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THINGS THAT MAKE YOU GOHmmmA walk around the fringes of nance

23 January 2012 1

History never repeats itsel , but it o ten rhymes MARK TWAIN

Sanctions and negotiations can be very inefective, andindeed oolish, unless the people you are talking with

and negotiating with and trying to reach agreements with are people who can be trusted to keep their word Casper Weinberger

The four most dangerous words in inves ng are Thisme its di erent.

Sir John empleton

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2.THINGS THAT MAKE YOU GOHmmm...

23 January 2012 2

Itsfunny how things turn out some mes.Today, January 20th, is my 45th birthday and I nd myself in a hotel room in Dubai tapping awayat my computer keyboard while I have some spare me in the hope of ge ng something wri en, as -

sembled and distributed before the craziness of the next week descends on me.

To get here from Singapore I ew seven hours on an Emirates 777 and, as we approached the UAE theCaptain informed us that, should we look out of the right side of the plane, we would see the Straitsof Hormuz.

Sadly, I was trapped in the middle row next to a Chinese lady of undeterminable age who, on a 7-houright that began at 9:35am Singapore me, polished o six cans of Heineken and two glasses of red

wine, so I couldnt get a decent view of the Straits below us, but it brought my mind back to where ithas been a fair bit recently, namely Iran and the price of crude oil and gold.

Oddly enough, on this very day in 1981 (my 24th birthday - sigh!), literally minutes a er the inaugura -on of the rst US President named Ron, 52 American ci zens walked free from a 444-day hostage

ordeal in the US Embassy in Tehran which had begun on November 4, 1979 when a group of irateIranian students seized the embassy in protest at the US decision to allow the deposed Shah of Iranto travel to New York to receive medical treatment.

The stand-o , the disastrous rescue a empt - Opera on Eagle Claw - and the seeming impotence of the United States in the face of such a challenge to its sovereignty all combined to help unseat JimmyCarter in the 1980 Presiden al elec ons and hand the US Presidency to the rst Ron - Ronald Reagan.

A li le over a year before he was unceremoniously ousted from the Oval O ce, on November 14,1979, Carter had put Presiden al pen to Presiden al paper and signed Execu ve Order 12170:

Pursuant to the authority vested in me as President by the Cons tu on and laws of the United States including the Interna onal Emergency Economic Powers Act, 50 U.S.C.A. sec. 1701 et seq.,the Na onal Emergencies Act, 50 U.S.C. sec. 1601 et seq., and 3 U.S.C. sec. 301.

I, JIMMY CARTER, President of the United States, nd that the situa on in Iran cons tutes an un -usual and extraordinary threat to the na onal security, foreign policy and economy of the United States and hereby declare a na onal emergency to deal with that threat.

I hereby order blocked all property and interests in property of the Government of Iran, its instru -mentali es and controlled en es and the Central Bank of Iran which are or become subject to the

jurisdic on of the United States or which are in or come within the possession or control of personssubject to the jurisdic on of the United States.

The Secretary of the Treasury is authorized to employ all powers granted to me by the Interna -onal Emergency Economic Powers Act to carry out the provisions of this order.

This order is e ec ve immediately and shall be transmi ed to the Congress and published in theFederal Register.

The White House,

November 14, 1979 Jimmy Carter

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23 January 2012 3

Thus, with a stroke of Carters pen, began thirty years of sanc ons against Iran that haveonce again become the focal point in a poten ally deadly game of chicken as the increasingly

bellicose Iranian regime of Mohammed Ahmadinejad stand their ground in an ever-more frac ousface-o with the West.

The original sanc ons against Iran froze a total of roughly $12 billion of assets including bank depos -its, gold and other proper es but, perhaps more importantly in historys eyes, weakened the countryto such an extent that, on September 22, 1980, Saddam Hussein was emboldened to invade Iran (withthe notable support of the United States and Kuwait amongst others). Every ac on has an equal andopposite reac on.

No sooner had Hussein invaded Iran than the US increased sanc ons, doing so again in 1984, whensanc ons were approved that prohibited weapons sales and all U.S. assistance to Iran. The UnitedStates also opposed all loans to Iran from interna onal nancial ins tu ons. In October 1987, Presi -

dent Reagan issued Execu ve Order 12613 prohibi ng the importa on and exporta on of any goodsor services from Iran.

Things got worse in the 1990s when Presidents Rafsanjani and Khatami fell foul of Bill Clinton whosigned Execu ve Orders 12957 and 12959 prohibi ng US trade with Irans oil industry and all US tradewith Iran respec vely.

Then came Ahmadinejad.

A er his elec on in 2005, Ahmadinejad setabout li ing the suspension on Iranian urani -um (try saying THAT ve mes quickly) enrich -ment and that brought him into direct con ictwith the UN who adopted a whole bunch of resolu ons, and George W. Bush who signedyet another Execu ve Order (13382 for thosekeeping score) freezing yet more Iranian as -sets.

Finally, on June 24, 2010, the US decided thatthe whole Execu ve Order thing was ge ngout of hand and so Barack Obama signed intolaw the Comprehensive Iran Sanc ons, Ac -countability, and Divestment Act of 2010 (CIS -ADA) which, amongst other things, enhancedrestric ons on the import from Iran of rugs,pistachio nuts and caviar.

But from the outset of sanc ons against Iran in 1979, it was crude oil and gold that were af -fected the most. The chart, above, shows the oil price which, having begun to recover from the1973 Arab embargo, spiked viciously as rst the Iranian revolu on that deposed the Shah then thestand-o with the US and nally the onset of the war with Iraq combined to send the price from a(then) already high $38 to a previously inconceivable $70.

Around the same me, gold was a rac ng a safe-haven bid as the unrest in the Middle East pushedthe price of crude higher and the spectre of a major con ict in the region with the US being drawn

CLICK TO ENLARGE SOURCE:WTRG ECONOMICS

x
http://www.wtrg.com/oil_graphs/oilprice1970.gif

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23 January 2012 4

into the fray occupied the thoughts of investors acrossthe globe. In a on was on everybodys mind as prices of

just about everything rose in lockstep.Sound familiar?

