14 percent this month, poised for the steepest loss since October 2008, amid concerns that reduced U.S. Federal Reserve stimulus will spur capital outflows and local protests over discretionary government budgets will slow state spending. Foreign investors have sold a net $219 million of Philippine shares in August after buying $1.6 billion this year through July. Oopsies!

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That's the Philippine peso, courtesy of Greg again. Same story, different currency. Meanwhile, Thailand ground zero for the Asian Crisis of 1997-98 has shown that investors' memories may not be as short as the recent series of new lifetime highs in Western equity markets would perhaps suggest:

Stock Exchange of Thailand Index (SETI)

May 22 - August 29, 2013

-5

-10

-15

-20
Thai Baht Value US Dollar Value

-25

-30

Source: Bloomberg

In Thailand's case, not only have the currency and equity markets been battered by fleeing investors, the country's bond market has taken what is known in the UK as a good old-fashioned shoeing. Here's Greg again:

Source: Greg Weldon 03 SEPTEMBER 2013 10

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So we have what can safely be classified as a rout in emerging markets, but it's the quietest rout nobody ever heard of, because the US has been faring remarkably well. However, because the root cause of the rout is Fed policy shifts (or hints of shifts), the rout will eventually come home to roost. Mark my words. This past week, Ambrose Evans-Pritchard pointed out that, as it gathers pace, this is one meltdown that the Fed simply cannot just ignore even if it currently chooses to try and that the scale and scope of what is happening in emerging markets matters a whole lot more now than it did the last time things came a little unglued: (Ambrose Evans-Pritchard): The US Federal Reserve has told Asia, Latin America, Africa and Eastern Europe to drop dead. This has the makings of a grave policy error: a repeat of the dramatic events in the autumn of 1998 at best; a full-blown debacle and a slide into a second leg of the Long Slump at worst. Emerging markets are now big enough to drag down the global economy. As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs. Even China felt compelled to sell $20bn of US Treasuries in July. "They are running down reserves by selling US and European bonds, leading to a selfreinforcing feedback loop," said Simon Derrick from BNY Mellon. We are told that emerging markets are more resilient than in past crises because they have $9 trillion of reserves. But any use of that treasure to defend the exchange rate entails monetary tightening, and therefore inflicts a contractionary shock on countries already in trouble. The numbers are quite frightening when you think of how far these countries have come in such a short time. In a world where 50% of the economy is accounted for by emerging markets, things could get mighty sticky, mighty fast. Says Ambrose: [F]oreigners bear 90pc of the currency risk in Malaysia, 81pc in Thailand, 79pc in Korea and 74pc in India. So let them take the haircut. Should these countries take that course, they will inflict a deflationary trade shock on the West. The eurozone is in no fit state to handle that. Nor is Britain. We are in entirely uncharted waters. Emerging markets were less than 15pc of global GDP in the early 1980s, when tightening by the Volcker Fed brought Latin America crashing down. That was an ugly episode for Western banks, but easily contained. China was then in autarky, shut off from the world. The Soviet Union and its satellites formed a closed system.
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The picture was already very different by the mid-1990s, when ex-Communists had joined the party. By then emerging markets had grown to a third of global GDP, big enough to rock the boat, as Fed chair Alan Greenspan discovered after Russia's default in August 1998. Amen to that, Ambrose, and well put. But if the Fed's potential moves have already been bad for Indonesia, the Philippines, and Thailand (and I might as well mention Singapore, whose stock market has fallen 7.5% in the last ten days, and Malaysia, which gave up a quick 7% in a month), the biggest effects have been felt in the country I focused on last week: India. The fall of the rupee is now reaching a crisis point, and although it has retraced some of its almost perpendicular move to an all-time low of 68.84 versus the dollar last week, it is by no means out of the woods. Not by a long shot.
Indian Rupee vs US Dollar
2008 - 2013

70

60

50

40 2008 2009 2010 2011 2012 2013

Source: Bloomberg

How much trouble is the rupee in? Well, since last week, when I wrote to you about Indians' love affair with gold as a means to protect themselves from currency depreciation and their government's attempts to break up that particular romance, the Indian government has outdone itself.

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Now, bear in mind as you read the following that the people mulling over these ideas are themselves Indians who know exactly what gold means to their fellow citizens, and then calibrate the harebrainedness of this scheme accordingly: (Reuters): India is considering a radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency. A pilot project will be launched soon, a source familiar with the Reserve Bank of India (RBI) plans told Reuters. India has the world's third-largest current account deficit, which is approaching nearly $90 billion, driven in a large part by appetite for gold imports in the world's biggest consumer of the metal. With 31,000 tonnes of commercially available gold in the country worth $1.4 trillion at current prices diverting even a fraction of that to refiners would sate domestic demand for the metal. India imported 860 tonnes of gold in 2012. "We will start a pilot project among some banks where we will allow them to buy back gold from individual households," the source, an official familiar with the central bank's gold policymaking, said. "This will start soon, we have discussed (it) with banks." The RBI will ask the banks to buy back jewelry, bars and coins for rupees. Lenders will have to offer better rates than pawn shops and jewelers to lure sellers. Stupefying. Utterly, UTTERLY stupefying. Indians buy gold because they don't trust the government or the rupee or the Reserve Bank of India that prints them, so if your solution to the problem of wholesale public exchange of fiat currency for gold is to offer to buy back that gold for yes, I know, but I have to spell it out fiat currency, then you have reached a level of stupidity that even I have a hard time comprehending. Fortunately, though, there is historical precedent: (Reuters): Any talk of using the country's gold to help meet India's international obligations revives memories of a 1991 balance of payments crisis when India flew 67 tonnes of gold to Europe as collateral for a loan to avoid a sovereign debt default. Yes, India's leaders have been down this road before, but never let it be said that previous demonstrations of ineptitude or bad policymaking might deter them from forging ahead with another brilliant rework of an idea that has already been proven unpopular with their populace after all, this time is DEFINITELY different: (Reuters): Selling gold reserves may sit badly with Indians, many of whom saw the 1991 sale as a public humiliation. The secret operation was only exposed after a vehicle carrying the first consignment of bullion broke down on its way to the airport from the central bank.

