Hmmm…

THINGS THAT MAKE YOU GO

A walk around the fringes of finance

“At the risk of sounding like a broken record, let me say it

yet one more time: Congress told us to impose limits. We
haven’t done it, and we need to do something—NOW. I
get it, I get it, I get it—there is a problem with not having
swaps data—and that necessarily implicates some kind
of delay. But again, as I’ve said numerous times, there are
things we can, must, and should do now (indeed, should
have done months ago) that are well within our power,
authority, and capabilities..”
– BART CHILTON, CFTC COMMISSIONER, MAY 19, 2011

“ It really is the political class all over

the world we have to watch”
– John Mauldin

“A hundred wagon loads of thoughts will not pay a single

ounce of debt”
– Italian Proverb

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 THINGS THAT MAKE YOU GO Hmmm... 2.

152 years ago today, the elegantly-moustached gentlemen

you see here was born in Edinburgh, Scotland - the youngest of ten
children. His father, Charles Altamont Doyle was an Englishman of Irish
descent while his mother, born Mary Foley was also a native of the
Emerald Isle.
After studying medicine at Edinburgh University, the young doctor
moved to Portsea in the South of England to open up a medical practice
at 1, Bush Villas.
During his spare time, the doctor liked to write stories and, in 1887,
at the tender age of 27, a short story he had taken three weeks
to write was published in the Beeton’s Christmas Annual.
The story was entitled ‘A Study In Scarlet’ and it introduced the
world to both the author, Arthur Conan Doyle, and to a sleuth
who was to become one of the most famous, well-loved and en-
during literary characters of modern times - Sherlock Holmes.
The title of the novel came from a speech Holmes gives to his
faithful companion, Dr. Watson, in which he says:
“There’s the scarlet thread of murder running through the colourless skein of life, and our duty is
to unravel it, and isolate it, and expose every inch of it.”
However, for the purposes of today, we are going to concentrate on another of Conan Doyle’s 56
stories.
The story concerns the mysterious disappearance of a thoroughbred racehorse on Dartmoor and the
murder of the horse’s trainer, John Straker, who was killed by a great blow to the skull. It contains
one of Conan Doyle’s most effective and famed plot points - the dog that didn’t bark (a situation that
inspired Mark Haddon’s best-selling book of 2003):
Gregory (Scotland Yard detective): “Is there any other point to which you would wish to draw my
attention?”
Holmes: “To the curious incident of the dog in the night-time.”
Gregory: “The dog did nothing in the night-time.”
Holmes: “That was the curious incident.”
(SPOILER ALERT: If you HAVEN’T read the story, the next paragraph will reveal the killer’s identity so
skip it if you wish to keep the mystery intact)
In the denouement of the story, Holmes explains to his baffled audience that the fact that the dog
didn’t bark suggested it knew the murderer and that this one vital piece of evidence had led Holmes
to deduce that Straker’s killer was, in fact, the missing horse itself, which Straker had been trying to
make lame so he could make a fortune gambling against his charge when it ran in The Wessex Cup.
The name of the missing thoroughbred was Silver Blaize.
And so, the man trying to tamper with Silver Blaize in order to make a fortune in ill-gotten gains ended
up being the architect of his own downfall.

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 THINGS THAT MAKE YOU GO Hmmm... 3.

So here we are, a little over a century and a half later right smack in the middle of our own
little mystery.
We have a ‘racehorse’ called ‘Silver’, several trainers who, it would appear, have been looking to make
a fortune of their own by ensuring an altogether contrived outcome, and, perhaps most striking of all,
we have our own dog that didn’t bark in the shape of the CFTC.
For two years, a CFTC-led investigation has supposedly been in progress to investigate the manipula-
tion of the silver futures market. This process has been conducted behind closed doors and, to date,
there has been no barking of any kind by the watchdogs charged with protecting our racehorse.
The recent volatility in silver has been fascinating to watch. Late entrants into the silver market were
burned for 30% in the space of a week and cries of a ‘bubble’ bursting were everywhere (notwith-
standing the simple fact that this ‘bubble’, in a commodity that has been around since the beginning
of time, seemed to have both formed and burst inside a couple of months).
Peter Schiff had this to say about the silver ‘bubble’:
Recent price spikes and increased volatility in gold and silver markets have many observers predict-
ing a dramatic popping to what they claim to be a precious metals bubble. However, after having
sold physical precious metals to the public for the past five years, I can attest that none of the
characteristic signs that have typified bubbles in the past are visible in today’s market.
Thought metals prices have indeed risen strongly; those gains have come from ridiculously low
prices reached at the end of a twenty-year bear market. To consider metals prices too high in this
market makes as much sense as saying current technology stock valuations are too low relative
to their 2000 peaks. In fact, despite the current run-up, precious metals prices remain well below
normal levels when measured against other asset classes.
Except..... Schiff said those words in 2006 - April 26, 2006 to be precise, when silver had just corrected
from $14.45 to $12.25 in a single day - a 15% correction. The fact that silver had begun the year trad-
ing at $9 was enough for the calls of a bubble bursting to play to eager audiences. But here we are,
five years later, talking about another ‘pop’ with silver trading roughly 300% higher that it was after
the 2006 ‘bubble’ burst.
But let’s get back to our mystery, and specifically the dog that didn’t bark - the CFTC.