A look at a chart of gold (chart, le ) around the sameme illustrates a very recognizable curve indeed:

This period also coincided with Russias invasion of Af -ghanistan which began on Christmas Eve 1979 and, nat -urally with oil rising so spectacularly, runaway in a onin the US (represented here by the US CPI, chart, le ,middle).

As the 1970s gave way to the 1980s, the world was apre y dangerous place to be.

The arrival of Paul Volcker as Chairman of the Federal Re -serve in August of 1979 was the beginning of a concertede ort to check the runaway in a on that had crippledthe US in the wake of soaring oil prices and, even thoughUS interest rates were at what today would not only bethe inconceivable level of 10%, but a level that wouldmean certain bankruptcy for the United States as everypenny of tax revenue (and then some) would be neededto pay the interest on their debt, Volcker set about vir -

tually doubling them. Austerity? Ive got your austerityright here.

The table (right) and the charton the following page (top)demonstrate just how seri -ous Volcker was about raisingrates as he set about crushingin a on:

In October 1979, Volckerraised interest rates 3.5% inone clip. In March of 1980he hiked then 5% - thatsFIVE PERCENT. The followingmonth, as the e ects of thosehigher rates became clear, heimmediately reacted, slashingthem by 8.5%.

The US wasnt out of the woods yet by any means - infact interest rates would again touch 20% brie y in Mayof 1981, but Volcker was able to move aggressively inboth direc ons when he needed to.

0

$100

$200

$300

$400

$500

$600

$700

$800

1983198219811980197919781977

IRANIANREVOLUTION

IRAN/IRAQWAR

GOLD SPOT PRICE1977 - 1983

0

3%

6%

9%

12%

15%

19841983198219811980197919781977

US CPI1977 - 1984

IRANIANREVOLUTION

IRAN/IRAQWAR

DATE RATEAug 79 11.375%Sep 79 11.50%Oct 79 15.50%Nov 79 15.50%Dec 79 14.00%Jan 80 14.00%Feb 80 15.00%Mar 80 20.00%Apr 80 11.50%

SOURCE:BLOOMBERG/TTYMGH



0

5%

10%

15%

0%

19841983198219811980197919781977

IRANIANREVOLUTION

IRAN/IRAQWAR

US Interest Rates1977 - 1984

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The Bernanke Fed does not have that luxury.

W hen Volcker began his term aschairman of the Federal Reserve,US public debt was $845 billion (chart, bo omle ) which a orded him a degree of la tudein his policy applica on (although back then,$845 billion WAS real money), he also inheritedhigher interest rates at which that level of debtwas at least sustainable which gave him evenmore exibility in the se ng of those rates.Today, with a su oca ng $14 TRILLION of pub -lic debt (an amount that has increased almost

40% since December 2008), and interest ratesat zero, Ben Bernankes room to maneuver is asource of mirth to ba ery hens everywhere.

The US currently has to borrow approximately40c of every dollar it spends and, according toJPMorgan, every 65bps increase in those ratesadds $100bln in interest payments to the Unit -ed States bill. Maybe not checkmate just yet- but its close...

a meaningful move upwards in interest rates

from here will very quickly alter the US debtdynamic to the point of outright insolvency.Currently, the US average maturity is 62.5months and their average interest rate (notincluding TIPS) is a staggeringly low 2.274%(down from 6.66% in 2000). That level is clear -ly unsustainable in the long term, par cularly

with the massive in a on of the Feds balance sheet that has taken place since 2008, but the US hasthe luxury of, as Jim Puplava likes to say, being the best house in a bad neighbourhood.

Once Europe reaches its inevitable denouement - and I suspect we are rapidly approaching that point;think March - all eyes will look for the next crumbling edi ce and there are plenty of them to choose

from.(Incidentally, while reports of an agreed 70% write-down on all Greek debt may well boost markets, Isuspect there will be a very long way to travel over inhospitable terrain before any agreement is freeof legal challenges either from bond holders or CDS holders:

( NYTimes ): Hedge funds have been known to use hardball tac cs to make money. Now they havecome up with a new one: suing Greece in a human rights court to make good on its bond payments.

The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a mul year project with no guaran -tee of a payo . And it would not be likely to produce sympathy for these funds, which many blame

for the lack of progress so far in the nego a ons over restructuring Greeces debts.

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

0%

Apr 80Mar 80Feb 80Jan 80Dec 79Nov 79Oct 79Sep 79Aug 79

US Interest RatesAugust 79 - April 84

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,100

31/12/1031/12/0531/12/0031/12/9531/12/9031/12/8531/12/80

August 1979

Volcker Term BeginsUS Public Debt:

$845 billion

December 2008US Public Debt:

$10.7 trillion

December 2010US Public Debt:

$14 trillion

US Public Debt ($ Bln)1976 - Present


http://www.nytimes.com/2012/01/19/business/global/hedge-funds-may-sue-greece-if-it-tries-to-force-loss.html?pagewanted=2&seid=auto&smid=tw-nytimesbusiness#h[]http://www.nytimes.com/2012/01/19/business/global/hedge-funds-may-sue-greece-if-it-tries-to-force-loss.html?pagewanted=2&seid=auto&smid=tw-nytimesbusiness#h[]

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23 January 2012 6

The tac c has emerged in conversa ons with lawyers and hedge funds as it became clear that Greece was considering passing legisla on to force all private bondholders to take losses, while

exemp ng the European Central Bank, which is the largest ins tu onal holder of Greek bonds with50 billion euros or so.

Legal experts suggest that the investors may have a case because if Greece changes the termsof its bonds so that investors receive less than they are owed, that could be viewed as a property rights viola on and in Europe, property rights are human rights.

According to one senior government o cial involved in the nego a ons, Greece will present ano er to creditors this week that includes an interest rate or coupon on new bonds received in ex -change for the old bonds that is less than the 4 percent private creditors have been pushing for and they will be forced to accept it whether they like it or not.

This is crunch me for us. The me for nice es has expired, said the person, who was not autho -

rized to talk publicly. These guys will have to accept everything.)