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The Rupeestone Cops. But on they go: (Reuters): Earlier on Thursday, India's Trade Minister Anand Sharma said the central bank should look into the possibility of monetizing gold holdings. It was not immediately clear whether Sharma was referring to the 557.7 tonnes of gold the RBI holds in its own reserves, or gold in private hands. He did not give more details of how the proposal would work. "I have not said there should be any mortgaging of the gold, or auction of the gold, that is incorrect. I have just said the RBI should look into ... how they can benefit the people, particularly with regard to the bonds or the monetization," Sharma said in response to a question in parliament. Naturally, with new incoming RBI governor Raghuram Rajan ready to take the hotseat, speculation turned to what he might do once he takes up the poisoned chalice reins: (WSJ): As the Indian currency keeps sinking against the dollar, some economists say the Reserve Bank of India's incoming governor might have no choice but to raise interest rates sharply, reminiscent of actions taken by U.S. Federal Reserve Chairman Paul Volcker in the U.S. in the 1980s. Mr. Volcker bucked political pressure to keep rates low and instead hiked benchmark rates to record levels to curb high inflation. But while inflation came under control in the early 1980s, it also left ... the U.S. economy in a recession. Some economists say that a similarly drastic step may be needed if Indian authorities are unable to arrest the rupee's slide soon. "If they keep missing the boat like they have been, they will be left with no policy options but to hike [interest rates]," said Shweta Singh, a London-based economist at Lombard Street Research. Ms. Singh proposed in a research note last week that it could fall upon Raghuram Rajan, who takes over as RBI governor on Sept. 5, to follow Mr. Volcker's steps. Seems sensible enough. But, as Bloomberg neatly summed up, the nature of India's problems is such that it may not be that simple for Rajan: (Bloomberg): To restore strong and stable growth, India will have to curb public borrowing, reduce its external deficit, attract foreign investment and get inflation back down.

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India's dysfunctional political landscape only makes matters worse: (Bloomberg): Thanks to the gridlock in New Delhi, the RBI is being asked to do it all with the one and a half policies at its disposal: interest rates (a powerful economic tool) and foreign-exchange intervention (a puny one). That's impossible, and it would be a big mistake for the RBI to try. Best of luck, Raghuram you're gonna need it. So we have equity markets AND currencies in Indonesia, the Philippines, Thailand, India, and to a lesser extent Malaysia and Singapore all in various states of freefall; but thankfully, the contagion is limited to Asia. Brazil is part of Asia, right? (UK Daily Telegraph): Dilma Rousseff, Brazil's president, held an emergency meeting on Thursday with her top economic officials to halt the real's slide after it hit a five-year low against the dollar. The central bank chief, Alexandre Tombini, cancelled his trip to the Fed's Jackson Hole conclave in order "to monitor market activity" amid reports Brazil is preparing direct intervention to stem capital flight. The country has so far relied on futures contracts to defend the real disguising the erosion of Brazil's $374bn reserves but this has failed to deter speculators. "They are moving currency intervention off balance sheet, but the net position is deteriorating all the time," said Danske Bank's Lars Christensen. Yes, Brazil, which fired the opening salvo in the developing global currency war, is now watching its currency, the real, and its equity market come under severe pressure.
5

Brazil Ibovespa Index (BOVESPA)

May 22 - August 29, 2013

-5

-10

-15

-20

-25
Brazil Real Value US Dollar Value

-30

Source: Bloomberg 03 SEPTEMBER 2013 15

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Stephen Jen of SLJ Macro Partners is worried: These are pre-quake tremors: something big is coming," Stephen Jen, the co-founder of hedge fund SLJ Macro Partners LLP, said in a phone interview from London on June 12. "There's tremendous deceleration in emerging markets. You may see crisis-like price actions without having a crisis. See? I told you he was worried. "This is a dangerous period," Jen said. "The Fed will start to normalize rates. It's a gradual process, but the pressure will only point in one direction, which is in favor of the dollar and against emerging markets." Last week, Brazil's central bank took action with a $60bn currency intervention aimed at stemming the Real's side, promising to sell $500mn in currency swaps on Mondays through Thursdays and multiple $1bn repos on Fridays. Saturday and Sunday will remain intervention-free. However, the country cut its GDP forecast for 2013 and 2014 and has seen yields on its 10-year bonds jump to 12% (before falling back below 11%). Brazil's need to stamp out inflation whilst kick-starting a moribund economy puts it in straits similar to India's. Again, good luck. The root cause of all this instability is, as I said at the beginning of this piece, Benny and the (Ink)Jets and their frivolous generosity. As emerging markets unravel in the face of a taper that was always inevitable at some point, the corner that the free-money Fed has painted other central banks into becomes ever more apparent as it shrinks. There really is no way out now, I'm afraid not without some kind of organic growth allied with controlled inflation. Emerging-market central bankers need both. They have neither. Ambrose Evans-Pritchard nicely sums up the situation facing the Fed: (UK Daily Telegraph): The Fed has a duty of care to emerging markets, since its own hands are hardly clean. Zero rates and quantitative easing were the cause of dollar liquidity flooding these countries. It was the biggest reason why net capitals flows into emerging markets doubled from $4 trillion to $8 trillion after 2008, much of it wasted in a late cycle blow-off. Yes, China, Brazil, India and others handled the liquidity bath badly. They ramped up credit without generating much worthwhile growth. In China's case the economic return on loan growth has collapsed from a ratio of 0.85 to 0.17. The diminishing returns have shrunk to almost nothing.