Back in 2004, the CFTC released the results of their first investigation into alleged
manipulation of the silver futures market. Director of Market Oversight, Michael Gorham, released a
statement in which he wrote:
There is no evidence, however, that silver futures prices have been distorted relative to cash silver
bullion prices, i.e., prices that represent the value of “real” silver...
The CFTC has closely monitored the silver market, both in terms of trading activity and price re-
lationships. We have found no evidence of manipulation, and those making the allegation have
provided no evidence of manipulation.
Three weeks later, and a mere two years after the creation of the Division of Market Oversight, Gor-
ham resigned to become the Director of the Center for Financial Markets at the Illinois Institute of
Technology in Chicago, Illinois.

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 THINGS THAT MAKE YOU GO Hmmm... 4.

Fast forward four years and, with the claims of manipulation not satisfied by the previous investiga-
tion, the CFTC released another report - unattributed to any individual. This time, the outcome was
similar:
As with the analysis of the silver markets in 2004, staff again concludes that there is no evidence to
support the argument that silver futures prices are being manipulated downward...
Further, analyses of trader concentration levels and relationships between short open interest lev-
els and prices also fail to reveal a significant downward influence on silver futures prices caused
by short futures traders.
In both reports, the CFTC compared the NYMEX futures price to the LBMA price which they maintain
is the ‘cash price’ of silver, but, as the action in the recent decline has confirmed, when the ‘cash’
price falls dramatically, the premium to spot prices for true physical silver in coin or bar form merely
expands to negate a large part of the fall in the paper market.
After a couple of false starts, the CFTC were charged with imposing position limits and were given
until January 2011 to do so. Funnily enough, the January deadline came and went with nothing more
than a proposal for discussion and that proposal largely failed to address any of the issues being
claimed by those crying ‘manipulation’ as it essentially grandfathered in all the existing positions
about which the outrage arose in the first place.
The CFTC proposals stipulate the following:
Spot-month position limit levels set at 25% of deliverable supply for a given commodity, with a
conditional spot month limit of five times that amount for entities with positions exclusively in
cash-settled contracts
What this essentially means is that anybody that has no intention of taking physical delivery of a
commodity will NOT be allowed to build a position that is greater then 125% of the total deliverable
supply while anybody looking to buy physical metal can only buy 25% of that same supply.
They also threw in this little grenade:
Exemptions for bona fide hedging transactions
(based on the Dodd-Frank Act’s new requirements
for such transactions) and for positions that are es-
tablished in good faith prior to the effective date of
specific limits adopted pursuant to the proposed
regulations.
In other words, the existing short positions allegedly
held by JPMorgan and HSBC amongst others about
which the complaints were made, are unaffected by
the new rules as they were already established.
The WHAT??
Far from being the dog that didn’t bark, the CFTC
have become the dog that held the door open for
the burglars while they ransacked the house.
Elsewhere though, there is another type of bark-
ing to be heard as the physical stocks of silver on
SOURCE: 24HOUR GOLD/COMEX

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 THINGS THAT MAKE YOU GO Hmmm... 5.

the COMEX continue to dwindle - from 87,000,000 ounces

in 2009 to a little over 32,000,000 ounces a mere 2 years
later and sooner or later, if the volatility in silver continues,
the answer to the CFTC’s investigation will be discovered not
behind closed doors, but in the full glare of the spotlight as
the amount of silver available to settle futures expiry gets
dangerously close to a shortfall. The more demand we see
for physical silver from the likes of China, the more danger-
ous it gets to allow huge structural shorts to persist.
Perhaps that’s why Commissioner Bart Chilton spoke this
week in urgent tones about the need to address the issue
of position limits?
Silver now seems to have stabilized and, with first day notice
for the July contract rapidly approaching, it looks as though
the battle will once again be joined as silver continues to
build a base between $33 and $35 (incidentally, a level that
is well and truly above its steep trendline, absent the sharp
spike to $50 (chart, left)).
One thing is for certain, the current trend simply CANNOT
continue as the stocks of available silver in the COMEX ware-
SOURCE: JESSE
houses continue to plummet regardless of fluctuations in
the paper price. Sooner or later either the CFTC dog barks, or the market dog will - and THAT will be
quite something to hear.
O O O O O O O O