The UK, Japan and the US are ALL facing the same intractable debt dynamics and you can be surethat, one-by-one, they will all have their feet held to the re. Even mighty Germany is not immune asthis week the spiky Egan Jones agency gave warning when pu ng Europes economic boiler-room onwatch for possible downgrade:

(Egan Jones): Germany maintains its posi on as the European Unions top economy. However,Germany has been shouldering the burdens of other EU countries via its exposure to the EFSF and indirectly via the ECBs he y exposure to the weaker banks and the weaker sovereign credits. Thecountrys debt to GDP of 83% as of 2010 (expect near 86% for 2011) and a de cit to GDP of 4.6%is weak (and ge ng weaker) for a top- er country. On the posi ve side, unemployment was only

6.8% but will probably increase as many EU countries implement austerity measures. Other posi -ves were the posi ve (EUR133B) balance of trade and the posi ve (EUR193B) current account asof the end of 2010.

In a on has been fairly moderate at 2%, but we expect an increase as a result of the decline in theeuro rela ve to the dollar. German chancellor Angela Merkel con nues to create tension with EUmember states by pushing for ra ca on of changes to the Lisbon Treaty. The government insiststhat private investors bear more of the costs of further European bailouts. Note, the cost of the

bailouts is likely to be absorbed via increased support for the EFSF, the ESM, the ECB and arise in the number of euros. The fallout froma likely Greek default needs to be monitored.

My best guess is that Japan comesinto focus rst as the sheer amountof cha er surrounding it has increased mark -edly of late and that can only mean that morepeople are looking more closely at the coun -try whose ability to nance their preposter -ous debt levels domes cally has quite liter -ally been the only thing stopping them fromdefaul ng for many years. The fact that, since1992, Japans domes c savings rate (le ) has

SOURCE:OECD

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23 January 2012 7

fallen from 15% to 2.7% is an alarm bell of deafening propor ons. When Japan nally DOES succumbto the inevitable, it will NOT be a pre y sight and, like Hemingway famously said, it will go broke two

ways; slowly then all at once. I think its fair to say that twenty years could be classi ed as slowly.Japan may yet be beaten to the punch by the UK, whose scal situa on is comparably dire (but a topicfor another day), but either way, they will both face their day of reckoning. Once those days havecome and gone, all eyes will turn to the US.

Itsno secret that the US is completely unable to withstand higher interest rates and so, to main -tain low rates, they have chosen to go down the path of Quan ta ve Easing or, to use the vernacu -lar, moneyprin ng. As a consequence, there are mul ple trillions of dollars of freshly-printed moneycurrently wai ng to be unleashed into the wild ($1.6 trln alone just si ng on deposit at the Fed inreturn for 0.25% interest).

What happens when that pent-up cash is released is anybodys guess and the cornerstone of the in a -on/de a on debate that rages constantly. My own belief is that the debate is largely a moot one as

any bout of de a on will be a acked with highly in a onary measures ensuring that, even if we havea brief period of de a on, ul mately, with the cure for the one ill being a healthy dose of the other,you can rest assured that we will end up with in a on either way.

In the late 70s/early 80s, the world faced a situa on remarkably similar to that it faces today in manyways but many believe there will somehow be a di erent outcome. As Sir John Templeton said, thefour most dangerous words in inves ng are this me is di erent, but as my good and wise friendBrian P likes to say This me isnt di erent. This me is NEVER di erent. In fact, if there IS one dif -ference, its that level of debt which only serves to make this me WORSE, not be er than last me.

Looking at the checklist above, it seems as though we are only missing two crucial ingredients and,though many people in posi ons of in uence over such things as Fed or ECB policy like to believethey have the necessary control over all aspects of what they are doing to address the worlds currentproblems, they are wrong. Dead wrong.

At some point, in a on WILL kick in and rates WILL rise as what Bill Fleckenstein likes to call the fund -ing crisis begins and that percep on of control will be sha ered.

When that happens, the current high prices of oil and gold will seem like nothing of the sort.

O O O O O O O O O O O O O

70s/80s Today

XX

Tension in the Middle East:

High Oil Price:

High Gold Price:

Runaway In a on:

Rapidly Rising Rates:

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This weeks edi on of Things That Make You Go Hmmm..... begins in Portugal, where AmbroseEvans-Pritchard sees a looming disaster before heading to Greece to see how the haircut nego -

a ons are going (hint: not so well), New York City where taxicab medallions may be the next bubbleto burst and, of course, to Italy where ordinary Italians are ge ng fed up with Germany. It was onlya ma er of me, frankly. We end up back with Ambrose Evans-Pritchard - this me in the UK whereausterity would appear to be having li le e ect (though, uncharacteris cally, there is a hint of bull -ishness about the US in Ambroses ar cle).

Alf Field explains why the gold correc on is over (and there arent many who know more aboutthe subject than Alf), John Mauldin o ers Greeks a disaster menu and tells them to take their pick,Satyajit Das bemoans the death of trust and the Chairman of Chinas Banking Regulatory Commissiondiscusses the challenges he sees heading his way in 2012.

Michael Pe s ponders when we might see a reversal in trade, the Economist examines the debt

hangover crippling the world and we have charts of plumme ng personal income, proof (posi ve?)of shenanigans in the London bullion markets and Richard Ross is back with the kind of idiosyncra clook at Europe that only he can provide.

The FDIC are back in business as the rst three banks of 2012 hit the wall while in our interviewssec on, the great Marc Faber holds court on bond markets and lost wagers, Andrew Lilico comes tosimilar conclusions as I have on the metable of a Greek default and, if you have me, you can listento me cha ng with Jim Puplava about a wide range of topics star ng in China and moving via severalother locales to the US.

Thats about it for another week. I will be absent from your inboxes again next week Im afraid as Illbe traveling back to Singapore so Ill see you all back here in a fortnight.

O O O O O O O O O O O O O

Before I go, just a reminder that I will be taking on my rst speaking engagement next monthat the Cambridge House California Investment Conference in Palm Springs. The conference runsover the weekend of the 11th and 12th of February so if any readers are in the area and would like tostop by, I would love to see you there.

