TTMYGH Aug 18 2014

Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.
Thinker, Trader, Holder. Why?

A desk is a dangerous place
from which to view the world.
John Le Carr
By repetition, each lie becomes an irreversible fact upon
which other lies are constructed.
John Le Carr
Look... were getting to be old men, and weve spent our lives
looking for the weaknesses in one anothers systems. I can see
through Eastern values just as you can see through our Western
ones. Both of us, I am sure, have experienced ad nauseam the
technical satisfactions of this wretched war....
John Le Carr, Tinker, Tailor, Soldier, Spy
People like you should be stopped, Mr. Woodrow,
she mused aloud, with a puzzled shake of her wise
head. You think youre solving the worlds problems,
but actually youre the problem.
John Le Carr, The Constant Gardener
To learn more about Grants new investment newsleter,
Bulls Eye Investor, Click here
THINGS THAT MAKE YOU GO
Hmmm...
A walk around the fringes of fnance
By Grant Williams
18 August 2014
2
Hmmm...
18 august 2014
Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
France Rebels Against Austerity as Europes Recovery Collapses ..............................24
ISIS: A Portrait of the Menace That Is Sweeping My Homeland .................................26
Ayell Be Back ..........................................................................................27
Sichuan Plan to Spur Banks to Extend More Mortgage Loans Falls Flat .......................28
The Boomerang Effect: Sanctions on Russia Hit German Economy Hard ......................30
The Great Chinese Exodus ...........................................................................31
Anti-Putin Alliance Fraying ........................................................................33
Another Piece Falls into Place? ......................................................................34
Europe Risks Deeper Economic Crisis as Russia Buckles and Defaults Mount in Ukraine ...36
CHARTS THAT MAKE YOU GO HMMM... ..................................................38
WORDS THAT MAKE YOU GO HMMM... ...................................................41
AND FINALLY... .............................................................................42
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18 august 2014
Things That Make You Go Hmmm...
Sometimes, just sometimes, you need to stop for a second, take a step back, and reconsider
the simplest pieces of any puzzle.
David John Moore Cornwall was a real-life spy. A spook.
An agent. He worked for Britains MI5 and, later, MI6
intelligence services.
Whilst there, Cornwall began a little hobby that, in
todays world, would be unthinkable for a serving
intelligence offcer: writing novels about the secret
world in which he lived and worked.
He chose a nom de plume with a certain je ne sais
quoi: John le Carr. The hero of le Carrs frst two
novels, Call for the Dead and A Murder of Quality, was
George Smiley, a somewhat ordinary spy who grew up
in a middle class family and attended an antiquated
Oxford college of no real distinction but who,
apparently, had the cunning of Satan and the conscience of a virgin.
Smiley was everything other spies of the time fctional ones, at least werent:
(Wikipedia): The spy novel writing of John le Carr
stands in contrast to the physical action and moral
certainty of the James Bond thriller established
by Ian Fleming in the mid 1950s; the le Carr
Cold War features unheroic political functionaries
aware of the moral ambiguity of their work, and
engaged in psychological more than physical drama.
They experience little of the violence typically
encountered in action thrillers, and have very little
recourse to gadgets. Much of the confict is internal,
rather than external and visible.
Unlike the moral certainty of Flemings British Secret
Service adventures, le Carrs Circus spy stories are
morally complex. They emphasise the fallibility
of Western democracy and of the secret services
protecting it, often implying the possibility of East-
West moral equivalence...
In 1979, the BBC adapted what is perhaps le Carrs
most famous novel for television, casting the great Alec Guinness as Smiley in a seven-part
miniseries that changed the face of television.
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18 august 2014
The series, Tinker, Tailor, Soldier, Spy, was a smash hit in a time before box sets and gratuitous
action scenes; and despite its measured, almost glacial pace, millions tuned in each week to
watch le Carrs masterpiece of cross and double-cross unfold before their eyes.
The fctional Smiley operated during the very
real Cold War between NATO and signatories to
the Warsaw Treaty Organization of Friendship,
Cooperation, and Mutual Assistance. (Those
communist countries LOVED a good, long title.
We in the West called it the Warsaw Pact,
and it essentially included the Soviet Union,
Bulgaria, Czechoslovakia, Yugoslavia, East
Germany, Hungary, and Poland. You know, all
the powerhouses.)
Looking back on it now, the Cold War was more Ali vs. Cooperman than Batman vs. Superman;
but at the time, the world lived in fear of a cataclysmic resolution to the confict. It seems like
a lifetime ago; but those years between 1946 and 1991, when communism fnally gave up the
ghost, were fraught with fears over a rogue USSR.
Throughout the entire episode, the price of gold the ultimate barometer of fear performed
as one would have expected it to once Richard Nixon removed the shackles on August 15,
1971, of course.
0
200
400
600
800
1000
The Cold War
1946 - 1991
1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990
-5
0
5
10
15
20
US CPI (%) RHS
Gold Price ($) LHS
Source: Bloomberg
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18 august 2014
Fear of confagrations along the borders of the Soviet Union led to consistent buying of gold
year after year and decade after decade. Yes, there were fare-ups, during which gold saw large
spikes; but as immediate dangers eased, so did the price exactly as one would expect.
To be fair, it wasnt all about those darn Russkies. No. The gold price was certainly helped
higher by an irritating infation problem (as you can clearly see from the chart on the previous
page). Once Nixon closed that damn window, gold wasted no time in playing catch-up and
responding to infationary pressure as well as to perceived Cold War threats; but either way,
once the downward pressure of a fxed price was removed, gold exploded higher rising 82% in
the frst 12 months and 419% in the space of 4 years.
There are a couple of interesting points to make about the action of the gold price during those
darkest of postwar days (points Ive made before, but will expand upon this week).
Lets begin with Asia.
During the 1980s and 1990s, Asian central bank reserves (particularly gold reserves) were
nothing to write home about. Thanks to the IMF and the World Bank, we can see exactly what
they were:
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2013 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960
Central Bank Gold Holdings
(East Asia & The Pacifc)
1960 - 2014
(oz mlns)
0
500
1000
1500
2000
RUNAWAY
INFLATION
COLD
WAR
Source: IMF / World Bank /Bloomberg
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18 august 2014
As you can see, the huge run-up in the gold price during the 1970s occurred against a highly
infationary backdrop and the ongoing Cold War; but, crucially, WITHOUT THE PARTICIPATION
OF ASIAN CENTRAL BANKS. (The IFC part of the World Bank classifes East Asia & The
Pacifc as China, Indonesia, Japan, Laos, Mongolia, Myanmar, the Philippines, Singapore,
Thailand, and Vietnam, as well as the Pacifc Islands).
0
1,000
2,000
3,000
4,000
5,000
6,000
0
500
1000
1500
2000
2013 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960
Central Bank Total Reserves vs Gold Price
(East Asia & The Pacifc)
1960 - 2014
(US$)
$
/
o
z $

b
l
n
s
If we switch our focus to those same countries total reserves, however, a completely different
story emerges. From the mid-1990s onwards, total currency reserves soared from $300 billion in
1994 to $5.8 trillion by the end of 2013.
That relentless climb has given Asian nations two things they didnt have the last time we saw
gold being chased higher by the terror of surging infation and the spectre of a large-scale
confict between opposing blocs: extraordinary purchasing power and the need to diversify their
massive holdings of US dollars.
If we throw India into the picture (India is classifed as part of South Asia by the IFC/World
Bank, along with Bangladesh, Bhutan, the Maldives, Nepal, and Sri Lanka countries we will
leave out of this discussion for now), we can see a microcosm of that build-up in purchasing
power laid out very clearly indeed:
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18 august 2014
0
50
100
150
200
250
300
2013 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960
India Total Reserves (incl. Gold)
1960 - 2014
(US$)
Doubled/Tripled
Indian reserves doubled between 2008 and 2009, and by 2012 they had tripled to almost $300
billion.
Why is India so important on its own? Well, for one very good reason:
0
300
600
900
1,200
2013 2011 2009 2007 2005 2003 2012 2010 2008 2006 2004 2002
India & China Annual Gold Purchases
(metric tonnes)
2002 - 2013
China
India
Source: World Gold Council / Thomson Reuters / GFMS
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18 august 2014
Yes, as anybody who follows the space knows only too well, Indians love their physical gold;
and, unlike their counterparts in the West, when they have money to save, they have no hang-
ups about swapping cash for hard yellow lumps of metal. Until February of this year, they were
the largest buyers of gold in the world. By a long, long way. Now, however, the Chinese have
overtaken them:
(WSJ): Golds wild ride has shaken investors. But in China, buyers just keep stepping up
to the plate.
Chinese demand for gold bars, coins and jewelry soared by 32% to record levels in 2013,
even as the price of gold slumped 28%.