All over Europe this week however, the sound of barking dogs has been deafening as
the Eurozone continues its slow-motion disintegration.
Greek bond yields soared further, closing in on 25%, as another comedy downgrade from the ratings
agencies hit home, the ECB threatened to refuse Greek sovereign debt as collateral which seems at
first glance as perhaps a threat too far from an organization becoming more divided by the day, Italy
was dragged back kicking and screaming into the limelight by S&P and in Spain the protests against
austerity by an increasingly agitated and consistently unemployed populace continued to worsen.
John Mauldin pointed out, in yet another excellent letter this weekend, the pressure on the Eurozone:
Greece will need another 30 billion euros early next year, on top of the current 330 billion euros
they owe and on top of the 80 some odd billion already committed. To get access to that money,
the Greeks will have to make asset sales of state-owned companies worth some 50 billion, plus
even more cuts in government spending, coupled with more taxes.
The chair of the eurozone finance ministers committee, Jean-Claude Junker, acknowledges what
everyone knows. Greece cannot pay its debt under the current debt burden, and the private mar-
ket is not going to give Greece any more money (debt) at anything close to terms that make sense
for Greece.
With regard to the threats of the ECB towards Greece, John had this to say:
If the ECB did follow through with its threat, Greece’s banking system would fail, said Jacques Cail-

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 THINGS THAT MAKE YOU GO Hmmm... 6.

loux, an economist at Royal Bank of Scotland. Greek banks have borrowed some €88bn from the
ECB. “This is the last card in the hands of the ECB in warning about the implications of a restructur-
ing,” he said...
Fifty plus 80 is €130 billion (with possible double counting of some of this, as some Greek bank
debt may be Greek government bonds. Note that the paid in capital to the ECB is only €10 billion).
The market is pricing in a 50% haircut to Greek debt, which technically would make the ECB far
more insolvent than Lehman! Member states (including Greece, Portugal, and Spain) will have to
pony up tens of billions more to recapitalize the ECB, or the ECB will have to print money. Now do
you understand why the Germans and the board of the ECB are so against restructuring?
Europe continues to be a basket-case - held together by political will and a generation in power for
whom World War II is still a vivid memory. As this generation gives way to a younger one that has no
recollection of the strife that tore Europe apart 70 years ago, one cannot help but wonder whether
the desire to hold together an alliance that many of them see as the cause of their own isolated prob-
lems will be strong enough to do so.
This weekend’s Spanish regional elections will deliver a crushing blow to their respective govern-
ments and, with rumours of hidden deficits swirling around that could really open a can of worms, it
is clear that the problems in Europe will come to a head sooner rather than later.
Whether it is Greece alone or the contagion spreading to Ireland and Portugal or even if either Spain
or Italy come screaming to the fore, it is clear that Europe has some major issues to work out in its
immediate future and one has to wonder whether political will is going to be enough to hold it all
together.
We shall see.
Sooner than we might like.

In today’s Things That Make You Go Hmmm..... we take a look at the S&P downgrade
of Italy, the potential for some nasty skeletons in Spain’s fiscal closet and get a roadmap of what hap-
pens when Greece defaults which is pretty scary stuff.
Away from Europe, we look at plummeting Chicago house prices, the problems facing the stocks on
China’s ChiNext exchange, the Yuan’s road to convertibility and we listen in on the dinner conversa-
tions of RBC Governor Mark Carney as well as finding out just how difficult it is trying to freeze Moam-
mar Gadhafi’s assets.
Forbes explains why Goldman Sachs are becoming harder to defend as public opinion continues to
shift, John Williams of ShadowStats waxes lyrical about his favourite subject - hyperinflation - and we
hear from Puru Saxena, John Embry and Rick Rule on a wide range of topics encompassing QE3, gold,
silver, uranium and the dollar.
We have some fascinating charts of the US long bond, European budget cuts and unemployment
rates and, in gold and silver, we look at the rampant Chinese buying of bullion and update the ‘Days
To Cover’ chart of various commodities that demonstrates just how much short-covering has been
done in silver particularly

Avanti!

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 THINGS THAT MAKE YOU GO Hmmm... 7.

Contents 22 May 2011

It’s Getting Harder To Defend Goldman Sachs

Hyperinflation & US Dollar Collapse
The Complicated Hunt For Gadhafi’s Billions
Spain Vote Threatens To Uncover Debt
Italy Outlook Revised To Negative By S&P; Ratings Affirmed
In Private, Mark Carney Offers A Less Rosy Outlook
Behind The Lagging Growth For ChiNext Stocks
Chicago-Area Home Sales, Prices Plummet
What Happens When Greece Defaults
Yuan May Be Fully Convertible In ‘3-5 Yrs’
Charts That Make You Go Hmmm.....
Words That Make You Go Hmmm.....
And Finally.....