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The credit boom disguised the underlying rot as the BRICS club lost labour competitiveness. Every case is different but nowhere was myth so divorced from reality as in Brazil. The country is languishing at 130th place in the World Bank's rankings for ease of doing business, industrial output is still 3pc below pre-Lehman levels and it has lost its way with dependence on iron ore and commodity exports. As Matt King from Citigroup says in a pithy note, tourists have discovered that "reality is less good than the brochure" in emerging markets and now they are pining for home. "Don't all come home at once. The exits are small," he warned. One cannot blame the US for the failings of these countries, yet Ben Bernanke and his successor will still have to live with the consequences. Globalisation has entrapped the Fed. Like it or not, the Fed is the world's monetary superpower. The exodus of money from emerging markets that we have seen so far is nothing compared with what could happen if this episode is mishandled. The rapid escalation towards a Western missile strike on Syria is bringing matters to a head fast, with talk of a spike in crude oil prices to $150 a barrel setting off its own chain reaction. If the Fed really thinks that the rest of the world will have to "adjust to us" as it insists on draining global liquidity come what may, it may have a very rude surprise, yet again. Amen again, Brother Ambrose. A rude surprise may well await the world. As Ben Bernanke eyes his own exit, Janet Yellen and Larry Summers wait in the wings to see which of them gets to take the handoff of the ominously swaying monkey chain from the incumbent chairman's hand. One false move and all the monkeys may end up in a heap on the floor.

*******
OK ... so this is the last TTMYGH for a little while, as I will be traveling, so let's jump in and see what fun and games I'm leaving you with. We kick off in Europe with a look at the "disastrous" budget that is being mooted as Greece's salvation, check in with Germany on the NSA's tendency to eavesdrop, head to China to hear how a broker literally had to pull the plug on itself, and then visit Syria for a lesson on hyperinflation. We find the Ides of September upon us, check out India's five-star problem (hint; it's not Beppe Grillo), mull over the problems caused by Asia's plunging currencies, and find out something we already knew about Larry Summers. Art Cashin joins us from the NYSE; Jim Puplava replays a superb interview with Adam Fergusson, author of When Money Dies; and we get a primer on next week's Aussie elections.

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Charts on disposable income, nonexistent credit creation, and the complexities of the desperate situation in Syria round things out, and that will just about do it. You've been a wonderful audience don't forget to tip your waitress.

See you on the other side. ******* The EU budget is a disaster that cannot save Greece
Ever driven on a motorway in Spain or Portugal? You'll notice it's not exactly the M25 often, cars are few and far in between (some pretty heavy congestion around Gibraltar not included). According to some estimates, 25 per cent of the EU's so-called regional funds in Portugal has been invested in roads, heavily contributing to a ridiculous situation where the country has 60 per cent more kilometres of motorway per inhabitant than Germany and four times more than Britain (H/T FT). Meanwhile, around one third of EU structural funds in Spain has been invested in infrastructure, further inflating an already critical construction bubble, while, like in Portugal, creating a whole host of ghost roads, airports and harbours. The EU's own auditors have hammered EU spending on roads, noting that 74 per cent of the project they monitored in a recent investigation recorded less traffic than expected. Welcome to the folly of the EU budget. This economic anomaly is at best irrelevant for the Eurozone crisis at worst outright damaging. Consider Greece. In the last week, there has been some talk of the EU budget being used in a third bailout for Greece. Although it's not entirely clear how this could work or how even how credible this speculation is one way could be to reduce the amount of its own cash the Greek government needs to put up in order to unlock EU funds, known as co-financing. Depending on the circumstances, this usually ranges between 25% and 60% of a total grant. Greece currently has special permission to put up only five percent, and it wants this extended to the next EU budget period, to run between 2014 and 2020. This is politically convenient since it draws from a cash allocation that has already been agreed (easier to sell to German taxpayers) while not coming with new, tough bailout conditions (easier to sell to Greek citizens). However, such an arrangement will also do absolutely nothing to save Greece: Most fundamentally, a quick look at the records shows that Greece has been allocated over 64bn in structural funds over the last two decades (to which the UK has contributed around 12%). Per capita, this is amongst the highest in the EU, yet the country is still bust and uncompetitive.