The line-up this year is fantas c with John Embry, Greg Weldon, Brent Cook, Bill Murphy and ChrisPowell of GATA and my friend, Al Korelin just a few of the many speakers in a endance.

It should be a lot of fun and, personally, Im looking forward to having the chance to meet and listento insights from some of the sharpest nancial minds around.

For details, please click on the link HERE

As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from me-to- me,the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm..... mayre ect the posi oning of one or all of the Vulpes funds - though I will not be making any speci c recommenda -

ons in this publica on.

Grant

www.vulpesinvest.com
http://cambridgehouse.com/conference-details/california-investment-conference-2012/58http://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdfhttp://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdfhttp://cambridgehouse.com/conference-details/california-investment-conference-2012/58

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Contents 23 J 2012

Portugal To Need Debt Haircut As Economy Tips Into Grecian Downward Spiral

Greek Debt Deal Hits Setback As Talks Suspended

Trust No One With Your Money Is The Tragic Legacy Of The Crisis

Gold Correc on Is Over

Liu Mingkang: Responding To The Challenges Of 2012If No Trade Reversal Now, Then When?

How The Taxi-Medallion Bubble Might Burst

Gentlemen, Choose Your Disaster

The Hangover

Salve Italia

America Overcomes The Debt Crisis As Britain Sinks Deeper Into The Swamp

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)

1 Central Florida State Bank, Belleview, FL 79.1 77.7 24.4

2 First State Bank, Stockbridge, GA 536.9 527.5 216.2

3 American Eagle Savings Bank, Boothwyn, PA 19.6 17.7 3.2

Total Cost to FDIC Deposit Insurance Fund 243.8

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Portugalsborrowing costs have jumped to record highs and are tracking the moves seenin the culmina ng phase of Greeces debt crisis, dashing hopes that the country will be able to

stave o contagion by embracing dras c austerity.

Yields on Portugals 10-year bonds climbed to 14.39pc on Thursday. Credit default swaps measuringbond risk have reached 1270 points, pricing a two-thirds chance of default over the next ve years.

While some of the latest damage re ects forced selling of Portuguese debt a er Standard & Poorscut the countrys credit ra ng to junk status last Friday, there are deeper worries that sharp scal cutsby the free-market government of Pedro Passos Coelho may prove self-defea ng.

Mr Passos Coelho has been praised by EU leaders and the Inter -na onal Monetary Fund for delivering on austerity, but the risk isthat severe ghtening - without o se ng monetary and exchanges mulus - will push Portugal into the same downward spiral thathas already engulfed Greece.

Jurgen Michels, Europe economist at Ci group, said Portugalseconomy will contract by a further 5.8pc this year and by 3.7pc in

2013, a far sharper decline than o cial forecasts. The peak-to-trough collapse would be 13pc, a full-edged depression.

As this gets worse it is going to be extremely di cult to go ahead with more austerity measures:poli cal contagion will start to come through, he said.

Portugal has so far reacted calmly. It has avoided the sorts of riots seen in Greece, but pa ence iswearing thin. The CGTP labour federa on held a protest march in Lisbon this week, vowing to resist

forced labour.A new study by the Barometer for Democracy shows that con dence in Portugals democracy hasfallen to the lowest since the end of the Salazar dictatorship. Barely more than half retain faith in thesystem and 15pc pine for authoritarian rule.

While Portugals public debt of 113pc of GDP is lower than Greeces, the private sector has muchlarger debts and the countrys total debt-load is higher at 360pc of GDP - much of it external debt.

There is huge private sector deleveraging going on and the banking system has big problems. It isunclear how much of this private debt is going to end up on the states door-step, said Mr Michels.

Without a sizeable haircut to its debt stock, Portugal will not be able to move into a viable scal path.We expect a haircut of 35pc at the end of 2012 or in 2013.

O O O AMBROSE EVANS-PRITCHARD / LINK

Crucial talks over a debt deal between lenders and the Greek government were suspendedover the weekend as the representa ve of bondholders ew out of Athens empty handed.Charles Dallara, managing director of the Ins tute of Interna onal Finance (IIF), a lobby group repre -sen ng private creditors who have lent 47bn (39bn) to the Greek government, has so-far failed toreach agreement on the key interest rate of the new bonds Greece will issue.

Athens was anxious to strike a deal ahead of a mee ng of eurozone nance ministers on Monday,which could have set in mo on the paperwork and approvals necessary to give Greece its next tranche

... con dence in Portugals democracy has allen to the lowest since the end o

the Salazar dictatorship. Barely morethan hal retain aith in the system and15pc pine or authoritarian rule.
http://www.telegraph.co.uk/finance/financialcrisis/9026144/Portugal-to-need-debt-haircut-as-economy-tips-into-Grecian-downward-spiral.html

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23 January 2012 11

of aid, worth about 130bn.

This will prevent a disorderly debt default when 14.5bn of Greek bonds mature in March. However,Greek government o cials said on Saturday that the crisis talks had now been postponed for a fewdays.

A spokesman for the IIF said that Mr Dallara had travelled to Paris for a long-standing social arrange -ment and his departure was in no way a re ec on on the talks. The talks have made substan alprogress, the spokesman said, no ng that Mr Dallara was in phone contact with the Greek primeminister and could return to Athens at any point.

Interna onal private creditors have already accepted a 50pc haircut or loss of their investments inGreek bonds, a move that would cut 100bn from Greeces 360bn debt pile. However, the s ckingpoints appear to be the term to maturity of the new replacement bonds and the rate of interest, orcoupon, that they will pay.

The IIF had been pushing for an average coupon of 4.25pc as it became clear that the haircut couldgrow to as much as 70pc.

Talks were underway between Mr Dallara, Greek prime minister Lucas Papademos and nance min -ister, Evangelos Venizelos when a snag was hit, a Greek government o cial said. It became knownthat the Troika [the Interna onal Monetary Fund (IMF), the European Central Bank and the EuropeanUnion] insisted on a more realis c, smaller rate.