The surge in buying saw China overtake India as the worlds top consumer of physical
gold, importing 1,066 metric tons of the metal to Indias 975 metric tons in 2013,
according to new data from the World Gold Council. (A metric ton is equal to 2,204.6
pounds.)
When prices drop, therell always be buyers, said Jiang Shu, senior gold analyst at
Industrial Bank in Shanghai.
In India, consumption increased by 13% but further growth was curbed by import
restrictions aimed at narrowing the countrys current-account defcit. The council
estimates around 200 metric tons was smuggled into the country.
Chinas lead over India as the worlds top importer is likely to be sustained, said Marcus
Grubb, the councils managing director of investment strategy.
China is 10 years behind India in terms of deregulation and growth of demand, Mr.
Grubb said. Given last year was such a strong year, it will be hard to equal that again
in 2014, [but] the stock of gold in China is less than half of that in India, so we think
theres plenty more room to grow.
But and Ive talked about this before its the metal they want to own. Period. Not futures.
Metal.
Oh... and not ETFs, either.
In 1966, the Central Fund of Canada listed the worlds frst exchange-tradeable gold product (a
closed-end fund) on the Toronto Stock Exchange, which amended its articles of incorporation
in 1983 to allow investors to directly own gold and silver bullion through an ETP; but the frst
gold-backed ETF began trading in Australia in March, 2003. A decade on, there was an estimated
$132 billion invested in gold ETPs around the globe, with notional holdings of well over 2,500
tonnes.
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18 august 2014
Again, back in the 1970s there was no market for gold proxies like ETFs. There was therefore
less demand overall, because owning gold meant... well... owning gold. And physical ownership
added one other important dynamic: selling gold wasnt something you did just because the
price fell a percent or two.
That behaviour has hardly applied during corrections in the recent bull market in gold:
-1000
-800
-600
-400
-200
0
200
400
600
800
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004
Gold ETF Investment Demand
(tonnes)
2004 - 2013
Source: WGC / Thomson Reuters / GFMS
As you can see, in 2013, outfows from the gold-backedETF universe were greater than the
cumulative infows from the previous three years. That simply couldnt have happened in the
last big gold bull market.
Selling gold (or something representing itself to be as good as gold), just like buying it, has
become too damn easy. But if we go back to that piece from the Wall Street Journal that
discusses Chinas taking over the top rung on the ladder of gold-buying nations, one key
sentence stands out:
When prices drop, therell always be buyers, said Jiang Shu, senior gold analyst at
Industrial Bank in Shanghai.
Thats very much the view of Asian investors and analysts. The lower the price, the greater the
demand; and that fact was most certainly in evidence in 2012s rout. Their opinion is based on
an understanding of golds place in the hearts and minds of people on this side of the globe
an understanding that is lost on many of their Western peers, who have more of a trading bias.
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18 august 2014
But heres where things get a little hard to reconcile.
On one side of the gold ledger we have massively increased investment demand, which
admittedly is somewhat fighty, as a lot of it is due to traders moving in and out of gold in order
to make a buck or two. But, as the massive increase in gold held by ETFs demonstrates, such
trading is most defnitely an addition to the demand side of the equation. On the demand side
of the ledger we also have hugely increased currency reserves at the central banks of nations
with a solid disposition towards owning physical gold nations that, when the price goes down,
buy it hand over fst.
On the supply side things get even more interesting.
In its just-released Gold Demand Trends report for Q2 2014, the World Gold Council had the
following to say about supply:
(WGC): During the second quarter, 98.2 additional tonnes of gold were supplied to the
market compared with Q2 2013. This 10% increase was almost solely due to growth in
mine supply; recycling was little changed. Year-to-date, supply is up 5% as the impact
of fresh hedging and mine production growth outweighed an 8% decline in recycling
activity.
Mine production increased by 4% for a second consecutive quarter, although 2014 is
likely to be the peak. Producers have, over recent quarters, implemented a range of
operational measures to manage costs and improve effciency. This trend continued
through Q2, but we expect this impact to tail off throughout the remainder of 2014 as
the scope for producers to implement further measures recedes.
Mine production over the year-to-date has benefted signifcantly from positive base
effects in the supply pipeline. A number of new operations came on stream over the
past year or two, notably in Canada and the Dominican Republic. Incremental growth
generated by the ramp up in production at these projects has had a considerable
impact on total supply. However, as these operations mature, year-on-year growth will
decelerate as the base periods drop out of the comparison, further exaggerating the
slowdown in supply in the second half of the year.
So record supply, but still a miserly increase YoY of just 4%, which is expected to be the peak as
the rate of increase reverts to its more customary 2.5% in the coming years and recycled gold
(i.e. melted-down jewelry, etc.) continues to decline.
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18 august 2014
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
H1 H2
Global Recycled Gold Supply
2004 - 2014 (H1)
Source: World Gold Council / Thomson Reuters / GFMS
But theres one more vital piece of this puzzle that we need to throw into the mix before we
try to reach any conclusions. And that, of course, is the actions of our old friends the central
banks.
Take a look at the chart below:
900
950
1000
1050
1100
1150
1200
1250
1300
1350
1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2014
LONDON
GOLD
POOL
COLD
WAR
GFC
WASHINGTON
AGREEMENT
UKRAINE
CRISIS
Ofcial Central Bank Gold Holdings
(Millions of Ounces) (IMF)
1957-2014
Source: IMF / Bloomberg
Notice anything strange?
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18 august 2014
After the London Gold Pool collapsed in March 1968 and the metal was fnally allowed to fnd
its own market price (stop sniggering at the back), central banks slowly built up their reserves
again before beginning to sell.
And continuing to sell.
From the end of Q2 1974, central banks sold gold bullion into the market remorselessly as the
price soared. They represented by far the biggest supply to the market during this time; and
while it makes sense to steadily sell something into a rising market, in times of escalating
tensions the normal response is to buy and hoard gold. Selling it? Well, that would just help
depress the price, surely?
One has to wonder what price gold might have reached had the central banks not been so
magnanimous as to reduce their holdings during that period.
Anyway, reduce them they did right up until the fall of communism and the end of the Cold
War.
Then once the Cold War was over they sold even harder.
With no further threat from those darn commies, central banks were fnally able to sell could
step up the pace at which they sold their gold. Between December 1991 and September 1999,
central bank gold holdings fell 6% or roughly 68 million ounces thats roughly 1,900 tonnes.
Then, on September 26, 1999, sterreichische Nationalbank (Austria), Banca dItalia (Italy),
Banque de France (duh), Banco de Portugal (easy), Schweizerische Nationalbank (Switzerland),
Banque Nationale de Belgique (Belgium), Banque Centrale du Luxembourg (no clues), Deutsche
Bundesbank (remember them?), Banco de Espaa (thatd be Spain), Bank of England (...),
Suomen Pankki (tough one... clue: sharks have them), De Nederlandsche Bank (Holland and
the Netherlands are the same country, apparently), Central Bank of Ireland, Sveriges Riksbank
(clue: fat-pack furniture), and the European Central Bank all signed the Washington Agreement
on Gold.
This agreement created a cartel of central banks that controlled the majority of the gold
market limited gold sales to 400 tonnes a year amongst the signatories and was intended (so
they said) to ease pressure on the gold market after Gordon Browns ridiculously suspicious
or, at best, childishly naive brilliantly conceived announcement of upcoming sales of the Bank
of Englands gold, which pushed the price to generational lows.
In fairness, you have to admire the scheme:
First, get one of your number do something so stupid that most people would believe it
could only be an idiotic mistake. Check.
Second, get a bunch of your number together to sign an agreement that would limit
sales of gold so as to make it look as though you were concerned about a falling price.
Check.
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18 august 2014
Third, enshrine in that document an annual limit far above the normal pace of sales.
Check.
Fourth, sell hell for leather. Check.
-1500
-1200
-900
-600
-300
0
300
600
900
2012 2007 2002 1997 1992 1987 1982 1977 1972 1967 1962 1957
Total Reported Central Bank Gold Purchases/Sales
1957 - 2013
Source: IMF / Bloomberg
Washington
Agreements
(I, II, III, IV)
London
Gold
Pool
Net Sale
Washington Agreement Era
Net Purchase
Net Sale In Excess of WA Limit
(The above chart represents ALL reported central bank activity not
just that of the signatories to the Washington Agreements, which
explains the periods where sales exceeded the agreed limit.)
Call me old-fashioned if you will, but I dont see too many years prior to the signing of the frst
Washington Agreement when those kindly central banks limiting gold sales to 400 tonnes
would have made a difference, do you? They sure picked up the pace once it was signed,
though...