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It follows therefore that it's the wrong type of funding for Greece. It can't be used for health spending, education or to recapitalise banks, for example, areas where the fiscal shortfall in Greece is / has been the most critical. It can, however, be spent on roads. Like the structural funds in general, it risks creating an opportunity cost by diverting limited public investment away from where it can have the greatest impact. Reducing the co-financing rate gets us away from the structural funds actually being a fiscal burden Greece can't afford putting up the matching cash (the structural funds tend to be oddly pro-cyclical). However, the trade-off is that it eliminates any form conditionality attached to the money. Is this really the way forward? It's a bureaucratic nightmare to get to the actual cash exactly what Greece doesn't need. This also illustrates why (almost) the entire EU budget is pretty much a running disaster, in desperate need of root-and-branch reform.
*** MATS PERSSON, THE TELEGRAPH / LINK

Plunging Currencies Crimp Asian Companies

Companies across Asia are facing a debt-repayment crunch as plunging local currencies make it more costly to repay foreign loans, a situation that is exacerbating stresses on the region's economies. Asian companies took out sizable foreign loans in recent years as the U.S. Federal Reserve kept interest rates low and printed money. For firms in nations like India and Indonesia, rates on U.S.-denominated debt were more attractive than local borrowing costs. But the current exodus of capital from emerging markets, amid expectations the Fed will end its period of extraordinary monetary stimulus later this year, has changed that equation. Foreign funds are pulling out of Asian bonds and other assets amid expectations U.S. rates will rise further. That is pushing currencies in Asia sharply lower and raising the cost of repaying U.S.-denominated borrowings. The situation in India is particularly unnerving. Indian companies have a combined $100 billion of unhedged foreign debt, according to data from Indian ratings firm Crisil, an affiliate of Standard & Poor's. A nearly 19% fall in the rupee since May has increased the cost of repaying those debts in local currency terms. "The depreciation of the rupee is causing a lot of pain among some big Indian corporates," said D.K. Joshi, an economist at Crisil. "Those who have not hedged their foreign debt will struggle to repay it."

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Reliance Communications, 532712.BY +0.97% one of the nation's largest telecoms companies, has $3.83 billion in unhedged foreign debt, with around $200 million due to be repaid this year. Nitin Soni, a director with Fitch Ratings in India, said Reliance will be able to repay the debt. But the company, which makes most of its revenues in rupees, will face sharply higher costs related to the loan, curtailing its business expansion, he said. A Reliance executive said the company borrowed overseas to avoid paying 12% interest rates in India and didn't hedge the loans as doing so would have been too expensive. The executive said Reliance has adequate overseas revenues to repay the debt. Companies in Indonesia also are exposed. PT Indosat, ISAT.JK -1.21% one of the nation's largest telecom firms, has almost $1 billion in offshore debt, which it took out to fund equipment purchases at a time when U.S. rates were much lower than Indonesia's. As foreign funds poured into Indonesian stocks and bonds, pushing up the value of the rupiah currency, these loans looked like a good bet. But the rupiah has lost almost 12% against the U.S. dollar this year, increasing the cost of debt, only about a quarter of which is hedged. "Obviously, the currency factor is a concern," said Stefan Carlsson, Indosat's chief financial officer. Indosat may book currency-related losses but will be able to repay its borrowings, he said. Few observers expect a re-run of the 1997-98 Asian crisis, when companies and banks across the region folded as they were unable to repay foreign loans amid a currency crisis. A higher portion of Asia's corporate debt is in local currencies today than back then. HSBC estimates that Indonesia's public and private external debt was 45% of gross domestic product in 2012, much lower than 90% before the Asian crisis. Asia's central banks also have much larger stockpiles of foreign reserves, which they can use to defend currencies. Still, there are worrying signs of stress. Many Asian countries are running current-account deficits, meaning they import more than they export....
*** WSJ / LINK

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Codename 'Apalachee': How America Spies on Europe and the UN

The European Union building on New York's Third Avenue is an office tower with a glittering facade and an impressive view of the East River. Chris Matthews, the press officer for the EU delegation to the United Nations, opens the ambassadors' room on the 31st floor, gestures toward a long conference table and says: "This is where all ambassadors from our 28 members meet every Tuesday at 9 a.m." It is the place where Europe seeks to forge a common policy on the UN. To mark the official opening of the delegation's new offices in September 2012, EU Commission President Jos Manuel Barroso and EU Council President Herman Van Rompuy flew in from Brussels, and UN Secretary-General Ban Ki-moon was on hand as guest of honor. For "old" Europe which finances over one-third of the regular UN budget this was a confirmation of its geopolitical importance. For the National Security Agency (NSA), America's powerful intelligence organization, the move was above all a technical challenge. A new office means freshly painted walls, untouched wiring and newly installed computer networks in other words, loads of work for the agents. While the Europeans were still getting used to their glittering new offices, NSA staff had already acquired the building's floor plans. The drawings completed by New York real estate company Tishman Speyer show precisely to scale how the offices are laid out. Intelligence agents made enlarged copies of the areas where the data servers are located. At the NSA, the European mission near the East River is referred to by the codename "Apalachee".

The floor plans are part of the NSA's internal documents relating to its operations targeting the EU. They come from whistleblower Edward Snowden, and SPIEGEL has been able to view them. For the NSA, they formed the basis for an intelligence-gathering operation but for US President Barack Obama they have now become a political problem.