The Gonnie, Gonnie Banks

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

41 Atlantic Southern Bank, , GA 741.9 707.6 273.5

42 First Georgia Banking Company, GA 731.0 702.2 156.5

43 Summit Bank, Burlington, WA 142.7 131.6 15.7

Total Cost to FDIC Deposit Insurance Fund 445.7

22 May 2011 7
 THINGS THAT MAKE YOU GO Hmmm... 8.

After reading Money and Power: How Goldman Sachs Came To Rule the World by
William D. Cohan, I can no longer defend Goldman Sachs and the status quo on Wall Street.
As Congress and the media were debating the controversial and populist-tinged Dodd-Frank Financial
Regulation bill, my first inclination was to defend Wall Street and traders overall. I didn’t like Dodd-
Frank’s Volcker Rule, which divests proprietary trading and alternative investments (hedge funds and
private equity) from Wall Street (commercial) banks. I believed the bill was similar to reinstating the
Glass-Steagall Act separating investment banking and trading from commercial banking.
I argued that banks need trading profits — where the main profits have been the last decade — to
offset losses on lending, especially during a recession. But now I agree with Chairman Volcker. We
can’t be certain Goldman Sachs CEO Blankfein and other sleuths won’t steal client inside information
to front run, compete, and trade against their clients and the public’s interests. The Chinese Wall is
the biggest myth and lie on Wall Street.
What’s clear to me now after learning more is that Wall Street embraced
... The entire firm came around and abused conflicts of interest for its own private good, directly at the
to believing the great mortgage great expense of its clients and the public.
bubble was a house of cards Goldman should be tarred and feathered over the 2008 meltdown. Like
ready to collapse others on Wall Street, Goldman had an active mortgage department de-
signing, packaging, securitizing, promoting, and selling mortgage-backed
securities and related synthetic derivatives. Goldman’s trading desk conceived, promoted, and sold
various protection strategies as market maker, agent, and principal.
As the housing bubble got close to bursting, Goldman became enlightened sooner than other banks,
partially from witnessing the “big short” strategies of its infamous hedge-fund client John Paulson.
The entire firm came around to believing the great mortgage bubble was a house of cards ready to
collapse, based on delinquencies, no-doc loans, fraud, and more. This is where Goldman made a seri-
ous error in judgment.
Goldman had two choices: discontinue the sale of junk-mortgage securities and alerting the govern-
ment, media, public, their clients, and investors; or, keep it a secret, sell off junk-mortgage securities
to investors, profit from the inevitable bursting of the bubble, and steal and even front-run part of
Paulson’s trade.
O O O FORBES / LINK

With so many questions surrounding the U.S. dollar and rising inflation, today King
World News interviewed internationally followed John Williams of Shadowstats to get his take on the
U.S. dollar, Fed and hyperinflation. When asked about the tremendous inflation globally Williams
stated, “The dollar has already been a factor for the major inflation that we are seeing now, and the
weakness that we have seen in the dollar up to now has primarily been as a result of the Fed’s efforts
to debase the dollar. A weaker dollar has spiked oil prices and we are seeing the highest inflation -- as
the government reports it -- in the last 3 years, and it’s going to get a lot worse.”
When asked if the US dollar will collapse Williams replied, “If we end up in the hyperinflation that I
think we’re going to see, then, no, the dollar won’t survive. They’ll probably come up with another
currency at some point as they reorganize the global currency system. For this to work I expect it to
have some backing of gold in order to sell this concept to the public, but the dollar in its current form

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 THINGS THAT MAKE YOU GO Hmmm... 9.

would not survive a hyperinflation.”

When asked about the timing of hyperinflation in the United States Williams stated, “That’s the type
of thing that could happen at any time, all of the fundamentals are in place. I do think we’re going to
have a dollar crisis. I can’t give you the precise timing on it, but circumstances are negative for the
dollar in terms of relative political stability. When you look at our government here we can’t control
the fiscal conditions. Our trade deficit is continuing to deteriorate, that’s a negative for the dollar,
inflation is rising on a relative basis, that’s a negative for the dollar.”
The Fed although it is officially ending QE2, most likely is going to come back with a QE3 and that will
debase the dollar and if we are going to debase the dollar the rest of the world generally is not going
to want to hold it.”
When asked how quickly could we see a dollar collapse Williams responded, “It could happen very
quickly, but they (the Fed) will try to forestall it as much as they can. When you do get a real panic it
may not be containable. In terms of the hyperinflation I don’t think it will be held off beyond 2014.
What we’re now seeing in the pickup in inflation here eventually will be seen as the beginnings of it.”
O O O KING WORLD NEWS / LINK

The German bank Commerzbank received an unusual transfer order in late Febru-
ary. The amount was €1.9 million ($2.7 million) and the bank was instructed to immediately transfer
the funds from a Commerzbank account to a foreign account with another bank.
The holder of the Commerzbank account was Saif al-Arab al-Gadhafi, born in 1982, the presumed
youngest son of Libyan autocrat Moammar Gadhafi. The dictator’s son, who had been living in a villa
in Munich’s Waldperlach neighborhood, suddenly left Germany and returned to Tripoli -- a sad loss for
those members of Munich’s jet set that had become accustomed to attending the younger Gadhafi’s
wild parties.
Commerzbank was reluctant to transfer the money and notified the authorities. The German Minis-
try of Economics, which has jurisdiction over such matters under the Foreign Trade Act, ordered the
account frozen, adding that Gadhafi’s son had to be prevented from removing the funds from the
country. As a result, the money is still collecting interest in the
Commerzbank account today.
The move, which occurred a few weeks ago, marked the begin-
ning of a global treasure hunt. Throughout the Western world,
investigators are now tracking down the money the Gadhafi clan
earned in the oil business in past decades and set aside. And it’s
not just the Gadhafis. In addition, there are worldwide efforts un-
derway to uncover the silent reserves of other potentates.
The United States has already frozen Gadhafi regime assets worth
more than $60 billion (€42 billion), which includes about $32 bil-
lion in the United States, close to $20 billion in Great Britain and
$1.7 billion in Austria. The amount of Libyan money in German
banks, almost $9 billion, is surprisingly large, given that Gadhafi’s
terrorists blew up the La Belle nightclub in Berlin more than 25
years ago, killing three and injuring 230.
But even as the search for the Gadhafi billions progresses, what
CLICK TO ENLARGE SOURCE: DER SPIEGEL