Then, in 2009, after the GFC had scared the world half to death (Remember that? When the
world was going to end and equity markets halved in a matter of a few months? No? Google it.),
central banks the largest source of supply to the market performed a graceless volte-face
and began buying. En masse.
Notably, the major Western central banks didnt take part in the buying spree, as they already
had a sizeable percentage of their reserves in gold. No. The buyers were the Eastern and Middle
Eastern central banks countries like, oh, Turkey for instance, which, in December 2011 made
a rather stunning announcement:
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18 august 2014
(WSJ): Turkey lifted its gold reserves by a hefty 1.328 million troy ounces, or 30%, last
month as central banks around the world maintained their positions as net buyers of the
precious metal.
According to data from the International Monetary Fund, the Turkish central bank
increased its gold reserves to 5.758 million ounces in November, from 4.429 million
ounces the month prior. This followed a rise of 697,000 ounces in October, the latest IMF
fgures show....
Prior to the purchases, Turkey had the 30th-largest offcial holding of gold in the world,
at around 7% of its foreign reserves, according to the World Gold Council, an industry
body. It is now likely to have the 22nd-largest offcial holdings following the additions.
Turkeys 5.758 million ounces equates to about 163 tonnes.
That was December 2011.
See if you can spot something interesting in this table (which comes to you courtesy of the
World Gold Council, and all numbers are as of March 2014):
Rank Country/Organization Gold Holdings (tonnes) Golds Share of Reserves
1 United States 8,133.5 72%
2 Germany 3,384.2 68%
3 IMF 2,814.0 N.A.
4 Italy 2,451.8 67%
5 France 2,435.4 66%
6 Russia 1,094.0 9%
7 China 1,054.1 1%
8 Switzerland 1,040 8%
9 Japan 765.2 2%
10 Netherlands 612.5 54%
11 India 557.7 8%
12 Turkey 512.9 16%
13 ECB 503.2 26.3%
14 Taiwan 423.6 4%
15 Portugal 382.5 84%
16 Venezuela 367.6 71%
17 Saudi Arabia 322.9 2%
18 United Kingdom 310.3 12%
19 Lebanon 286.8 24%
20 Spain 281.6 25%
Since that hefty 30% increase in its gold reserves waaaaay back in December 2011, Turkey has
increased them again by (whats a good word for 10x? Hefty?) 314% which has taken its gold
reserve to a not-so-whopping 16% of total reserves.
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Hmmm...
18 august 2014
OK... so same table, different way of looking at it:
WEST EAST
Country
Gold Holdings
(tonnes)
Golds Share
of Reserves
Country
Gold Holdings
(tonnes)
Golds Share
of Reserves
United States 8,133.5 72% Russia 1,094.0 9%
Germany 3,384.2 68% China 1,054.1 1%
Italy 2,451.8 67% Japan 765.2 2%
France 2,435.4 66% India 557.7 8%
Switzerland 1,040 8% Turkey 512.9 16%
Netherlands 612.5 54% Taiwan 423.6 4%
ECB 503.2 26.3%
Portugal 382.5 84%
UK 310.3 12%
Spain 281.6 25%
Eastern central banks have been rapidly accumulating gold in order to diversify their reserves
away from the US dollar (and, for that matter, the euro); and while weve already seen Indias
hunger for the yellow metal, amongst that group nobody has been a more consistent buyer than
everybodys favourite nemesis Russia:
8
0.0
-0.2
0.2
0.4
0.6
0.8
1.0
0.2
10
12
14
16
18
20
2006 2008 2007 2009 2006 2010 2011 2012 2013 2014
22
24
26
28
30
32
34
36
38
40
Russian Central Bank Gold Reserves
(oz millions)
2006 - 2014
MoM Change
Source: Russian Central Bank / Sharelynx
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Hmmm...
18 august 2014
Since 2006, the Central Bank of Russia has made net monthly sales of gold on only four
occasions and has stood pat on 12 others. Every other month has seen an increase in their gold
holdings.
Who said Russians were unpredictable and inconsistent?
Away from the East, another juggernaut has been making some moves of its own in the gold
market the last couple of years, as this story from back in early 2013 demonstrates:
(Centralbanking.com): The Central Bank of Brazil added 14.7 tonnes of gold to its
reserves in November, the latest in a series of purchases that has seen its gold holdings
increase by 90% since September.
It now possesses 67.2 tonnes of gold, according to the latest World Gold Council (WGC)
fgures, an increase of 31.9 tonnes in the three-month period. At todays London am fx
that equates to $1.7 billion worth of additional gold.
Gold now comprises 1% of Brazils international reserves. The purchases over the last
three months represent the central banks frst signifcant gold trades in a decade.
Brazils holdings have remained steady since it shed over three quarters of its gold
between 1999 and 2001.
-60
-50
-40
-30
-20
-10
0
10
20
30
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: World Gold Council
Monthly Change in Brazil Gold Reserves (tonnes)
2000 - 2014
Interesting chart. I think its safe to fle that one under policy change, dont you?
17
Hmmm...
18 august 2014
Somebody asked the WGC what they thought about Brazils sudden splurge in the gold market:
(CentralBanking.com): Marcus Grubb, the managing director of Investment at the WGC,
attributes the purchase to the central bank diversifying away from its dollar holdings.
I was surprised with the timing of the purchase, but not the logic behind the move. I
think it mirrors what some of the other central banks in countries with surpluses and
large reserves have been doing, he said.
The issue with those countries in Asia and Latin America they all now fnd
themselves over-dependent on the dollar and the euro, and assets denominated in those
currencies. They want to diversify their reserve assets away from them.
Hmmm... then somebody asked the Brazilian Central Bank for their take on things:
A Central Bank of Brazil spokesperson was unwilling to comment on the motivation
behind the gold purchases.
Of course.
Now heres the kicker: that huge increase takes Brazils gold as a percentage of their total
foreign reserves to (drumroll, please)... 0.8%.
So, we see some strong buying of gold on the part of Brazil, Russia, and India; but, of course, in
the end any discussion on central bank gold buying has to come back to China.
200
400
600
800
1000
1200
-78%
+156%
+200%
+266%
+256%
BRIC Gold Reserves (tonnes)
2000 - 2014
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Brazil (rhs)
India
Russia
China
Source: World Gold Council
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Hmmm...
18 august 2014
As you can see, the BRIC countries have all signifcantly increased gold as a percentage of
their reserves in recent years with Russias being the most consistent of the four but after
almost fve years of deafening silence we can only hazard a guess at what the PBoC is doing.
Why only guess? Well, because the Chinese dont want us to know what theyre doing; and
handily for them, the rest of the world is willing to play along, as an expert recently pointed
out in the International Business Times:
(IBT): Theres a concerted effort to diversify to some extent away from the U.S. bond
market, U.S. dollars, and buy hard assets like gold, China being the leader, [Scott]
Carter [CEO of LearCapital] told IBTimes.
So far, so good, Mr. Carter...
With China, they want to obtain enough gold to back their currency, he continued.
Im with you, buddy. All the way...
In a decade, China could have 6,000 to 8,000 tons of gold backing the Chinese yuan,
which could be a game-changer in global markets in terms of reserve and dominant
currencies, he said.
Ah... and you were doing SO well.
Mr. Carter kind of half got the point, in that Chinas having 6,000 to 8,000 tonnes and backing
its currency with it would be a gamechanger; but, like so many others, he bases his assumptions
on playing along with the Chinese reluctance to disclose the true amount of gold held in the
vaults of the PBoC.
If you really want to understand what the reality might very well be, then from time to time
you need to take a little leap of imagination when considering the activities of the Chinese
Central Bank and open your mind to possibilities that the mainstream just refuses to entertain.
Nobody and I mean nobody does that better than my friend Koos Jansen.
Koos watches gold data more closely than just about anybody else in the world (Nick Laird,
if youre reading this, youve still got Southern Hemisphere bragging rights, my friend); and,
crucially, he is one of the few who is happy to ignore what hes told by offcials and do the math
himself.
Now, when it comes to gold and China, that takes an incredible amount of hard work. However,
when he does that work, the numbers Koos comes up with are quite extraordinary and for my
money likely to be far more accurate than anything coming out of the PBoC.
19
Hmmm...
18 august 2014
In a post that ANYBODY who has even a passing interest in gold should read, Koos diligently
established that the Chinese had probably been a net importer since the 1990s. From there, he
painstakingly joined the dots:
(Koos Jansen): [W]e dont know how much of the gold China domestically mined prior
to [the 1990s] has been exported, but after, lets say, 1995 all domestic mining did
not leave the mainland. My best estimate of how much gold was being held among
the Chinese population in 1995 is 2500 tonnes, according to Albert Cheng from the
World Gold Council (page 55). Starting from that year I will try to make a conservative
estimate on how much gold the Chinese have been accumulating.