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Just over two weeks ago, Obama made a promise to the world. "The main thing I want to emphasize is that I don't have an interest and the people at the NSA don't have an interest in doing anything other than making sure that (...) we can prevent a terrorist attack," Obama said during a hastily arranged press conference at the White House on August 9. He said the sole purpose of the program was to "get information ahead of time (...) so we are able to carry out that critical task," adding: "We do not have an interest in doing anything other than that." Afterward, the president flew to the Atlantic island of Martha's Vineyard for his summer vacation. Obama's appearance before the press was an attempt to morally justify the work of the intelligence agencies; to declare it as a type of emergency defense. His message was clear: Intelligence is only gathered because there is terror and anything that saves people's lives can't be bad. Ever since the attacks of Sept. 11, 2001, this logic has been the basis for a wide range of new surveillance programs. With his statement delivered in the White House briefing room, Obama hoped to take the pressure off, primarily on the domestic political front. In Washington the president is currently facing opposition from an unusual alliance of left-wing Democrats and libertarian conservatives. They are supported by veteran politicians like Republican Congressman Jim Sensenbrenner, one of the architects of the Patriot Act, which was used to massively expand surveillance in the wake of 9/11. On July 24, a bill that would have curtailed the power of the NSA was only narrowly defeated by 217 to 205 votes in the House of Representatives. Even stalwart Obama supporters like Democrat Nancy Pelosi, minority leader in the House of Representatives, are now calling into question the work of the intelligence agency. Pelosi says that what she reads in the newspapers is "disturbing." It wasn't until late last week that news broke that the NSA had illegally collected tens of thousands of emails over a number of years. Obama's public appearance was aimed at reassuring his critics. At the same time, he made a commitment. He gave assurances that the NSA is a clean agency that isn't involved in any dirty work. Obama has given his word on this matter. The only problem is that, if internal NSA documents are to be believed, it isn't true....
*** DER SPIEGEL / LINK

Why Wall Street Wants Larry Summers (and Why the Rest of Us Should Not)
On the surface the debate about the Chairmanship of the Federal Reserve is about the merits of the two leading candidates, Lawrence Summers and Janet Yellen. But looks can be deceiving. President Obama leans toward Summers not on the merits but because the Wall Street bankers want him. Summers is one of the boys, and the bankers know that Summers will do their bidding, at the expense of everybody else.

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Obama has declared that the two candidates' attitudes to inflation and unemployment are his main concern, entirely glossing over the fact that the Fed oversees and regulates the US banking system. Our recent near-death experience under Alan Greenspan's anti-regulation Fed chairmanship, aided and abetted by the deregulation pushed by Summers, should cause the President to think hard about banking regulation. Yet Obama and his tight-knit circle of advisors, almost all of whom are from Wall Street, are apparently too beholden to Wall Street to contemplate any serious regulation of an industry that continues to be out of control. On the merits, Janet Yellen is the obvious candidate. For six years, 2004 to 2010, she was President of the San Francisco Fed. She is Deputy Chair of the Federal Reserve Board and former Chairman of the Council of Economic Advisors. Her academic record is exemplary and distinguished. Her leadership of the Fed was widely admired, while Summers' Presidency of Harvard ended in a debacle. Yellen correctly foresaw the risks of the 2008 financial meltdown, while Summers famously missed it. She, not Summers, has hands-on experience running the Fed. Moreover, she has not played the revolving door by cashing in on government service for personal wealth. That, of course, is why she is suspect on Wall Street. Yellen has proven herself to be less interested in her personal wealth than in her nation's monetary policy. For that reason, Wall Street leaders view her as dangerous. Summers, on the other hand, is safe and reliable, the bankers' best friend in politics. From the bankers' point of view, his record is perfect. Summers late 1990s' advocacy of financial deregulation is of course legendary. In the Obama years, he championed the bank bailouts while also fighting attempts to cap the bankers' bonuses and to set limits on risky bank behavior, including Summers' opposition to the Volcker rule to limit banks from trading on their own account. Summers not only shot down proposals by Senator Dodd and others to limit Wall Street bonuses, but took an even more audacious stand: that the AIG unit that helped trigger the entire calamity by writing reckless credit default swaps should also get their mega-bonuses after the fact. Summers explained to a shocked nation that he did not want to "violate the contracts" of these employees, even as the world economy lay in ruins at their handiwork. Even Gordon Gekko would not have had such audacity. When Summers left the Obama White House, he made a beeline back to Wall Street, just as he had done after leaving the Treasury in 2001. In a normal moral universe, a leading candidate for the Fed Chairmanship would hesitate to pass through the Washington-Wall Street revolving door so quickly and boldly, for fear of triggering public concerns about financial conflict of interest. Yet Summers quickly took up not just one Wall Street position but many, including with DE Shaw, Citigroup, NASDAQ, and other companies.

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As Summers' colleague and former Harvard dean Harry Lewis has recently noted, Summers did all of this while being a full-time professor with the limited right to consult "one day per week." Moreover, Lewis describes how Summers' lucrative consultancies reflect a persistent pattern in which Summers has shown a completely dismissive attitude towards financial ethics and financial conflict of interest. When a Harvard colleague of Summers was caught in a financial conflict of interest, Summers, shrugged it off under oath (at the time he was President of the University): "In Washington I wasn't ever smart enough to predict them [ethics rules] things that seemed ethical to me were thought of as very problematic and things that seemed quite problematic to me were thought of as perfectly fine." Summers testified that in his view, "there was no aura of wrongness of any kind [in the US Treasury] that would be associated with providing advice on a financial issue in which one had an interest." Unseemly, yes. Problematic for Summers' public credibility as a bank regulator? You bet. A problem for Obama to select Summers as Fed chair? Sadly not. The Administration has long ago blurred any boundaries between itself and Wall Street....
*** YAHOO FINANCE / LINK