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 THINGS THAT MAKE YOU GO Hmmm... 10.

will happen with the frozen funds remains completely unclear. Serious problems have arisen in con-
nection with the attempt to deprive the Gadhafi clan of its funds.
Indeed, the fortune hunters could suffer a setback, particularly given that it has become increasingly
clear how close relations were between the Libyan dictator and Western countries. Furthermore,
Gadhafi’s cash is not the direct result of fraud, but came from profits from his perfectly normal busi-
nesses.
O O O DER SPIEGEL / LINK

Weekend elections that threaten to drive Spain’s ruling Socialist party from
power in several regions and cities also promise a potentially nasty surprise: the revelation of piles
of undisclosed debt in local governments that could undercut the country’s drive to avoid an interna-
tional bailout.
Five months ago, a government change in Spain’s Catalonia region revealed a budget deficit more
than twice as big as previously reported. Now, a growing chorus of economists, local politicians and
business leaders say that new governments are likely to discover, as Catalonia did, piles of “hidden
debt” owed to health clinics and other suppliers.
Economists, analysts and anecdotal reports from companies that supply local governments suggest
there is widespread, unrecorded debt among once-free-spending local governments. Some compa-
nies are complaining that fiscally frail administrations are pressuring them to do business off the
books and not immediately bill for goods and services, said Fernando Eguidazu, vice president of the
Circulo de Empresarios business lobby group in Madrid.
Such bills could add tens of billions of euros to the official debt fig-
ures reported by local and regional governments. If such skeletons
come out of the closet in coming weeks, Spain’s cost of funding
could continue to rise—throwing the country back into the limelight
after it has struggled to demonstrate it doesn’t need to be bailed
out like Greece, Ireland and Portugal.
“Investors are worried about the regions, given that there has a
been precedent in Spain and other countries of debt not being re-
corded properly,” said Luigi Speranza, a BNP Paribas economist.
Sunday’s elections, which will be held in 13 of the country’s 17 re-
gions and its more than 8,000 municipalities, threaten to be hard on
Prime Minister José Luis Rodriguez Zapatero’s Socialists. Polls show
Socialist-led governments could be unseated in Castilla-La Mancha,
the Balearic Islands, Asturias and Extremadura regions. Undermined
by a 21% unemployment rate and a perceived slowness in react-
SOURCE: WSJ ing to the country’s economic crisis, the Socialists could also lose
control of the municipal governments of Barcelona and Seville, the
country’s second- and third-largest cities.
The social fallout from the poor economic conditions is evident in Spain this week as waves of protests
swept the country. Young people took to main squares in Madrid, Barcelona and Valencia on Thursday
to protest unemployment among those in their 20s and 30s, which has reached 50% in some areas,
and the government’s austerity program. Demonstrators are hoping their ranks will swell over the
weekend as people head to the polls.
O O O WSJ / LINK

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 THINGS THAT MAKE YOU GO Hmmm... 11.

Italy had its credit-rating outlook lowered to negative from stable by Standard & Poor’s,
which cited the nation’s slowing economic growth and “diminished” prospects for a reduction of gov-
ernment debt.
S&P affirmed the country’s A+ long-term rating, the fifth highest, and its top-ranked A-1+ short-term
rating, the company said in a statement today.
“Italy’s current growth prospects are weak, and the political commitment for productivity-enhancing
reforms appears to be faltering,” S&P said. “Potential political gridlock could contribute to fiscal slip-
page. As a result, we believe Italy’s prospects for reducing its general government debt have dimin-
ished.”
The Italian economy expanded 0.1% in the first quarter, less than econo-
... The euro region’s third- biggest mists forecast, as gains in exports failed to offset weak domestic demand.
economy won’t return to its The euro region’s third- biggest economy won’t return to its pre-recession
pre-recession level for at least level for at least another two years, and the $2.3 trillion economy needs to
another two years raise productivity, the Organization for Economic Cooperation and Devel-
opment said this month in a report.
Fitch Ratings today cut Greece’s long-term debt rating to B+, four notches below investment grade,
and placed it on rating watch negative. Even a voluntary extension of the country’s bond maturities
would be considered “a default event,” the rating company said in a statement. Greek 10-year bond
yields surged to a record 16.6%.
In Italy, “diminished growth prospects stem from what we consider to be a lack of political commit-
ment to deregulating the labor market and introducing reforms to boost productivity,” S&P said. “We
believe measures to reduce the bottlenecks and rigidities in Italy’s economy are especially important
in light of Italy’s limited monetary flexibility.”
The negative outlook implies a one-in-three chance that Italy’s ratings could be lowered within the
next 24 months.
On May 5 Prime Minister Silvio Berlusconi’s cabinet, aiming to spur growth and productivity in the
economy, passed a plan to cut bureaucracy and offer tax breaks for companies that invest in research.
Finance Minister Giulio Tremonti, who avoided the kind of stimulus policies that inflated budget defi-
cits in other euro nations, said the plan won’t require any increase in spending.
The government last month cut its forecast for economic growth in 2011 to 1.1% and in 2012 to 1.3%
from previous estimates of 1.3% and 2% respectively.
O O O BLOOMBERG / LINK