According to the PBOC their offcial reserves in 1995 accounted for 394 tonnes, Chinese
mines produced 108 tonnes that year; our starting point is 3002 tonnes (2500 + 394 +
108) in 1995. Subsequently I added yearly domestic mining, cumulative, as the Chinese
didnt net export any gold since that year. In 2001 The PBOC announced their offcial
reserves had increased to 500 tonnes and in 2003 they announced having 600 tonnes.
Because the gold market wasnt fully liberalized in those years, I have subtracted
these gains from cumulative domestic mining. Just to be on the conservative side, also
because I have zero trade data from 1995-2001.
The offcial subsequent update to 1054 tonnes by the PBOC was in 2009, when the gold
market was fully liberalized. This gain I didnt subtract from cumulative domestic
mining, as I believe this was imported monetary gold. The increase in PBOC holdings
from here on is pure guessing, though I feel comfortable raising their holdings to 3500
tonnes in 2013.
Import I have calculated using Hong Kong net exports to the mainland (my data begins
in 2001), net gold imports numbers disclosed by Chinese gold reports (2007-2011) and
analysing SGE withdrawals (2007-2013), using the equation:
mine + scrap + import = SGE withdrawals
import = SGE withdrawals scrap mine
The end result is [the chart below].
The chart ... I think is conservative as it excludes hidden demand on which I have no
hard numbers (yet):
- Mainland tourist buying jewelry in Hong Kong and storing it locally or bringing it home.
- Potential gold smuggling via tunnels from Hong Kong into the mainland.
- Undeclared gold import by affuent Chinese circumventing all authorities (customs,
SGE).
20
Hmmm...
18 august 2014
Taking this into account, its safe to say there is now more than 14,000 metric tonnes
of gold in China mainland. Divided by 1.3 billion people thats 10.7 grams of gold per
capita.
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Estimated Total Chinese Gold Reserves
(Metric Tonnes)
25 July 2014
Cumulative Total Import
Cumulative Domestic Mining
Ofcial Reserves
Jewelry Base (1995)
Source: Koos Jansen - SGE / WGC / CGA / HK Customs
(Please note that I have updated this chart to include Koos latest numbers, as
the original ones in the article didnt yet include the numbers for 2014.)
If you care about gold and youre not following Koos, then you should be. You can do so at his
website by clicking HERE or on Twitter by clicking @KoosJansen.
Now, stop for a second and just imagine what would happen if the world-at-large didnt wait to
have numbers like Koos offcially confrmed but instead made the kinds of thoroughly vetted
assumptions that Koos does after sifting diligently through the data.
Back in the day, it used to be called research.
If the PBoCs holding 6,000 to 8,000 tonnes would be a gamechanger, what effect does would
their holding nearly 15,000 tonnes have, I wonder?
I wonder.
Before we fnish this weeks somewhat lengthy missive (though, in fairness, there has been a lot
of real estate devoted to charts), there are a couple more points worth pondering.
21
Hmmm...
18 august 2014
Firstly, we need to take a look at what the central banks as a group have done in the face
of panic in recent years. When we do, we see that they may not always have things quite as
securely under control as their minutes and press conferences littered with explanations of
how everything is meeting expectations would have you believe.
The chart below is a close-up of the period from January 2009 to July 2014:
950
960
970
980
990
1000
1010
1020
1030
1040
1050
2009 2010 2011 2012 2013 2014
GFC-Induced
Panic Buying
QE1-Inspired
Buying
Total Ofcial Gold Reserves
(oz millions)
2009 - 2014
Seems to me that, when 2008 came out of the clear blue sky and blindsided every central
banker in the world (the situation was contained, I believe they said...), they panicked just
like everybody else; and when they did, where did they run? Yup. To gold.
When QE1 ended and equity markets fell out of bed once again, guess what? Yup. Another
sudden panicky-looking dash into the ultimate safe-haven asset our old friend gold.
In fairness to this group of geniuses, they at least got the joke after that and bought steadily
for almost three years, though, as weve seen, some of them bought harder than others.
Now we stand on the brink of another possible war between NATO and Russia as tensions over
Ukraine ratchet ever higher.
Weve already seen the effect the last threat had on gold, so how do things stack up this time
around?
22
Hmmm...
18 august 2014
Well, funnily enough, for once this time really is different; and the New Cold War is, as you can
see from the chart below, apparently not even remotely troubling. In fact, gold is trading below
where it was when the Russians frst dipped their toes in Ukraine to test the water:
1200
1250
1300
1350
1400
The New Cold War?
2014 - ????
February March April May June July August
Russian Incursion
Into Ukraine
Source: Bloomberg
Curious.
So when it comes to gold, there are the thinkers, like Koos; there are the traders, like the
millions day-trading GLD for a penny here and there; and then there are the holders.
The question for all of them is the same: why?
Traders of gold dont want anything to do with physical gold. They are happy trading pieces of
paper scrapping amongst each other for pennies (and in some cases making a lot of them),
but the gold they buy and sell could just as easily be Microsoft shares or an ETF that tracks
lumber. Its all about the price not the ownership.
Many investors who claim to own gold as an insurance policy do so through the ownership
of ETFs such as GLD. Thats just not the same as owning metal, Im afraid. Doing that, youre
simply one of the traders. Youre NOT a holder.
23
Hmmm...
18 august 2014
Individuals (and institutions) who buy physical gold and hold it, unencumbered, outside the
banking system are true holders. They arent about to alter their position in any meaningful
way just because the price moves a few percent against them (or, for that matter, for them).
They own gold as an insurance policy, and until the reason for owning it is proven wrong, they
hold onto it.
That just leaves the central banks.
One could make the case that, given their consistent selling over a 40-year period, they are
anything but holders. One could also say that, given the sudden about-face they made in 2009,
they are nothing but traders (though trading far bigger trendlines than most).
But the simple truth is that, just like the investing public, they too are split though not into
traders and holders but rather, it would seem, into holders and buyers.
Ask yourself these four questions:
The last time the world faced a meaningful threat of a large-scale confict between East
and West, the gold price soared. This time it hasnt moved. Why?
With gold consistently pouring into Eastern Central Bank vaults in exchange for dollars,
what happens if there is another sudden panic of some sort and investors (including
central banks) suddenly decide to stampede into gold en masse like they did in 2009?
Why are the most rapacious buyers of physical gold a group of countries that last time
we saw an exponential rise in the gold price had no meaningful currency reserves but
that now amongst them own a staggering 46% of total global reserves?
If you had the power to create money out of thin air as, for example, the PBoC can,
can you think of a reason why you might want to convert as much of it into gold as you
possibly could?
Just like George Smiley, if you can come up with plausible answers to these questions, you
might just be able to fgure out the ending to a tale of intrigue that has captivated millions
around the globe.
I know how I think the story ends.
*******
A reader recently sent me an email asking if Id been muzzled, as I hadnt written
about gold in a long, long time. My answer was that, far from being muzzled, I had found so
many other interesting things to write about and that gold had been rather boring of late.
However, I have a feeling that things are about to get very interesting again in that little corner
of the investing world.
24
Hmmm...
18 august 2014
This week is bookended by Ambrose Evans-Pritchard, who takes on the disastrous growth
numbers in Europe as well as the French rebellion against austerity and the stand-off over
Ukraine.
Between his words of wisdom, we travel to the Middle East to take a look at the nightmare
that is ISIS, to Scotland to try to assess the landscape AFTER the upcoming referendum, and to
China, where plans to increase mortgage lending have come unstuck.
Russian sanctions are starting to bite and bite hard in Germany as the anti-Putin alliance
begins to fray; Chinas leaders are watching the millions leaving their shores with great
interest; and my great friend David Hay of Evergreen in Seattle conjures up his usual elegant
prose to describe another piece that may have just fallen into place in a troubling puzzle.
Charts of the currency war, consumer sentiment, and stock buybacks set us up nicely for
interviews with Jim Rickards (who talks to Peter Schiff about this weeks subject matter
gold), the wonderful Bill Fleckenstein (who waxes lyrical on a range of subjects including the
bond market and gold) and Passport Capitals John Burbank (who explains why hes bullish,
extremely cautious and thinking about 1987).
Finally, if you want a glimpse into the future, check out the video on page 42. I wonder if
theres a robot out there just waiting to render me obsolete?
Answer on a postcard, please.
Until Next Time...
*******
France rebels against austerity as Europes recovery collapses
Eurozone strategy is in tatters after economic recovery ground to a halt across the region and
France demanded a radical shift in policy, warning that austerity overkill is driving Europe into
a depression.