The Day Everbright Had to Pull Power Plugs to Stop Erroneous Trading
How did a simple system glitch slip past layers of supposedly strong fail-safe mechanisms and rock the country's entire securities market? This is the question that many people have been asking since a trading error by Everbright Securities directly led to erroneous transactions worth billions of yuan on August 16. The A-share index surged as a result, then fell the same day when the firm admitted its mistake. This is "an extreme case without any precedent since the establishment of the A-share market," the China Securities Regulatory Commission (CSRC) said in a press briefing. It is still looking into the matter. No human error was found. But it is clear that the fiasco could have been prevented if Everbright was more careful with the design of its trading system and if it had not intentionally skipped crucial steps regarding risk control to beat competitors by a split second in placing orders. Everbright has suspended Yang Jianbo, head of its Strategic Investment Division (SID), which is directly responsible for the mistake. Soon after, Xu Haoming resigned as the firm's president. Founded in 2010, the SID was a rising star in Everbright. It earned 124 million yuan in profit for the company in 2012, a 33-fold increase from the previous year.

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The glory ended on August 16. Within two seconds at 11:05 a.m., its trading system generated 26,082 buy orders, sweeping clean all stocks for sale on the main board and pushing up the Shanghai Composite Index by 5.62 percent from its closing level the previous day. It happened because the order-generating system was programmed to resend orders if it did not receive feedback from the order execution system in 150 seconds, an Everbright executive said. In itself, the repetitive operations are unlikely to cause much trouble because they need to pass through layers of examination and risk control before being sent to the stock exchange and executed. But all of these layers failed. By the time the morning trading session closed, Everbright had offered to buy stocks worth 23.4 billion yuan, and shares worth 7.3 billion yuan were actually bought. Traders canceled the rest, resold some of the stocks and shorted the stock index future, narrowing the firm's risk exposure by the end of the day to 196 million yuan. When the traders realized the system had sent out a huge amount of unintended orders, "new orders were still being generated and there was no way to stop them," a source with firsthand knowledge of the situation said. "The traders had to pull out the Internet cable and also the power cord" to shut down the computers, he said. The buy orders mistakenly placed by the system had far exceeded the limit of 80 million yuan that Everbright said it allocated to the SID for that day. Individual traders are in no position to change the ceiling independently because doing so requires permission from several departments, an executive of a securities firm said. As it turned out, the SID's trading system, comprised of a self-designed order-generating system and an order-execution system developed by Shanghai Mecrtsoft Tech Co. Ltd., lacks a crucial component that prevents orders larger than a preset limit from being executed. Everbright and Mecrtsoft have blamed each other for not building the component into their part of the trading system. The main reason for the mistake, the brokerage firm said, is the order-execution system failed to exercise effective control over the amount of capital that could be used for trading. Mecrtsoft has declined to comment. A source inside the firm said its order-execution system was meant to be only a passageway linking traders with the stock exchange. The company also develops an order-generating system capable of shutting out larger-than-expected orders, but Everbright did not buy it, he said....
*** CAIXIN / LINK

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A five-star problem
The rupee's tumble continues to grip India. On August 29th Duvvuri Subbarao, the departing boss of the central bank, told an audience in Mumbai of the widespread "dismay about the ferocity of the depreciation". Today, on August 30th, I spoke to the boss of a big hotel in the city who says he is preparing to dollarise his business. The rupee is too flaky to operate in, he said. "It's just like Russia and Indonesia in the 1990s." Shortly after this, Manmohan Singh, the prime minister, addressed parliament on the matter. While part of the currency slump is a "natural" correction to reflect high inflation, he said, "foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening". That statement looks correct on a three-day time horizon. The rupee almost breached 69 per dollar earlier this week. On August 30th it bounced back to 65.7, making it the best-performing big currency worldwide that day, though still leaving it down 16% year-to-date. The vote by Britain's parliament against military action in Syria has helped push down oil prices. That is helpful for India, a big energy importer. And some of the Reserve Bank of India's tweaks have calmed nerves. On August 28th the central bank said it would provide dollars directly to India's big oil-importing firms. That will stop them having to sell rupees in the spot market. It is an indirect way for the RBI to use its reserves to support the exchange rate. Whether India's currency has stabilised is another matter. There is plenty to worry about. The prospect of the Federal Reserve ending its purchases of bonds draws ever closer, especially with good news from the American economy this week. That means the "Great Exit" of money from emerging markets may continue. Both Indonesia and Brazil raised interest rates this week to protect their currencies, making India relatively less attractive. A foreign investor in town told me at he would not invest in India until it raised its rates. He had arrived in India expecting to allocate more funds to it now prices have fallen, but after several days he felt more pessimistic and reckoned that the slump had further to go. As if to confirm that view, GDP figures were released on August 30th for the quarter to June. Growth slowed to 4.4%, from 4.8% in the preceding quarter. Manufacturing contracted. These figures do not yet reflect the credit crunch that has taken place over the last two months, so it seems likely that GDP growth will slow even further. A good monsoon may boost farming, but the formal, industrial bit of the economy is in dire condition. On August 27th Palaniappan Chidambaram, the finance minister, said that the government had fast-tracked $27 billion of power and other projects stuck in red tape. But I have yet to find a full account of these proposals. In the past such announcements have contained far more hype than substance, as we explained in an article in June. That credit crunch is still pronounced, even if the rupee has recovered a little. Most measures of stress in the financial system are still flashing red, reflecting Indian banks' bad debt problem. Credit default swaps on State Bank of India, which measure its risk, have soared. Short-term market interest rates have not come down. The government has yet to show much desire to clean up banks' dud loans and is instead putting more pressure on them to "extend and pretend".
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Even as mayhem stalks the currency market, the election campaign is ramping up. India's legislators may be lousy at making decisions about economic reform, but they are remarkably decisive at passing more populist measures. Early this week a new programme to increase food subsidies was agreed. Moody's, a credit rating agency, warned that this will put more pressure on the public finances. Then the lower house of parliament approved a new law on land reform. It replaces a decrepit act that is over a century old. But businesses say the new rules will make it even harder to buy land to set up factories, with long delays becoming the norm.
*** ECONOMIST / LINK