Mark Carney gave a few members of the public an unusually candid glimpse into his
thinking at a private dinner Wednesday night, during which he said people should not judge how well
Canada emerged from the recession for years because the financial crisis is not really over.
Speaking at a fundraising event held by the United Jewish Appeal Federation of Greater Toronto, Mr.
Carney, the Bank of Canada Governor, painted a stark picture of the global rebound. He also sug-
gested that America’s deficit troubles – which he warned this week could threaten Canada’s economy
– would probably not be addressed until after next year’s presidential election.
Those assertions are not particularly outlandish to anyone who has closely followed economic news

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 THINGS THAT MAKE YOU GO Hmmm... 12.

on either side of the Canada-U.S. border. But the statements were more blunt than Mr. Carney tends
to be when knows his comments are fair game for public consumption – which is why, despite the
presence of economists and Bay Street types, the invitation to the dinner stipulated that the com-
ments should be “off the record.”
To the central bank’s chagrin, one attendant failed to notice that condition until Thursday morning,
moments after he e-mailed a synopsis of Mr. Carney’s refreshingly revealing remarks to a long list of
clients.
“He doesn’t see the U.S. as addressing its fiscal issues until after 2012, and is con-
... a full recovery from the cerned that the bond market isn’t sending America the signal that it needs to act
financial crisis and the due in part to huge central bank holdings of Treasuries,” Avery Shenfeld, the chief
global downturn will economist at CIBC World Markets, said in the widely circulated note.
take many years, if not “The tone was generally pessimistic on developed economy prospects, saying that
decades we are still in the financial crisis (likely alluding to the hangover from fiscal stimu-
lus in terms of sovereign debt, and the U.S. housing mess), and that judgments on
how well Canada came through it should probably not be made until we can look back five years from
now.”
Once he realized his mistake, Mr. Shenfeld asked those receiving his initial e-mail not to cite it. But the
cat was out of the bag, and other economists at the session confirmed the account.
The incident illustrates the dicey issue of transparency for central bankers such as Mr. Carney, who
operates at arm’s-length from his political masters in Ottawa. The comments about Canada’s recovery
run counter to some of the more triumphant rhetoric of the Conservative government, which recently
won a majority on a platform of sound economic management in the downturn.
Bank of Canada spokesman Jeremy Harrison said it’s important that senior officials of the central bank
meet with Canadians to explain what they do, and to get their feedback. Often, he said, events such
as the one Wednesday night are closed to media so there can be a “frank and open” exchange. But
even then, he noted, “any comments by bank officials on these occasions will reflect views that have
already been communicated publicly.”
Mr. Carney has often said that a full recovery from the financial crisis and the global downturn will
take many years, if not decades. Plus, given his repeated warnings about household debt in Canada
and a comment earlier this week that “fiscal consolidation” in the United States must start now or
trading partners such as Canada could be at risk, his caution on the domestic economy isn’t exactly
shocking.
Another comment, that it will be a long time before there is “meaningful” monetary policy tightening
in the United States, wasn’t exactly new, either, since most economists see the U.S. Federal Reserve
staying on hold until the end of 2012 or later.
O O O GLOBE AND MAIL / LINK

The illusion of never-ending growth at ChiNext, China’s Nasdaq-like growth enterprises

board, dissipated like morning fog as companies released 2010 annual and 2011 first quarter financial
reports.
With almost every report, the ChiNext index slipped another notch. Altogether the index fell nearly
9.5% in April alone, bottoming at around 897 points at month’s end.

22 May 2011 12
 THINGS THAT MAKE YOU GO Hmmm... 13.

Some 55 stocks have lost more than 30% of their value since the beginning of the year, and share
prices for 37% of the listed companies have fallen below initial public offering levels.
Currently some 212 companies trade on ChiNext, which was launched in June 2010 as a bourse for
high-tech start-ups. About six companies join the board every week.
Moreover, the average price-to-earnings ratio for ChiNext companies has slid significantly in recent
months. It was just over 40 as of mid-May, about half the average P/E ratio in the second half last year.