Growth slumped to zero in the second quarter, with Germany contracting by 0.2pc and France
once again stuck at zero. Italy is already in a triple-dip recession.
Yields on 10-year German Bunds fell below 1pc for the frst time in history, beneath levels seen
during the most extreme episodes of defation in the 19th century. French yields also touch
record lows. Much of the eurozone is replicating the pattern seen in Japan as it slid into a
defation trap in the late 1990s.
It is unclear whether tumbling yields are primarily a warning signal of stagnation ahead or a bet
by investors that the European Central Bank will soon be forced to launch quantitative easing,
buying government bonds across the board.
25
Hmmm...
18 august 2014
Michel Sapin, Frances fnance minister, sent tremors through European capitals with a defant
warning that his country would no longer try to meet its defcit targets and would not infict
further damage on its economy by tightening into the downturn. I refuse to raise taxes to
close any budget gaps, he said.
What is absolutely necessary is to adjust the pace of defcit reduction to the exceptional
situation we are in today. Growth is too weak in Europe and infation is too low. We must
therefore stop reinforcing the causes of this depression, he told RTL television.
We must face the fgures in front of us with realism. The truth is that, contrary to the
forecasts of the International Monetary Fund and the [European] Commission, growth has
broken down, both in France and in Europe.
He halved his French growth forecast to 0.5pc this year
and to little more than 1pc next year, too weak to stop
unemployment hitting fresh highs. The IMF has already
warned that there will be no job growth until 2016.
Germany has so far refused to yield any ground on
austerity policies but is increasingly vulnerable.
Revised data show that the economy has been far
weaker than thought over the past two years, falling
into a signifcant double-dip recession last year.
Professor Paul De Grauwe, from the London School of
Economics, said: They are victims of their own folly.
Germany needs massive investment in its energy sector
and it should be doing it now while it can borrow for
almost nothing.
Mr De Grauwe said EMU elites have misdiagnosed the
cause of Europes intractable slump, blaming it on lack
of reform when it is in reality a demand crisis made
worse by a debt purge since the fnancial crisis. They
are doing everything they can to stop recovery taking
off, so they should not be surprised if there is, in fact, no take-off, he said.
It is balanced-budget fundamentalism and it has become religious. We know from the 1930s
that if everybody is trying to pay off debt and the government then deleverages at the same
time, the result is a downward spiral. The rigidities in the European economy have absolutely
nothing to do with the problem we face today.
Many German economists said one-off factors explained the sudden stop in the second
quarter but Berlins Institute for Economic Research (DIW) warned that deeper forces may be at
work, with a risk of recession as Germany suffers the blowback effects from sanctions against
Russia. The economy may shrink again in the third quarter, it said....
*** AMBROSE EVANS-PRITCHARD / LINK
26
Hmmm...
18 august 2014
Isis: a portrait of the menace that is sweeping my homeland
Abu al-Mutasim, 18, from a Syrian border town in the province of Deir Ezzor, joined the
rebellion against the regime of President Bashar al-Assad in early 2012. He left his family home
in Bahrain, where his parents worked, and fought for the Free Syrian Army for a few months
before joining the hardline group Ahrar al-Sham. Around the end of the year, disillusioned, he
went to visit his family. His parents banned him from travelling back to Syria. But last summer
he returned to join the Islamic State in Iraq and Syria (Isis), now renamed the Islamic State.
I asked him what he would do if his father were a member of Jabhat al-Nusra, al-Qaidas
offcial franchise in Syria, and the two met in a battle. I would kill him, he replied frmly.
Abu Ubaida [a prophets companion] killed his father in battle. What drives people such as
al-Mutasim? I faced this question directly recently, as I saw Deir Ezzor, the province where I too
come from, overrun by Isis, and as the group carried out some of the Syrian conficts grisliest
atrocities.
Isis, a Salaf jihadist force, evolved out of a group founded by Abu Musab al-Zarqawi, a
Jordanian militant who moved to Iraq after the US invasion of Afghanistan in 2002. He later
launched al-Qaida in Iraq, responsible for the bombing of the Askari mosque in Samarra that
triggered Iraqs 2006-07 civil war. Renamed the Islamic State in Iraq after its leader was killed
in a US raid in 2006, it was weakened in 2007 after US forces aligned with Sunni Iraqi tribes to
fght the group.
The Syrian confict revived Isis, which provided support to one of its members, Abu Mohammed
al-Jaulani, to form a group in Syria after the 2011 uprising. In April 2013 the groups current
leader, Abu Bakr al-Baghdadi, announced a merger between his group and Jabhat al-Nusra,
under the name of Islamic State in Iraq and Syria. The merger was rejected by Jabhat al-Nusra
and most of its foreign jihadists then defected to Isis. Since then Isis has been at war with
Syrian rebels to impose itself as a state that accepts no other group acting in rebel-held areas
unless they pledge allegiance to it. On 29 June, on the frst day of Ramadan, Isis announced
that al-Baghdadi was elected by the Shura Council as a caliph for all Muslims, and changed its
name to the Islamic State.
Deir Ezzor is the ffth province in Iraq and Syria so far to experience the groups model of
governance, a strategy so extreme that al-Qaida formally disavowed the group in February.
Isiss frst wave of sweeping victories was in the Sunni provinces of Nineveh and Salaheddin
in June. It then benefted from the massive stockpiles of weapons it captured, as well as
the momentum it gained in morale and fear, to conquer new areas in Syria, often with little
resistance. After taking over Deir Ezzor, the group is now advancing northwards in the Aleppo
countryside.
27
Hmmm...
18 august 2014
From a military perspective, Isis thrived on the disunity of the Syrian rebels and the
inconsistencies of their backers. When al-Baghdadi announced the merger between his group
in Iraq and Jabhat al-Nusra, the group started to act as a state in rebel-held areas. Despite its
low numbers, Isis established a reign of terror in many areas across Syria. It alienated most of
the rebel groups by creating smothering checkpoints, confscating weapons and imposing its
ideology on the local population, something Jabhat al-Nusra had avoided.
By the end of last year, all rebel groups declared war against Isis and drove it out of Idlib, most
of Aleppo and Deir Ezzor. But the war cost the rebels a lot: around 7,000 people were killed in
the battles against Isis and the main rebel coalitions started to disintegrate as a result of the
fghting. The Islamic Front, once the most powerful rebel coalition, is now a shell of its former
self. Jabhat al-Nusra, once the most effective rebel group, is struggling to halt the drifting of
its fghters or sympathisers to Isis, especially after it lost its stronghold in Deir Ezzor.
The disintegration of these groups was accelerated by the fact that many of their rank and fle,
as well as commanders, either sympathised with Isis or were reluctant to direct their guns to
any party other than the Syrian regime. After all, groups such as Ahrar al-Sham had links to al-
Qaida and held similar views to Isis, even if their leaders disputed with Isis over territories....
*** UK GUARDIAN / LINK
Ayell be back
David Cameron reckons people should think jolly hard before they vote in Scotlands upcoming
referendum on independence. As he and other unionist leaders often argue, the result on
September 18th will be irreversible and binding. Should Scots leave the United Kingdom and
then change their minds, they will just have to lump it. Such entreaties seem to be working:
the no to independence campaign has a comfortable poll lead.
A second warning lurks between the lines: if they vote
no, Scots had better accept that outcome, too.
There should be no neverendum; the term applied
to Quebecs decades-long deliberations over breaking
from Canada. Whether or not this message will go
heeded is less certain. The reason can be found in the
comparison between the yes and no campaigns.
In Bathgate, a commuter town in West Lothian, a
huddle in a windswept car park exemplifes Better
Together, the offcial pro-union outft. These activists
are motivated not by grand ideals but a grudging
acceptance that the referendum campaign needs to
be fought and won (the secessionist Scottish National
Party (SNP) called the vote after winning an unexpected majority in the Scottish Parliament in
2011).
28
Hmmm...
18 august 2014
Yes inspires the heart, no the head, argues Harry Cartmill, counting out leafets. Like
many, he is also active in the unionist Labour Party. The drill here is as in election years:
canvass swing voters by phone or in person, constantly refne the database and hit targets set
by headquarters. They may not be terribly impassioned, but unionists are disciplined, dutiful
and experienced.
If the no campaign is a machine, yes is a carnival. Though closest to the SNP, it extends
farther beyond party politics than Better Together. Yes Scotland, the offcial campaign, provides
local groups with materials but otherwise lets them do what they want. Many canvass, but
others prefer street stalls, flm screenings and pop-up independence cafes (see chart).
Campaigners have used crowdfunding websites to raise money for yet bolder projects. In
Dundee they converted an old fre engine into a battle bus, the Spirit of Independence. This
is understandable: most Scots say they do not support independence; Yes Scotland has to win
people over, not just induce them to vote.