What Syria Teaches Us About Hyperinflation

Syria is a humanitarian disaster, of course, but it's an economic catastrophe too. The latter doesn't get much attention for obvious reasons, but 290 percent inflation certainly qualifies. It turns out you can't have much of an economy when your country is a war zone, and the regime is attacking civilians. But functioning economy or not, the government still has to pay its bills. So what does it do when there's nothing to run or tax? Easy: It prints what it needs. That's what the pariah Assad regime has done to cover the difference between what it has to pay, and what its few remaining patrons have paid it. The predictable result of all this new money chasing fewer goods has been massive inflation. Now, the regime has tried to hide just how massive inflation actually is with its "official" numbers, but Steve Hanke, a professor at Johns Hopkins, has estimated what it really is based off black market exchange rates. As you can see in the chart below, the ongoing civil war, foreign sanctions, and the threat of bombing have sent Syria's inflation rate well into the triple digits the latest reading, which isn't shown, has it at 292 percent, to be exact.

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It's a depressing reminder that Milton Friedman didn't get it quite right. Inflation is always and everywhere a monetary phenomenon. But hyperinflation is actually always and everywhere a political phenomenon. Now, there's always a lot of confusion about what inflation means exactly. It doesn't mean the cost-of-living has gone up that can happen when inflation is low or falling if wage growth is even lower or falling more. And it doesn't mean that the price of a few things has gone up. It means that, in the aggregate, the price of all things has gone up. This, as Friedman memorably put it, is a story about money. Overall prices rise too much when the government prints too much money. But why would a government print so much money that it becomes worthless? Run-of-the-mill incompetence or political weakness can explain printing a little too much money enough, say, to get double digit inflation. But it doesn't explain printing so much that you need to resort to scientific notation to keep track of it. So what does explain it? Well, let's look at Hanke's table of the ten worst hyperinflations in history to see what they have in common. (Really, try imagining what it would be like if prices doubled every 15 hours like they did in Hungary in 1945).

Click to Enlarge

Look at those start dates again. Hyperinflations tend to happen following wars or revolutions. Now, Weimar Germany and Zimbabwe look like exceptions to this rule, but they're not really the former's resistance to reparations, and the latter's botched land reform halted economic activity as much as any conflict.

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So, to generalize, there's some kind of political crisis that destroys the economy. But the government can't stop trying to govern. In fact, it has to do even more to try to restore order, and reverse the collapse. And doing more means spending more money that it doesn't have to begin with. So it prints what it needs. And it keeps printing. But it turns out you can't print money and pretend you have an economy when you don't. Inflation skyrockets, and begins feeding on itself. See, it's not just about the money-printing; it's about people's expectations too. The more money the government prints, the more worthless people expect it to be and the quicker they dump it. There's a bank run on the currency. Now, this might succeed at getting the economy functioning again, but it does so at the cost of wiping out any wealth not held in real assets, like land or factories....
*** THE ATLANTIC / LINK

Beware the Ides of September: a turbulent month for the economy

September is a dangerous month. Five years ago this month, Lehman Brothers went belly-up. Twelve months earlier there was the run on Northern Rock. Black Wednesday in September 1992 saw Britain's departure from the exchange rate mechanism; the pound left the gold standard in September 1931. The signs are that September 2013 will also be an interesting month. That's interesting as in scary. There are five potential flashpoints: Syria, the G20 summit, emerging markets, the Federal Reserve meeting to discuss scaling down the US stimulus, and the German election. Any one of them has the potential to damage the global economy. Let's start with Syria. Military action by the west against the Assad regime could affect growth in two ways: directly, through higher oil prices, and indirectly, by depressing business and consumer confidence. On the face of it, there is no real reason why the air strikes favoured by Barack Obama should have led to the price of crude rocketing. Syria is not an oil producer and there would only be an impact on oil supplies if Iran tried to close the Strait of Hormuz. This seems unlikely. But commodity markets quite often ignore economic fundamentals. There is already a Syria premium built into the price of Brent crude, which was changing hands at just under $120 a barrel in London last week. Any hint of the conflict spreading beyond Syria will see the cost of oil rise further, and while talk of $150 a barrel seems overly pessimistic there have been plenty of examples of rumour, fear and speculation combining to ramp up prices. Capital Economics estimates that $150 crude would knock a percentage point off global growth, turning a lacklustre performance into something close to stagnation.