... the average price-to-earnings A decline for the P/E ratio was not unexpected because the China Securi-
ties Regulatory Commission (CSRC), in hopes of skimming market froth,
ratio for ChiNext companies last year took steps to accelerate a ChiNext expansion by speeding up IPO
has slid significantly in recent approvals.
months. It was just over 40 as of But some market watchers wonder whether the regulator’s strategy went
mid-May, about half the average too far. Besides, many ask, is it wise to push company values downward
P/E ratio in the second half last on an exchange without a delisting mechanism?
year. Researchers at ChiNext’s parent bourse, the Shenzhen Stock Exchange,
have offered a positive explanation for the downturn: They say the
growth board’s companies are not growing as rapidly now that they are shifting from an early devel-
opment-fast growth stage to a more mature, slower and stable side of the cycle.
They also point to a slowdown in some areas of the Chinese economy as a reason for weaker company
financials.
Indeed, the board still has plenty of cheerleaders who say the go-go days are not over yet.
“ChiNext firms should play a role in emerging industries, and they have just entered their growth
stages,” said an investment banker. “They are not big, which allows them to grow more than 50%
each year.”
Figures gleaned from 2010 annual reports show ChiNext companies realized overall revenue growth
of 31% last year. Small- and medium-sized enterprises listed on Shenzhen exchanges reported com-
bined growth of 32%, while the Shenzhen main board companies boasted growth as high as 42%.
O O O CAING.COM / LINK

Sales of existing homes in the Chicago metropolitan area sank 19.2 percent in April
from the same month last year, and the median price fell 14.5 percent, the Illinois Association of Real-
tors said Thursday.
There were 5,710 existing homes sold, down from 7,070 sold a year earlier, when the market got a
boost from a federal tax credit. The median price was $162,500, down from $190,000 in April 2010.
Sales were up 7.3 percent from March, and the median price was 2.8 percent higher.
Statewide, sales dropped 21.8 percent last month from a year earlier to 8,526. The median price
was down 12.2 percent at $136,066. But since March, sales rose 8.5 percent, and the median price
increased 4.7 percent.
Nationally, home sales fell 12.9 percent in April from a year earlier to 5.05 million. The median sales
price fell 5 percent to $163,700, but rose 2.4 percent from March. Sales dipped 0.8 percent from
March.

22 May 2011 13
 THINGS THAT MAKE YOU GO Hmmm... 14.

... In the city of Chicago, sales “The median prices for May, June and July are expected to be higher than
plummeted 26.2 percent last April in both Chicago and Illinois,” he said in a statement.
month from April 2010 to In the city of Chicago, sales plummeted 26.2 percent last month from April
1,464. The median price fell 2010 to 1,464. The median price fell 8.7 percent to $205,500. Sales climbed 1
percent from March, and the median price rose 7.6 percent.
8.7 percent to $205,500
“Promising signs continue in both the housing market and in the economy.
Our sales forecast shows that the housing sales volume will continue to increase for the next two
months with a monthly growth of 11 to 16 percent for Illinois and a monthly growth of 8 to 17 percent
for Chicago.”
Hewings expects the market to reach its 2011 peak in June.
O O O CHICAGO NEWS-SUN / LINK

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s
time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played
the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s
banking sector – presumably we will now see either another Greek bailout or default within days.
What happens when Greece defaults. Here are a few things:
- Every bank in Greece will instantly go insolvent.
- The Greek government will nationalise every bank in Greece.
- The Greek government will forbid withdrawals from Greek banks.
- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian
president had to flee by helicopter from the roof of the presidential palace to evade a mob of such
depositors), the Greek government will declare a curfew, perhaps even general martial law.
- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency
(this is a classic ploy of countries defaulting)
... The European Central Bank - The New Drachma will devalue by some 30-70 per cent (probably around
will become insolvent, given 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent
its very high exposure to Greek or more of all Greek euro-denominated debts.
government debt, and to Greek - The Irish will, within a few days, walk away from the debts of its banking
banking sector and Irish bank- system.
ing sector debt. - The Portuguese government will wait to see whether there is chaos in
Greece before deciding whether to default in turn.
- A number of French and German banks will make sufficient losses that they no longer meet regula-
tory capital adequacy requirements.
- The European Central Bank will become insolvent, given its very high exposure to Greek government
debt, and to Greek banking sector and Irish banking sector debt.
- The French and German governments will meet to decide whether (a) to recapitalise the ECB, or
(b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little for-
eign currency-denominated exposure, it could in principle print its way out, but this is forbidden by

22 May 2011 14
 THINGS THAT MAKE YOU GO Hmmm... 15.

its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of
bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t
prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to
print its way out will prove much of a hurdle.)
- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate
imposed debt-equity swaps.
- This assumption will prove justified, as the Spaniards choose to over-ride the structure of current
bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and prob-
ably other courts, also), claiming violations of property rights. These cases won’t be heard for years.
By the time they are finally heard, no-one will care.
- Attention will turn to the British banks. Then we shall see…
O O O ANDREW LILICO / LINK