We were informed that the IIF authorised Mr Dallara to nego ate a compromise at 3.8pc, said asenior Greek banker who is close to the nego a ons.

O O O UK DAILY TELEGRAPH / LINK

T he rst casualty of war is said to be the truth but, in nancial crises, it is trust that dies. Whilethe a er-e ects of the recent crisis are constantly debated, this deeper issue remains unad -dressed.Paul Seabright, a professor at the Toulouse School of Economics, has iden ed traits that underpin so -cial systems such as money: the capacity to weigh up the costs and bene ts of trus ng others and theins nct to return favours in kind or seek revenge when trust is betrayed. When it is working well, thesystem enables strangers to safely deal with each other. But this fragile system, on which the global

economy depends, is now at risk of failing.

Money, a mechanism of exchange and a store of value, galvan -

ised modern economies. Debasement of currencies throughquan ta ve easing and ar cially low interest rates underminethese func ons.

This is encouraging interest in alterna ve paper money, such as the Bavarian Chiemgauer, the LewesPound or the BerkShares programme in Massachuse s. With limited acceptance within a small areaand (some mes) a nite expiry date, alterna ve currencies encourage local business and emphasisecommunity values. They also indicate distrust of governments, banks and global nance. Once anunques oned and secure store of wealth, government bonds are threatened by the risk of sovereigndefaults or destruc on of purchasing power. Instead of risk-free return, government bonds now o erreturn-free risk, in the words of Jim Grant.

The rising value of gold is also evidence of these concerns. Wealthy savers are switching from nancial

... Instead o risk- ree return, governmentbonds now ofer return- ree risk, in the

words o Jim Grant
http://www.telegraph.co.uk/finance/financialcrisis/9030163/Greek-debt-deal-hits-setback-as-talks-suspended.html

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23 January 2012 12

instruments to alterna ve assets farmland, ne arts and other collec bles to preserve the valueof their savings. But these savings are locked in unproduc ve investments and cannot circulate freely.

Reviled and mistrusted, banks are losing legi macy. In the US, on Bank Transfer Day (November 5,2011), an online campaign launched by an unhappy Bank of America client, disgruntled customerswithdrew money from tradi onal banks, transferring it to not-for-pro t credit unions. The growth of peer-to-peer lending rms, such as Prosper and Lending Club is part of the same trend. If it con nues,the trend may lead to a signi cant contrac on in the availability of credit globally, with serious con -sequences for growth.

The limits of policymakers tools have been mercilessly exposed. Fiscal policy is severely restrictedacross the world and with interest rates in most developed countries near zero, the scope for conven -

onal monetary policy is also limited. The European Central Bank is being called upon to print moneyto deal with the eurozone debt crisis. At best, this will be a pallia ve measure. And it would not bewithout nasty side-e ects, undermining trust in money, government bonds and, ironically, centralbanks.

O O O SATYAJIT DAS / LINK

Gold is unique amongst metals, partly because it is not consumed, but also because it hassome unusual quali es. It has no u lity value. One cannot eat it or drink it. It earns no income,does not corrode and does not tarnish. Other quali es include divisibility (a quan ty of gold can bedivided into smaller quan es) and it is fungible, (one ounce of gold can be subs tuted for anotherounce of gold of the same degree of neness). There are large stocks of gold available and new an -nual produc on has generally been less than 2% of the stock of gold. These are the very quali es thatcaused gold to be used as money over the millennia.

Other metals and commodi es are produced for consump on. When their stocks build up due to sup -ply exceeding demand, holders become forced sellers due to the cost of storage or due to spoilage.Thus the price of the commodity drops to a level where marginal producers go out of business un ldemand exceeds supply. Then stock levels decline un l they are exhausted and condi ons of shortageprevail. This results in sharply rising prices for that commodity, eventually a rac ng new suppliers.In so commodi es, weather condi ons can also play havoc with stock levels, causing drama c pricechanges.

The point is that with all commodi es otherthan gold, stock levels are important determi -nants in the price of the commodity. Gold has

been accumulated over the years because itwas money or as a hedge against a range of scal, economic and poli cal risks. The stock

of gold rela ve to new annual gold produc onhas always been high.

In 1971, when the $35 per ounce link betweenthe US dollar and gold was severed, it was as -sumed that all the gold produced throughoutprior history was about 90,000t. This is a rub -bery gure and should probably be a highernumber. As it is not important to this discus -

CLICK TO ENLARGE SOURCE:ALF FIELD
http://goldswitzerland.com/wp-content/uploads/2012/01/alf-field-comex-gold-elliott-wave-count-2011.jpghttp://www.ft.com/intl/cms/s/0/dac141b0-4111-11e1-b521-00144feab49a.html#axzz1k3aqmAWz

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sion, we will use 90,000t as a star ng point. Over the centuries some gold was lost or was no longeravailable to the market. If we assume that about 15,000t was lost, it means that in 1971 about 75,000t

of gold was available to the market. New produc on in 1971 was 1,450t, less than 2% of the availablestock of gold.

One reliable gure available in 1971 was that gold held by central banks and o cial ins tu ons wasabout 37,000t. By deduc on, the remaining 38,000t of the available stock must have been ownedby investor/hoarders in the form of bullion, coins or jewelry. New produc on of 1,450t in 1971 wasmeaningless when compared to stocks of 75,000t. The future gold price was going to be determinedby what exis ng holders of gold did with their stocks and what the level of demand would be fromnew buyers. For several reasons there was considerable new buying of gold during the 1970s, result -ing in a sharply rising gold price.

Fast forwarding 40 years to our current situa on...

O O OALF FIELD

/ LINK

Ayear of poli cal bickering in the United States and debt crisis in Europe has nega vely a ectedChina, raising serious ques ons for 2012: Will China slide with the rest of the world into aneconomic downturn? With risks guaranteed to increase, will Chinese banks remain pro table? Whatdirec on will nancial reform take, and what will drive it?