Several larger nationalist initiatives have developed lives of their own. National Collective,
a gathering of creative types, has toured Scotland putting on pro-independence arts and
music festivals collectively known as Yestival. Other bodies, like Common Weal and Radical
Independence, are marshalling idealistic ideas for an independent Scotland and connecting the
yes campaign to other causes, like nuclear disarmament. From August 18th a group of these
sub-campaigns will hold daily press conferences.
A pro-independence gig in a muggy Edinburgh basement typifes this colourful scene. Sporting
political badges and bags marked Another Scotland is Possible, the crowd roars with laughter
as a series of lefty comedians lampoon the no camp. Better Together, deadpans Keir
McAllister, even sounds creepy: the sort of thing your psycho ex would say once theyd locked
you up in a dungeon with gaffer tape around your mouth....
*** THE ECONOMIST / LINK
Sichuan Plan to Spur Banks to Extend More Mortgage Loans
Falls Flat
The Sichuan governments plan to encourage mortgage loans by subsidizing banks has fallen fat
because bankers say they do not meet the application requirements.
The Finance Department of the southwestern provinces government promised to give banks a
one-off subsidy equivalent to 3 percent of the mortgage loans they made from July 1 to the end
of the year, a June 24 document shows.
The announcement was removed from the governments website this month following discussion
over whether it went too far trying to shore up a fagging property market. Critics also
questioned giving taxpayer money to banks.
29
Hmmm...
18 august 2014
So far, however, no banks in the province have accepted the offer....
The subsidies apply only to banks that lend to frst-time homebuyers at an interest rate of
no more than the central banks benchmark interest rate, which is 6.55 percent, the policy
document shows.
But the reality is that mortgage loan interest rates in Sichuan average 5 to 10 percent higher
than the benchmark interest rate, a local banker said. At the current subsidy terms, banks
have little incentive to cut their lending rates, he said.
The policy did not solve the fundamental problem that discouraged banks from extending
mortgage loans because they take up too much credit and do not generate as much proft,
another banker with a city commercial bank said.
Some bankers also noted that defaults on mortgage loans in Chengdu, the capital of the
province, were rising and, according to one of the bankers, even more than in coastal regions,
where properties are more expensive.
A number of other provincial and city governments have also urged bankers to extend more
mortgage loans, but none has said it would subsidize banks for doing so.
Meanwhile, banks should watch for risks associated with properties for commercial use, such as
offce buildings and shopping complexes, the banking regulators unit in Sichuan recently said.
Its data shows that the outstanding amount of loans owed by 447 commercial property projects
in the province has reached 49 billion yuan as of June 30, up 34.66 percent from the same date
last year. The growth rate exceeded the provincial average by more than 25 percentage points.
The supply of commercial properties has exceeded demand, the regulator said.
It also said investments in Chengdus commercial properties averaged 1.15 billion yuan per
project. New Century Global Center, a large and well-decorated multifunctional recreation
center with offce buildings, cost nearly 10 billion yuan.
Deng Hong, the billionaire behind the project, has been arrested for ties to Li Chuncheng. Li
was a former mayor of Chengdu and deputy Communist Party chief of Sichuan who has been
stripped of his party membership and removed from his posts amid an investigation into former
Politburo Standing Committee member Zhou Yongkang.
*** CAIXIN / LINK
30
Hmmm...
18 august 2014
The Boomerang Efect: Sanctions on Russia Hit German
Economy Hard
It wasnt that long ago that Kremlin offcials could hardly avoid laughing when asked about
the economic sanctions imposed on Russia by the West. As long as every NATO member state
jealously sought to protect its own business interests, things werent all that bad, they
gloated.
But since last week, their moods have darkened. For months, the European Union in particular
had been reluctant to enact effective penalties against Moscow. Last Wednesday, though, the
28 EU heads of state and government cleared a psychological hurdle: For the frst time, they
opted go beyond sanctions targeting individual political leaders in Moscow, adding prohibitions
against doing business with specifc Russian companies that contribute to the destabilization of
the situation in Ukraine. A concrete list is to be presented by the end of the month. European
development banks have also been banned from providing loans to Russian companies.
The US, for its part, penalized a dozen leading Russian
conglomerates, including oil giant Rosneft, natural
gas producer Novatek, Gazprombank and the weapons
manufacturer Kalashnikov. From now on, they are
forbidden from borrowing money from American
monetary institutions and from issuing medium- and
long-term debt to investors with ties to the US.
For the companies involved, the penalties are a
signifcant blow. It has become diffcult to acquire
capital in Russia itself, with both domestic and foreign
investors withdrawing their money from the country
in recent months. It is hardly surprising, then, that
Russian Prime Minister Dmitry Medvedev spoke of a
return to the Cold War and President Vladimir Putin
warned that sanctions usually have a boomerang effect.
Even prior to the sanctions, the Russian economy had been struggling. Now, though, the Ukraine
crisis is beginning to make itself felt in Germany as well. German industrys Committee on
Eastern European Economic Relations believes that the crisis could endanger up to 25,000 jobs
in Germany. Were a broad recession to befall Russia, German growth could sink by 0.5 percent,
according to a Deutsche Bank study.
The most recent US sanctions, warns Eckhard Cordes, head of the Committee on Eastern
European Economic Relations, have placed an additional strain on the general investment
climate. Particularly, he adds, because European companies have to conform to the American
penalties.
31
Hmmm...
18 august 2014
By last Thursday, just a day after the US sanctions were announced, the German-Russian
Foreign Trade Offce in Moscow was besieged by phone calls from concerned German companies
who do business with both the US and Russia. The German Chambers of Commerce and Industry
estimate that up to a quarter of German companies that do business abroad could be affected.
And the risks are signifcant, with large fnes threatening those who violate the American
sanctions, whether knowingly or not.
Stefan Fittkau, who heads the Moscow offce of EagleBurgmann, the Bavaria-based industrial
sealing specialists, says company sales have already plunged by 30 percent. Orders have been
cancelled or delayed -- or we simply dont receive them anymore, he says. Novatek, Russias
second largest natural gas company, for example, had hired EagleBurgmann to take care of
seals at a vast liquefed natural gas facility on the Yamal Peninsula in Siberia. Now, though,
doing business with Novatek is no longer allowed.
The inclusion of Rosneft on the list also affects more than a dozen German companies:
The construction frm Bilfnger maintains facilities for Rosneft, for example, while Siemens
received a 90 million contract to supply turbines and generators. In the end, both sides, the
Russians and the Europeans, will lose, says Frank Schauff, head of the Association of European
Businesses in Moscow.
Already, the uneasiness can be seen in the Ifo Business Climate Index. One in three of the
companies surveyed at the end of June said it expected adverse effects. Russian customers
have begun looking for suppliers outside of Europe, says Ulrich Ackermann, a foreign trade
expert with the German engineering association VDMA. They are concerned that European
companies, because of the threat of increased sanctions, wont be able to deliver....
*** DER SPIEGEL / LINK
The Great Chinese Exodus
Even when the emperors did their utmost to keep them at home, the Chinese ventured overseas
in search of knowledge, fortune and adventure. Manchu Qing rulers thought those who left must
be criminals or conspirators and once forced the entire coastal population of southern China to
move at least 10 miles inland.
But even that didnt put an end to wanderlust. Sailing junks ferried merchants to Manila on
monsoon winds to trade silk and porcelain for silver. And in the 19th century, steamships carried
armies of coolies (as they were then called) to the mines and plantations of the European
empires.
Today, Chinas borders are wide open. Almost anybody who wants a passport can get one. And
Chinese nationals are leaving in vast waves: Last year, more than 100 million outbound travelers
crossed the frontiers.
32
Hmmm...
18 august 2014
Most are tourists who come home. But rapidly growing numbers are college students and the
wealthy, and many of them stay away for good. A survey by the Shanghai research frm Hurun
Report shows that 64% of Chinas richdefned as those with assets of more than $1.6 million
are either emigrating or planning to.
To be sure, the departure of Chinas brightest and best for study and work isnt a fresh
phenomenon. Chinas communist revolution was led, after all, by intellectuals schooled in
Europe. Whats new is that they are planning to leave the country in its ascendancy. More and
more talented Chinese are looking at the upward trajectory of this emerging superpower and
deciding, nevertheless, that theyre better off elsewhere.
The decision to go is often a mix of push and pull. The elite are discovering that they can
buy a comfortable lifestyle at surprisingly affordable prices in places such as California and
the Australian Gold Coast, while no amount of money can purchase an escape in China from
the immense problems afficting its urban society: pollution, food safety, a broken education
system. The new political era of President Xi Jinping, meanwhile, has created as much anxiety
as hope.