A senior economist has said China could achieve full convertibility of the yuan in
three to five years - much sooner than previous forecasts.
... “The yuan could be- Xiang Songzuo, deputy director of the International Monetary Institute with Ren-
come familiar to global min University of China, told China Daily on Friday that full convertibility of the
investors very soon and yuan could be achieved within that time span, citing sources from the central bank.
become a global reserve It is the earliest estimate for the full convertibility of the yuan, as most other ex-
currency,” perts have said such a move was about a decade away.
The People’s Bank of China, the country’s central bank, declined to comment on
Friday.
Wu Xiaoqiu, senior finance professor of Renmin University of China, said it is possible for China to
achieve full convertibility of the yuan by 2015.
“The yuan could become familiar to global investors very soon and become a global reserve currency,”
he said.
The World Bank said in a report on Tuesday that by 2025 the yuan could become a major global cur-
rency together with the US dollar and the euro - echoing China’s rising say in the world economy.
The dollar, the predominant global reserve currency, has had its credibility dented as the loose mon-
etary policies of the United States damaged the interests of other countries, including China, analysts
said. The euro, on the other hand, is suffering setbacks as Europe encounters financial turbulence.
Currently, the Chinese currency is not freely convertible for foreign direct investment and securities
transactions, as the country is fearful of possible financial turbulence caused by abnormal capital
flows.
Zhou Xiaochuan, the central bank chief, said at the Lujiazui Forum in Shanghai on Friday that when
cross-border use of the yuan hits a certain level, there will be a natural demand for full convertibility.
O O O CHINA DAILY / LINK

22 May 2011 15
 CHARTS THAT MAKE YOU GO Hmmm... 16.

The ‘Days To
Cover’ chart shows how
many days of global produc-
tion it would take to elimi-
nate futures shorts in many
commodities and a look at
the most recent version (left)
compared to how things
looked back in August of 2010
(below) is most educational -
particularly in silver...

CLICK TO ENLARGE SOURCE: SHARELYNX

CLICK TO ENLARGE SOURCE: SHARELYNX

22 May 2011 16
 CHARTS THAT MAKE YOU GO Hmmm... 17.

CLICK TO ENLARGE SOURCE: DSHORT

The Long Bond, after putting in a bearish engulfing pattern in Wednesday’s session
saw solid followthrough selling in the overnight session and into early Thursday morning. About mid
morning Thursday they began to recover after being down nearly a full point at one time. By the time
the session closed, they had managed to come all the way back and ended up closing only 3 ticks
lower. Once again they were rescued just as they were breaking down technically on the price charts
(don’t you love our free markets here in the US).
The Fed has to love the hedge funds rushing out of risk trades and stuffing money into the bond mar-
ket. What QE-related purchases of Treasuries could not accomplish (lower longer term interest rates),
the risk off trades have performed. With the Fed supposedly going out of the bond buying business at
the end of next month, someone has to buy these paper IOU’s.
Look for more bond selling if the equity markets can mount any sort of strong rally. If the equities give
up the ghost and begin fading, the bond bears will receive the usual ignominious treatment that they
are getting accustomed to receiving from this market.
Either the stock market rallies or the bond market rallies; both are not going to go up together. Let’s
see which poison the Fed chooses to administer to the public.
O O O DAN NORCINI / LINK

22 May 2011 17
 CHARTS THAT MAKE YOU GO Hmmm... 18.

Chinese investors
bought 93.5 tonnes of gold coins
and bars in the first quarter. China pro-
duced 340 metric tons of gold last year
and consumption was about 700 tonnes,
leaving a gap of nearly 360 tonnes...
Gold ownership is rising from a very, very
low base which means that the invest-
ment demand and demand for an infla-
tion hedge from 1.3 billion increasingly
wealthy Chinese people is more than sus-
tainable...
SOURCE: WSJ The not realized important fact that the
people of China were banned from own-
ing gold bullion from 1950 to 2003, means that the per capita consumption of over 1.3 billion people
is rising from a tiny base.

The table below shows unemployment rates, inflation and planned spending cuts for
the Eurozone. A couple of things stand out to me..... see what you think.
(Thanks Scott)

SOURCE: STRATFOR

22 May 2011 18
 WORDS THAT MAKE YOU GO Hmmm... 19.

John Embry -- Chief Investment Strate-

gist at the Canadian firm Sprott Asset Management --
discusses the reasons why people should own precious
metals, and in particular gold and silver. In Embry’s view,
gold will gain in importance as a monetary asset in the
years ahead, likely regaining an official role in the world’s
financial system.

CLICK TO WATCH

Puru Saxena of Puru Saxena

Wealth Management explains to CNBC Asia
why QE3 is all but a done deal and what ef-
fects it will have when it comes...

CLICK TO WATCH

Rick Rule. Eric King. Gold. Silver.

Uranium. The Dollar. QE3.
What else is there?

CLICK TO LISTEN

22 May 2011 19
 and finally…

In June 2010, a team of scientists and intrepid explorers stepped onto the shore
of the lava lake boiling in the depths of Nyiragongo Crater, in the heart of the Great Lakes region
of Africa. The team had dreamed of this: walking on the shores of the world’s largest lava lake.
Members of the team had been dazzled since childhood by the images of the 1960 documen-
tary “The Devil’s Blast” by Haroun Tazieff, who was the first to reveal to the public the glowing
red breakers crashing at the bottom of Nyiragongo crater. Photographer Olivier Grunewald was
within a meter of the lake itself, giving us a unique glimpse of its molten matter.
O O O BOSTON.COM (THANKS RAJ) / LINK

Hmmm…

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