Liu Mingkang is in a good posi on to answer these ques ons. As chairman of the China BankingRegulatory Commissiona (CBRC) from its founding in 2003 un l his re rement in October, Liu person -ally presided over its quarterly analysis conferences. The mainlands banking regulator s ll maintainsthis tradi on, winning it the praise of industry insiders. In late December 2011, Liu talked with Caixinabout Chinas economic posi on in the world in the coming year and the task of nancial reform.

Caixin: What kind of global economic situation can we expect in 2012?

Liu: Ive said in the past that this economic crisis will spread from the United Statesto Europe and nally land in Asia. Now we can see that its already begun in uencingAsia.

For example, growth in Chinas auto industry has been cut in half. A stock of over750,000 autos had accumulated in warehouses as of November, now up to nearly800,000. Even though this is all part of a natural cycle, cars grow obsolete quickly.This kind of stock could spiral out of control, which indicates that this is quite a seri-ous excess of capacity.

Or take the shipbuilding industry for example. Thats been affected by changing de-mands from Europe and the United States, too. As of right now, they havent had asingle order for a long time. I trust that the relevant state departments are alreadyrigorously controlling the expansion of production capacity in these industries.

From a macro perspective, the global economic situation has four major characteris-tics.

First, there have been massive changes to power structures that push growth. Contri-bution rates to the global economy from nations outside the G8 countries have for the

rst time reached and surpassed that of the G8. Its p ossible that the global economic
http://goldswitzerland.com/index.php/gold-correction-is-over-by-alf-field/

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growth rate for 2012 wont reach 3 percent, but emerging economies should hold toaround 6 percent.

Second, there have been changes to market growth structures. In the past, the UnitedStates and Europe were the major consumer markets, and China was the worlds fac-tory. Forty percent of our exports were shipped off to the United States and Europe,more if one factors in exports transited through Hong Kong. But that proportion sliddramatically in 2011, as Asia (including the Middle East) became the major exporttarget. Even though Asia still didnt buy as much as the United States and Europe lastyear, the proportion is shifting. African and South American markets are still not ter-ribly big, but they too are growing.

Third, the role of government has changed greatly in every nation. For one, they havebegun to actively support the development and adjustment of business. This has most-ly been accomplished through expansionary scal and monetary policy. For another,governments have begun strengthening regulation where there was none before indomains that experienced problems during the nancial crisis. Whether the G8 or G20come to a consensus or not, governments should begin playing a larger role in domainswhere pure market force fails.

O O O CAIXIN / LINK

Europes underlying problem is not budget de cits or even unsustainable debt. These aremainly symptoms. The real problem with Europe is the huge divergence in costs between thecore and the periphery in the past decade costs between Germany and some of the peripheral coun -tries have diverged by anywhere from 20% to 40%. This divergence has made the la er uncompe -

ve and has resulted in the massive trade imbalances within Europe.

Trade imbalances, of course, are the obverse of capital imbalances, and the surge in debt in peripheralEurope in the past decade debt owed ul mately to Germany and the other core countries was theinevitable consequence of those capital ow imbalances. While European policymakers alterna velysweat and shiver over scal de cits, surging government debt, and collapsing banks, there is almostno prospect of their resolving the European crisis un l they address the divergence in costs. Of courseif they dont resolve this problem, the problem will be resolved for them in the form of a break-up of the euro.

The best resolu on, and the one Keynes urged without success on the US in the 1920s and 1930s, is

that Germany take steps to reverse its trade surplus. It could boost disposable household income andhousehold consump on by cu ng income and consump on taxes, and as German household incomegrows rela ve to the countrys total produc on, the na onal savings rate would automa cally dropand the trade surplus contract and eventually become a de cit. Or Germany could engineer a massiveincrease in infrastructure spending.

If Germany doesnt do either, and especially if it imposes austerity, there must be a surge in unem -ployment for many years within Europe as German excess capacity meets dwindling demand in pe -ripheral Europe. This surge in unemployment will force the peripheral countries into the unenviablechoice either of absorbing that surge in unemployment themselves, or of forcing the unemploymentback onto the core countries by abandoning the currency that is at the heart of their lack of compe -

veness.
http://english.caixin.com/2012-01-17/100349542.html

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The historical precedents and much of the commentary coming out of Germany suggest that Ger -many will not take steps to reverse the trade surplus. Countries that run large and persistent trade

surpluses never seem to understand that their surpluses are mainly the consequences of domes cpolicies that generate addi onal domes c growth by absorbing foreign demand.

O O O MICHAEL PETTIS / LINK

Remember the sharp rise in taxi medallion prices over the past few years? I thought that theprice was pre y jus able back then, in October, although I did have my concerns:Any me you see a chart like the ones above, you have to worry that theres a bubble. Plus, therespoli cal risk: the mayor can print new medallions, making the exis ng ones worth a li le less (but nota lot less, given that the income from medallions is largely xed).

Since then, however, two things have happened. First, New York City agreed to print 2,000 new me -dallions thats a very large increase. And secondly, Charles Komano you remember him hasdone the hard math of what this means for conges on and taxi incomes.

The rst thing to understand is that while 2,000 cars might not seem very much in the context of acity which sees 800,000 cars per day, in fact its huge. Taxis spend 40 mes as much me driving incongested areas as private cars do, so 2,000 medallions is the equivalent of 80,000 private cars. Andwhen you impact the amount of tra c that much in an area which is already highly congested, thee ects can be enormous:

The bo om line, here, is not just signi cantly more conges on, with travel speeds dropping on aver -age from 9.5 mph to 8.4 mph. That inconveniences everybody, of course, not least the cab driversthemselves, who will take a whole extra minute, on average, to get to where their passenger wants togo. That decreases the number of fares they can pick up per day, and hurts their income.

And at the same me, the number of people wan ng to take a taxi is likely to go down, when tra cspeeds fall, rather than up. If you have fewer people hailing a greater number of cabs, then its simplemath that the number of fares per cab shi is likely to fall. According to Charless calcula ons, it willfall in total a good 19%.

If taxi fares stay constant, that means a 19% drop in taxi-fare income, per cab. Fares wont rise enoughto cover that fall. And of course the income for the driver is going to fall more than 19%, because the
http://mpettis.com/2012/01/if-no-trade-reversal-now-then-when/

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medallion owners are going to be very reluctant to drop the amount they charge the drivers per shi .