Another aspect of this massive population outfow hasnt yet drawn much attention. Whatever
their motives and wherever they go, those who depart will be shadowed by the organs of the
Leninist state theyve left behind. A sprawling bureaucracythe Overseas Chinese Affairs Offce
of the State Councilexists to ensure that distance from the motherland doesnt dull their
patriotism. Its goal is to safeguard loyalty to the Communist Party.
This often sets up an awkward dynamic between Chinese arrivals and the societies that take
them in. While the newcomers try to ft in, Beijing makes every effort to use them in its
campaign to project its political values, enhance its global image, harass its opponents and
promote the use of standard Mandarin Chinese over the dialects spoken in Taiwan and Hong
Kong.
Politics, though, isnt the most important issue on the mind of Ms. Sun, a 34-year-old Beijing
resident whos bailing out. (She requested anonymity because she doesnt want publicity
to spoil her plans.) The main reason shes planning to pack up: Her 6-year-old daughter is
asthmatic, and Beijings chronic pollution irritates the girls lungs. Breathing freely is a basic
requirement, she says. The girl also has a talent for music, art and storytelling that Ms. Sun
fears Chinas test-driven schools wont nurture.
Recently, Ms. Sun few to San Francisco to shop for a school for her daughter, browse for
property and handle the paperwork for permanent U.S. residency. She insists that shes not
leaving China forevera sentiment expressed by many on their way out who see a foreign
passport as an insurance policy in case things go badly wrong in China.
Im just giving my family another option, she says....
*** WSJ / LINK
33
Hmmm...
18 august 2014
Anti-Putin Alliance Fraying: Germany, Slovakia, Greece,
Czech Republic Urge End to Russian Sanctions
Last week Germany reported that in the second quarter, its GDP declined by 0.2%, worse
than Wall Street consensus. This happened a few shorts days after Italy reported a second
consecutive decline in its own GDP, becoming the frst Europen country to enter a triple-dip
recession. Whats worse, Europes slowdown took place before the brunt of Russian sanctions
hit. Surely in the third quarter the GDP of Germany, a nation whose exports accounts for 41%
of GDP, will be even worse, with whisper numbers of -1% being thrown casually around, but one
thing is certain: Europe is about to enter its third recession since the Lehman collapse just as
we forecast at the end of 2013, a triple-dip which may become an outright depression unless
Draghi injects a few trillion in credit money (which will do nothing but delay the inevitable and
make it that much worse once the can can no longer be kicked), and unless normal trade ties
with Russia are restored.
Which means one thing: for Europe to resume the status quo, it needs to break away from
the western alliance and the sanctions imposed upon the Kremlin which solely beneft the
populist agenda of Washington, and certainly not Europe proper, which it is now quite clear, is
far more reliant on Russia than vice versa. it is also something Putin apparently was aware of
from the very beginning.
And now, that realization is starting to spread to Europes own countries, which while the
new cold war was only one of rhetoric were perfectly happy to go for the ride but now that
trade war has fnally broken out, suddenly increasingly more want out.
As we reported previously, it all started with the Greeks, a nation of heavy food exports into
Russia, who were the frst to announce their displeasure with the Stop Putin coalition:
[T]he moment Russia retaliated, the grand alliance started to crack. Enter Greece which
has hundreds of millions in food exports to Russia, and which was the frst country
to hint that it may splinter from the western pro-sanctions alliance. According to
Bloomberg, earlier today the Greek foreign minister and former PM said that we are
in continuous deliberations in order to have the smallest possible consequences, and if
possible no signifcant impact whatsoever.
And making it very clear that this will be a major political issue was a statement by
the main opposition party Syriza which today said that the Greek governments blind
obedience to the Cold War strategies of Brussels and Washington will be disastrous
for countrys agriculture. In a moment of surprising clarity, Syriza asked govt to
immediately lift all sanctions to Russia, as they dont contribute to a solution of the
Ukrainian crisis, and instead fuel an economic and trade war, in which Greece has
unfortunately become involved. Syriza concluded that the government hasnt weighted
Greeces special interests and bilateral relations with Russia.
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Hmmm...
18 august 2014
Then it was Slovakia whose premier Robert Fico criticized Ukraine for preparing sanctions
against Russian persons and companies, and he has called on Ukraine not to approve them,
expressing concerns that the legislation could result in a halt to natural gas supplies.
If the confict between Ukraine and Russia escalates, the legal norm could cause
interruption of natural gas supplies to Slovakia (and to Western Europe) via Ukraine
from Russia, he said.
Slovakia depends on supplies of Russian gas. However, if gas supplies via Ukraine were
interrupted, Slovakia would get gas through backfow from the West.
It is strange that a country that has signed an association agreement with the EU
and which we are trying to help is taking one-sided steps that endanger the individual
economic interests of EU member countries, instead of coordinating its approach with
the EU, Fico said.
We do not want to be a hostage in the Russian-Ukrainian problem. We expect Ukraine
not to adopt formal steps that, if implemented, can endanger our interests. A country
that has signed the association agreement should not behave like that, Fico declared.
Poland too complained last week, however for now it fnds the fault not with the alliance but
with Russia for daring to retaliate to western sanctions....
*** ZEROHEDGE / LINK
Another piece falls into place?
Among my lengthy collection of favorite sayings is this gem: You are entitled to your own
opinions but not your own facts! One application of this aphorism these days pertains to
whether or not the stock market is in the middle innings of a long-term (aka, secular) bull
market or if its in the penultimate inning when, appropriately enough, most teams go to their
bull pens.
Evergreen was fortunate last week to host GaveKal Researchs brainy young expert on monetary
and economy trends, Will Denyer. Will stayed at our home, giving me ample type to quiz him on
some of my most nagging concerns. Much of our discussions took place as we cruised gorgeous
Lake Washington in the kind of sublime summer weather only the coastal side of the Pacifc
Northwest can offer.
One of the topics I repeatedly broached with Will is toward the top of my worry list: The
possibility that much of the wealth creation weve seen over the past 30 years was due to an
unprecedented debt splurge one that is impossible to recreate (barring massive and painful
debt liquidation, that would set the stage for the next leveraging-up cycle).
35
Hmmm...
18 august 2014
Frankly, this is a topic that I dont think either Evergreen or GaveKal Research have spent
enough time analyzing, even though Ive raised it a few times in prior EVAs. (It was particularly
apt to ponder as we slowly motored by hundreds of multi-million dollar homes along the lake,
including one listed for a cool $32 million.)
Knowing Wills intellectual curiosity, he will refect deeply on whether weve hit the debt wall
in the weeks ahead, and produce a thorough and thoughtful reply. From his perspective, one
of his most pressing questions was whether the US economy and stock market is in a 2004 or a
2007 phase.
If it is the former, this would mean that both the economy and stocks have several more years
of good times ahead. If its 2007 dj vu, then investors should be battening down the hatches
as if they were on sail boats off the coast of Hawaii last week with twin hurricanes hurling
toward them.
As Ive repeatedly relayed, the co-founder of GaveKal Research, Anatole Kaletsky, frmly
believes we are in a 2004 situation. Will, however, as indicated above, is simply in analytical
mode, attempting to objectively weigh the data.
Im sure it will come as a surprise to precisely zero EVA readers that I made the case for it being
much more like 2007 than 2004. Whether its the hyperventilating condition of a wide range
of asset classescollector art, fne wine, rare books, luxury real estate, the riskiest stocks and
bonds or the similarly overheated action in new-issues and M&A (mergers and acquisitions),
the message is the same. This type of activity occurs much later than halfway through the ball
game.
Very recently, though, another piece of the puzzle of where we are in the market and economic
cycles has fallen into place. This involves the exceedingly vital element of credit spreads.
For those who are perplexed whenever they read this term in the fnancial media, or hear it
bandied about on CNBC, its actually a most simple metric. It is merely the difference between
the yield on US treasury bonds and non-government debt of the same maturity.
36
Hmmm...
18 august 2014
Up until the end of July, credit spreads were continuing to tighten as they have done
persistently since March of 2009, with a few hiccups along the way. There is little doubt this
tremendous spread compression has played a crucial role in levitating stock prices and many
other risk-assets as well.
As Ive conceded before, I really havent given the devil his due in this regard. While Ive
repeatedly carped that the Feds serial QEs have failed to achieve their main goal of lowering
mortgage rates, Ive failed to emphasize how successfully our central bank has crushed credit
spreads. This process has been a prime catalyst in forcing investors to venture into areas they
would normally avoid, like the gamiest stocks and bonds, in search of higher returns.
*** DAVID HAY / EMAIL FOR FULL ARTICLE
Europe risks deeper economic crisis as Russia buckles and
defaults mount in Ukraine
German bond yields plummeted to record lows and stock markets sold off across the world
after Ukraine and Russia came to the brink of war, threatening to set off a fnancial shock and
push Europe into deep recession.