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The impact on sentiment is impossible to gauge. There were no long-lasting effects on confidence from the much more extensive military action in Iraq a decade ago, but that was before the Great Recession of the past five years. Businesses looking for a fresh excuse to keep investment plans on hold may find that Syria provides it. That is more likely to be the case if the G20 summit in St Petersburg ends in acrimony. The conclave of developed and developing countries was supposed to usher in a new epoch of more co-operative global governance, and so it did for the first 12 months after the G20's inaugural meeting in Washington in 2008. Since then it has been downhill all the way. G20 countries have failed to agree a joint line on economic stimulus versus austerity, and in the end member countries have simply done their own thing. But this time the summit could get really nasty if Vladimir Putin cuts up rough over US policy towards Syria, and gets backing from China. On past form, the chances of a big diplomatic bustup are high, in which case expect markets to respond in their time-honoured fashion by seeking out safe havens in gold, the Swiss franc and the US dollar. This would exacerbate the problems of the more vulnerable emerging market economies, which have already seen sharp falls in their currencies against the dollar. India, which saw the rupee sink to a record low last week, and Indonesia, which raised interest rates to defend the rupiah, are the most exposed. Both India and Indonesia have deep-seated structural problems and these have been exposed by the Fed's announcement that it was contemplating scaling back or tapering its asset purchases under the quantitative easing programme. Money has flowed out of emerging markets and back into the US as a result, prompting fears of a rerun of the Asian currency crisis of 1997....
*** UK GUARDIAN / LINK

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Charts That Make You Go Hmmm...

Source: Washington Post

Now that the United States is strongly signaling that it will lead some form of

limited offshore strikes against Syria in response to suspected chemical weapons attacks on civilians, one point you're going to hear repeated over and over about the country is that it's complicated. And that's no joke, as the above map helps to drive home. The map, from Columbia University's really exceptional Gulf/2000 Project, shows the different ethnic and linguistic groups of the Levant, the part of the Middle East that's dominated by Syria, Lebanon and Israel. Each color represents a different group. As you can see, there are a lot of groups swirled together. There are enclaves, and there is overlap. Ethnic and linguistic breakdowns are just one part of Syria's complexity, of course. But they are a really important part. The country's largest group is shown in yellow, signifying ethnic Arabs who follow Sunni Islam, the largest sect of Islam. Shades of brown indicate ethnic Kurds, long oppressed in Syria, who have taken up arms against the regime. There are also Druze, a religious sect, Arab Christians, ethnic Armenians and others....
*** WASHINGTON POST / LINK

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Source: Sober Look

Based on the data from the Federal Reserve Bank of St. Louis here is a single chart

that shows credit growth in the US is continuing to decline while the Fed's balance sheet is expanding.
*** SOBER LOOK / LINK

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The first chart shows both the nominal per capita disposable income and the real

(inflation-adjusted) equivalent since 2000. This indicator has been significantly disrupted by the bizarre but not unexpected oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013. The July nominal 0.11% month-over-month and 1.45% year-over-year numbers have us approximately back to the trend we saw near the end of last year prior to the forward pull of income and subsequent plunge to manage expected tax increases. However, when we adjust for inflation, the real MoM change of 0.02% required that second decimal place to register above zero. The real YoY is a miserable 0.06%....
*** DOUG SHORT / LINK

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Words That Make You Go Hmmm...

With next week's
Australian elections looming large, The Economist gives an excellent briefing on who is contesting it, what it might mean for the country's mining industry at home and abroad, and why it matters to a wider world...

CLICK TO WATCH

Art Cashin is a legend on the floor of

the NYSE and, with 50 years under his belt, one of the most astute observers of markets in the world. In this fascinating conversation he casts an eye over the currencies we have discussed in this edition of Things That Make You Go Hmmm..., as well as gold, silver, the FOMC, the taper, and Syria... CLICK TO LISTEN

Jim Puplava is currently replaying

some old interviews, and many of them are fantastic. This week Jim revisited an interview with Adam Fergusson, the author of one of my favourite books. Fergusson's When Money Dies is the seminal account of the Weimar hyperinflation in Germany and details beautifully what it was like living through that nightmare. A must-listen interview from the author of a must-read book... CLICK TO LISTEN

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and finally...
Mark Forsyth
in conversation with David Astle. In this delightful conversation two devoted students of the English language reveal their extraordinary understanding of words and their meanings. UK author Mark Forsyth is the author of two books about strange and beautiful and obscure words that have slipped from general usage. David Astle is an Australian author, columnist, and crossword maker with a cult following... (Thanks AC)

CLICK HERE TO LISTEN

Hmmm...

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Grant Williams
Grant Williams is the portfolio manager of the Vulpes Precious Metals Fund and strategy advisor to Vulpes Investment Management in Singapore a hedge fund running over $280 million of largely partners' capital across multiple strategies. The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors. Grant has 28 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm... since 2009. For more information on Vulpes, please visit www.vulpesinvest.com

*******
Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH 66th Annual CFA Conference, Singapore 2013 Presentation: 'Do The Math': Mines & Money, Hong Kong 2013 Presentation: 'Risk: It's Not Just A Board Game': Fall 2012 Presentation: 'Extraordinary Popular Delusions & the Madness of Markets': California Investment Conference 2012 Presentation: 'Simplicity': Part I : Part II As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes fundsthough I will not be making any specific recommendations in this publication.

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