All of which implies to me that if theres a medallion-price bubble, then the introduc on of 2,000 newmedallions is likely to prick that bubble. And conversely, if medallions keep on changing hands for amillion dollars a pop even a er those 2,000 new cars are on the road, then we can be pre y sure thattheres no bubble here at all..

O O O FELIX SALMON / LINK

lets now see if I can outline the choices Europe faces. First, lets take Greece, because it is in -struc ve. Greece has two choices. They can choose Disaster A, which is to stay in the euro, cu ngspending and raising taxes so they can qualify for yet another bailout; nego a ng more defaults; get -ng further behind on their balance of payments; and su ering along with a lack of medicine, energy,

and other goods they need. They will be mired in a depression for a genera on. Demonstra ons will

get ever larger and uglier, as the government has to make even more cuts to deal with decreasingrevenues, as 2.5% of their GDP in euros leaves the country each month. There is a run on their banks.Any Greek who can is ge ng his money out.

Greek voters will then blame whichever poli cal group was responsible for choosing Disaster A andvote them out, as the opposi on calls for Greece to exit the euro. Which is of course Disaster B.

Leaving the euro is a nightmare of biblical propor ons, equivalent to about 7 of the 10 plagues thatvisited Egypt. First there is a banking holiday, then all accounts areconverted to drachmas and all pensions and government pay is nowin drachmas. What about private contracts made in euros with non-Greek businesses? And it is one thing to convert all the electronic

money and cash in the banks; but how do you get Greeks to turn intheir euros for drachmas, when they can cross the border and buygoods at lower prices, as in a on and/or outright devalua on willfollow any change of currency. It has to. That is the whole point.

So how do you get Zorba and Deimos to willingly turn in their remaining cash euros? You can closethe borders, but that creates a black market for euros and the Greeks have been smuggling throughtheir hills for centuries. And how do you close the shing villages, where their cousin from Italy meetsthem in the Mediterranean for a li le currency exchange? What about non-Greek businesses thatbuilt apartments or condos and sold them? They now get paid in deprecia ng drachmas, while havingto cover their euro costs back home? Not to men on, how do you get hard currency to buy medi -cine, energy, food, military supplies, etc.? The list goes on and on. It is a lawyers dream.

There is a third choice, Disaster C, which is worse than both of the above. Greece can stay in the euroand default on all debt, which cuts them o completely from the bond market for some me to come.This forces them to make dras c cuts in all government services and payments (salaries, pensionsetc.), and su er a capital D Depression, as they must balance their trade payments overnight, or dowithout. Then they choose Disaster B anyway.

The only real op ons are Disaster A or Disaster B. Whether they opt to go straight to the drachma(Disaster B) is only a ma er of ming. They will get there soon enough.

Why then do they wait? Whats the point of going through all these mo ons? Because Europe fearsa disorderly Disaster B. For the rest of Europe, it is the Abyss. The Greek hope is that Europe (readGermany) keeps funding them in order to keep back from the edge of the Abyss.

...Te only real options are Disaster A or Disaster B. Whether they opt to gostraight to the drachma (Disaster B)is only a matter o timing. Tey willget there soon enough
http://blogs.reuters.com/felix-salmon/2012/01/20/how-the-taxi-medallion-bubble-might-burst/

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Sadly, the lull proved but brief. The rst two weeks of the year were surprisingly calm for thestorm-tossed euro zone. But a gale is blowing again. First a series of downgrades from Standard

& Poors, a leading debt-ra ng agency, coincided with a stand-o in the voluntary restructuringtalks between Greece and its private bondholders. Now there are signs of a con nent-wide recession.The euro crisis is back.

Indeed, the next few weeks could be decisive for the single currencys future. Several euro-zone gov -ernments must sell huge amounts of debt in bond auc ons. They are also due to wrap up nego a onsover the new scal compact, demanded by Chancellor Angela Merkel of Germany to enforce budgetdiscipline, at a European Union summit at the end of January. And the brinkmanship in Greeces debttalks could yet lead to a disorderly default (see ar cle).

What happens in Greece could be drama c and painful, especially for the Greeks. If their country isforced out of the euro zone a er a chao c default it will cause problems for everyone. Yet Greece is

small and its creditors see a restructuring as inevitable. The crucial country is Italy.Italy is too big for the exis ng rescue fund to bail out. (Spainis at risk too, but its debt is a lot smaller and the marketsare more con dent it will be repaid.) Italy is unique inits combina on of size and punishingly high bond yields(currently 6%). It is hard to see the euro surviving werethe worlds third-biggest debtor judged unable to pay itscreditors.

The immediate consequence of this for Mrs Merkel is that any sort of restructuring of Greece musttherefore come with a credible plan to backstop Italy (and other weak countries), at least in theshort term. Without such backing, the markets will simply move on, perhaps very quickly, from Greeceto Italy, and the many banks that have lent to it. A credible rewall from the European Central Bank(and possibly the Interna onal Monetary Fund) would stop them.

But staving o contagion is not enough. Italy also needs lower interest rates on its bonds. Sadly, thecountry epitomises the economic and poli cal problems in Mrs Merkels strategy of relying on scalausterity to save the euro.

In economic terms, Italys main problem is not public pro igacy. Its debt may be huge, but it is run -ning a primary budget surplus (ie, before interest payments), its overall budget de cit is much smallerthan Frances, and its recent budget puts it on course to eliminate that de cit in 2013. Under a newgovernment, led by Mario Mon , a former European commissioner, Italy has regained the place at thetop European table that Silvio Berlusconi lost (see ar cle). Mr Mon has not merely pushed througha tough budget, but he is also embarking on a di cult, if overdue, set of liberalising and structuralreforms to open up sheltered parts of the economy to compe on.