Flight to safety sent yields on German 10-year Bunds tumbling to 0.97pc after Ukraine said
its artillery had destroyed a signifcant part of a Russian armoured column that crossed the
border into the Donbass. Yields on two-year notes turned sharply negative, implying that large
investors are willing to pay the German state to look after their money.
NATO chief Anders Fogh Rasmussen said the crisis had reached danger point, but stopped short
of calling it an invasion. I can confrm that last night we saw a Russian incursion, crossing of
the Ukrainian border, he said.
European foreign ministers warned that they would tighten the sanctions noose yet further
unless Russia draws back. Any unilateral military actions on the part of the Russian Federation
in Ukraine under any pretext, including humanitarian, will be considered by the European Union
as a blatant violation of international law, it said.
The DAX index of equities in Frankfurt buckled in the last minutes before the market closed,
ending the day down 1.4pc, and down 10pc since early July. The VIX volatility index surged
11pc. Yields on 10-year US Treasuries dropped to a fourteen-month low of 2.33pc, while the
DOW was off 114 points in early trading, with heavy falls for Russian stocks listed in New York.
The dramatic actions by Russia came as the Ukrainian armed forces surrounded Donetsk
and Luhansk, and appeared close to a fnal assault on rebel strongholds. The Russian foreign
ministry accused Ukraine of trying to block the entry of a humanitarian relief convoy, calling it
a provocation.
37
Hmmm...
18 august 2014
Just hours earlier Russian president Vladimir Putin had given a conciliatory speech and seemed
to be searching for a way out. The country has plunged into a bloody chaos, a fratricidal
confict, a humanitarian catastrophe has hit south-eastern Ukraine. We will do all we can to
stop this confict as soon as possible and end bloodshed in Ukraine, he said. Veteran Kremlin
watchers noted that the speech was not broadcast live in Russia.
The escalating clash is now haunting the European economy, already on the brink of fresh
recession, with a string of southern states in debt-defation. Italy has collapsed back into
a triple-dip recession, and Germany is contracting. Marcel Fratzscher, head of the German
Economic Research Institute (DIW) warned of technical recession after manufacturing orders
to the rest of the eurozone fell 10.4pc.
Gabriel Sterne from Oxford Economics warned that a full-blown confict in the Eastern Ukraine
could lop 2pc off eurozone GDP over the next two years through trade damage and fnancial
channels, with a contraction of 0.5pc in 2015. The markets have been far too sanguine about
the whole crisis, he said.
Mr Stern said Ukraines economy is likely to shrink by 8pc this year. He warned that there is now
a 50pc chance of default on the countrys external debts, partly owed to Russian institutions
and banks. This would send shock through the European fnancial system, and beyond. Franklin
Templeton, the global asset group, held $7.3bn of Ukrainian bonds at the end of 2013, insisting
that the country was in a sweet spot and would nurture good relations with Russia.
Ukraines hryvnia has crashed by 40pc since January, making it much harder for the government
and Ukrainian companies to cover foreign currency debts of $145bn. Ukraine has secured a
rescue from the International Monetary Fund of up to $18bn but this is likely to prove far too
little if the crisis deepens.
The agricultural group Mriya has already missed debt payments and has requested restructuring
on $650 of bonds. A several other companies are on the brink. This is going to get worse, but it
will be case by case. The IMF may have to impose a Greek-style PSI (haircut) on holders public
debt in the end, said Tim Ash from Standard Bank.
Chris Weafer from Macro Advisory in Moscow said the Russian economy is effectively frozen
by sanctions. The country faces a fresh threat as oil prices drop to $102, from $115 earlier
this year. If it cracks below $100 it could fall a lot further, Russia will come under serious
pressure, he said.
*** AMBROSE EVANS-PRITCHARD / LINK
38
Hmmm...
18 august 2014
Charts That Make You Go Hmmm...
Todays University of Michigan consumer sentiment report demonstrated
how the current geopolitical uncertainty is impacting US consumers. The Current Conditions
subindex is now at the highest level since the recession (beating forecasts), while the
Expectations subindex declined sharply (worse than forecast). US consumers are feeling
better about their current situation but have become increasingly jittery about the future.
While the current events in Eastern Europe and the Middle East are likely to have a smaller
impact on the US than the EU, Americans have certainly become more cautious. It remains to
be seen how much of this decline in sentiment will translate into weaker consumer spending.
In the post-recession economic climate it doesnt take much for US households to pull back
spending.
*** SOBERLOOK / LINK
39
Hmmm...
18 august 2014
This past Monday, Stanley Fischer, the offcial who took over as Vice Chairman of
the Federal Reserve in June, commented that the weak economic recovery might simply
be continued fallout from the fnancial crisis and subsequent recession. However, it is also
possible that the underperformance refects a more structural, longer-term shift in the global
economy.
Much ink was spilled in response.... [A]n interesting take came from Jeffrey Snider. To wit:
That should be the one unambiguous observation for all of the monetary pieces of
this grand experimentation; despite historically low interest rates, a qualifer that
disqualifes monetary policy of having the effects it both intends and expects. In his
conclusions, despite all these allusions to unspecifed problems and defciencies, Fischer
is both still somehow supportive of the idea QE was successful and more than sanguine
about the further effcacy of related policy prescriptions, including the growing chorus
turning fad of macroprudential policies.
No theories were expended by Mr. Fischer as to what may actually be drastically altering
the trajectory of investment in the US and globally, these unnamed supply structures
The lack of actual speculation on this account is quite revealing, as it is in the course of
observing it in context.
Since the start of QE2 in 2010, the 500 companies of the S&P 500 have repurchased
an astounding $1.5 trillion in stock (through only Q1), sending the index soaring while
at the very same time confounding economists as to why the productive base in the US
and globally may be so eroding. That this has been done via cheap debt also indicts the
monetarist impulse of historically low interest rates as a means for economic growth
that is effcient, and thus actually sustainable.
*** JEFFREY SNIDER (VIA DOUG SHORT & LANCE ROBERTS) / LINK
40
Hmmm...
18 august 2014
Many consider deliberate currency devaluation to be a tool that can help jump
start a nations economy. The aim of such a practice is to increase exports while encouraging
domestic purchases by making goods outside of the country relatively more expensive.
However, like any good prisoners dilemma, this might be the case if only one country acted
in isolation. The reality is that many major countries engage in the same policy, and the end
result as the infographic details is a race to the bottom.
So far the winner in the race is...
*** VISUAL CAPITALIST / LINK
41
Hmmm...
18 august 2014
Words That Make You Go Hmmm...
Jim Rickards talks with Peter Schiff
about currency wars, the future of the dollar,
and, of course, gold. His comments on US gold
reserves (specifcally their deliverability or
lack of it) and Germanys seemingly aborted
repatriation attempts are fascinating and
couldnt have been timed better, given this
weeks theme.
CLICK TO WATCH
Fleck is back (and its about damn
time).
As always, Bills sanguine wisdom is a breath
of fresh air as he discusses the two directions
the bond market is being pulled in, the
dangers of expressing your view right now,
whether hyperinfation is a possibility, and
of course gold.
No hyperbole, no crazy predictions, just
smart, level-headed analysis of an always-
confusing picture.
CLICK TO LISTEN
Secular or cyclical? John Burbank
of Passport Capital parses the dilemma facing
the Fed and picks apart the recovery, which
he feels is anemic.
Bullish? Yes... but only in a few very select
places.
John sees a series of big red fags fying in all
sorts of places nowhere more so than in the
case of liquidity, and that makes him think of
1987.
CLICK TO WATCH
42
Hmmm...
18 august 2014
and fnally...
Folks, meet Baxter. Baxter is coming for you. Well... not YOU, exactly, and, come
to think of it, not Baxter, exactly; but Baxter and his ilk are coming for your job, and in this
fascinating video (courtesy of Mike Shedlock) we get a glimpse into the future of robotics.
What a world it will be...
CLICK HERE TO WATCH VIDEO
Hmmm...
43
Hmmm...
18 august 2014
Grant Williams
Grant Williams is the portfolio 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 frm and its investors.
Grant has 28 years of experience in fnance 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
PDAC 2014 Presentation: Gold and Bad: A Tale of Two Fingers
ASFA Annual Conference 2013: Wizened in Oz
66th Annual CFA Conference, Singapore 2013 Presentation: Do the Math
Mines & Money, Hong Kong 2013 Presentation: Risk: Its Not Just a Board Game
As a result of my role at Vulpes Investment Management, it falls upon
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commentary I write in the pages of Things That Make You Go Hmmm... may
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44
Hmmm...
18 august 2014
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