O O O ECONOMIST / LINK

Britain has sunk deeper into debt. Three years a er bubble burst, the UK has barely begun totackle the crushing burden le by Gordon Brown. The contrast with the United States is franklyshocking.The latest report on Debt and Deleveraging by the McKinsey Global Ins tute shows that total publicand private debt in the UK is s ll hovering at an all- me high. It has risen from 487pc to 507pc of GDPsince the crisis began.

... What happens in Greece could be dramaticand pain ul, especially or the Greeks. I theircountry is orced out o the euro zone a tera chaotic de ault it will cause problems oreveryone
http://www.economist.com/node/21543168

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As the chart above shows, as recently as 1990 Britains debts were s ll just 220pc of GDP. Has a richcountry ever been debauched so fast in peace me?

The ordeal of belt- ghtening will be grim, dragging out for a genera on if Japan is any guide. TheJapanese at least began their post-bubble debacle as the worlds top creditor na on with a tradesuper-surplus and a savings rate of 17pc. Britain has no such bu ers.

It is a very di erent picture in the US where light is emerging at the end of the tunnel. Americanbanks, rms, and households have been chippingaway at their debts, more than o se ng Wash -ingtons double-digit de cits.

The total burden has dropped to 279pc, downfrom 295pc at the peak of the boom. Householdshave purged roughly a third of the excess, rough -ly tracking the historic pa ern of post-bubble de -leveraging.

US debt is already lower than Spain (363pc),France (346pc), or Italy (314pc), and may under -cut Germany (278pc) before long -- given the re -fusal of the European Central Bank to o set scalcontrac on with monetary s mulus.

One is tempted to ask what all the fuss wasabout in the US. The debt of nancial ins tu onsis just 40pc, compared to the UK (219pc), Japan

(120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to$6.1 trillion -- accelerated by the Lehman collapse -- as lenders rely more on old-fashioned deposits.

Tim Congdon from Interna onal Monetary Research said US banks were never as damaged as claimedand now have the highest capital ra os in over thirty years. The rate of loan write-o s has droppedfrom 3.2pc to 1.9pc, a faster improvement than a er the nancial crisis of the early 1990s.

There has to be a prospect that Fed funds rate will move back to a more normal level say, 2pc to4pc - over the next couple of years, he said. If so, this will come as an almighty shock to the bond andcurrency markets. Almost nobdy is prepared for such a turn of events.

In hindsight, the US property boom was was remarkable modest compared to what happened inSpain, or what is happening now in China now where the house price to income ra o in Beijing,

Shanghai, and Shenzhen is near 18. Americas ra o peaked at 5.1 and is already back to its modernera average of three. The excesses have been unwound.

O O O AMBROSE EVANS-PRITCHARD / LINK

SOURCE:MCKINSEY/UK DAILY TELEGRAPH
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9031478/America-overcomes-the-debt-crisis-as-Britain-sinks-deeper-into-the-swamp.html

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21.CHARTS TH AT MAKE YOU GOHmmm...

23 January 2012 21

T he top chart shows the intraday average gold price over a 24 hour period between 2006 and2010: 1,000 trading days.Below (le ) shows what the gold price WOULD be if it only traded between the London AM and PM

xes while the chart below, right, demonstrates what the gold price would be if it hadnt traded be -tween the AM and PM xes.

Bo om line? Without that speci c period between 1970 and today, gold would be trading at $3,345...

SOURCE:CASEY RESEARCH/SHARELYNX

CLICK TO ENLARGE CLICK TO ENLARGESOURCE:CASEY RESEARCH/SHARELYNX SOURCE:CASEY RESEARCH/SHARELYNX
http://www.caseyresearch.com/gsd/sites/default/files/Intraday%20Average%20Gold%20Price%20Movements_8.jpghttp://www.caseyresearch.com/gsd/sites/default/files/Buy%20PM%20Fix.pnghttp://www.caseyresearch.com/gsd/sites/default/files/Buy%20AM%20Fix.png

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22.CHARTS TH AT MAKE YOU GOHmmm...

23 January 2012 22

Richard Ross of Auerback Grayson - my favrourite char st - is back with a bullish look at Eu -ropean equi es. Saddle up!

[email protected]
mailto:rross%40agco.com?subject=Things%20That%20Make%20You%20Go%20Hmmm.....mailto:rross%40agco.com?subject=Things%20That%20Make%20You%20Go%20Hmmm.....

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23.

23 January 2012 23

WORDS TH AT MAKE YOU GOHmmm...

The man who puts the Yogi into Bear, Marc Faber, talks toBloomberg TV about the upcoming bond market meltdown

and explains why, even though he is expec ng the end of the globalnancial system as we know it, he is s ll bullish equi es.

Marc reveals how he lost a bet to David Rosenberg that will costhim a bo le of whiskey, and compares the current bond market tothe last throes of the NASDAQ bubble.

Call me old-fashioned, but even though he may have been wrongso far about those government bonds, Ill s ll side with Marc...

Andrew Lilico, managing direc -tor at Europe Economics, talksabout the ming of a Greek debt defaultand the prospect of contagion in the

euro zone. Lilico also discusses Spanishand Italian bonds with Mark Barton onBloomberg Televisions The Pulse.

Lilico sees a default in March.... thencomes the contagion

Ihad the great privilege of speaking with Jim Puplava of Finan -cial Sense this past week.In a wide-ranging conversa on, Jim and I discussed China, Japan,Australia, Europe and the United States and tried to get a sense of how the issues facing each of these areas of concern may or maynot end up being resolved in 2012...

CLICK TO WATCH

CLICK TO WATCH

CLICK TO LISTEN
http://www.zerohedge.com/news/mark-faber-resumes-bloodfeud-treasurys-still-sees-entire-financial-system-implodinghttp://www.financialsense.com/financial-sense-newshour/guest-expert/2012/01/19/grant-williams/2012-is-the-year-the-european-crisis-is-resolvedhttp://www.bloomberg.com/video/84515732/

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SUBSCRIBE UNSUBSCRIBE COMMENTS

and fnally

W hat a voice...

W hat a life...E a James Obituary

Hmmm

CLICK TO WATCH

ETTA JAMESJanuary 25, 1938 - January 20, 2012

GRANT WILLIAMS 2011
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