THINGS THAT MAKE YOU GOHmmm…A walk around the fringes of finance

20 April 2011 1

“The fact that we are here today to debate raising Amer-ica’s debt limit is a sign of leadership failure. It is a sign that the US Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reck-less fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”– SENATOR BARACK H. OBAMA, MARCH 2006

“ LECTOR, SI MONUMENTUM REQUIRIS CIRCUMSPICE”(reader, if you seek his monument, look around you)

– Epitaph, Sir Christopher Wren

2.THINGS THAT MAKE YOU GO Hmmm...

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I had been reading about gold as an investment but more importantly as a hedge against money-printing for some time and had dabbled in ETFs while i told myself that I would DEFI-NITELY buy some

gold – real gold. Physical gold. Shiny,

yellow, heavy gold.

But of course, I didn’t.

It was all too hard, frankly. Why go to all the trouble of researching, finding a bullion dealer, choos-ing between bars and coins and then plunking down your cash in return for a lump of gold when you could sit at home in front of your computer, click your mouse a few times and be the proud owner of some unallocated claim on a pool of gold that may or may not be there but that gives you exposure to any move in the gold price?

You can buy exposure to gold during the commercial break of Grey’s Anatomy. Easy.

The trouble with doing that, is that you then end up with a position. It becomes a number that you trade into and out of based on extraneous factors that may or may not have an effect on the underly-ing price. There aren’t many people who have taken a position in GLD (or SLV for that matter) who haven’t either been chased out of their position in a big down-move, or failed to pull the trigger on a buy-order because they felt the price had run too far.

All over the world there are people who thought gold had run too far, too fast at $800, $900, $1000 – in fact, pick a price between $500 and where we stand today, a little shy of $1,500, and you will find somebody who tried to put in a low bid in the ETFs waiting for a pullback that never came and subsequently missed out on the ride of a lifetime.

The thing about the whole ‘buying physical’ idea is that, just as it’s a pain in the neck to go buy your first coin or bar, it’s also as much of a pain to go and sell it again too – nobody hangs around a bullion dealer watching the price change in the hope of catching the top of the day – for one thing, that’s a sure-fire way to miss Grey’s Anatomy, but for another, it’s a pointless and time-consuming exercise.

The second you actually hand over cash in exchange for a piece of gold, it all falls into place. Gold FEELS like money – more so than even the highest-denominated fiat banknote you will ever hold. Trust me. If you haven’t done it yet, try it.

Richard Russell has long countenanced not valuing your gold holdings in dollar-value terms, but sim-ply as a number of ounces you own and there is a lot of sense in that.

The reason I bring this up is a story this week about the University of Texas’ Endowment Fund which has just disclosed a billion dollar holding of gold. Not derivatives. Not claims. Gold. Physical gold.

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Shiny, yellow, heavy gold:

The University of Texas Investment Management Co., the second-largest U.S. academic endow-ment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board.

The fund, whose $19.9 billion in assets ranked it behind Harvard University’s endowment as of August, according to the National Association of College and University Business Officers, added about $500 million in gold investments to an existing stake last year, said Bruce Zimmerman, the endowment’s chief executive officer. The holdings are worth about $987 million, based on yester-day’s closing price of $1,486 an ounce for Comex futures.

Interestingly enough, Kyle Bass of Hayman Advisors (a TCU alumni, no less) was instrumental in the decision-making process:

The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board, Zimmerman said at its annual meeting on April 14. Bass made $500 million on the U.S. subprime-mortgage collapse.

“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

In a recent report, Eric Sprott used data from CPM Group to make an interesting point. Here is that interesting point written in two different ways:

Between 2002 and 2010, the amount of global assets that were held in the form of gold more than tripled.

Between 2002 and 2010, the amount of global assets that were held in the form of gold increased from 0.2% to 0.7%

Seen graphically, the point of that statement is even more emphatic. The so-called ‘bubble’ in gold is nothing of the sort.

Sure, there is some froth in gold as hot money has come into the commodity space and the lev-el of acceptance of the gold ’story’ has become wider-spread, but as far as the long-term invest-ment case for gold goes, unlike the X-Files, the truth is NOT out there.

i make no apologies for boring people to death about gold. I have been doing it for several years now and my friends fall into two distinct categories; those who bought a gold coin to shut me the hell up and those who either avoid my calls altogether or pull a Basil Fawlty and faint whenever the subject comes up. The first group is by far the smaller of the two (which explains why I spend so much time on my own writing pieces like this) whereas the second is larger, more vociferous and populated with some of the smartest people I know. I know which group is happier about gold nudging $1,500 though.

There is a tremendous amount of pushback when it comes to buying gold - it is the most emotive of investments for whatever reason - and people either get it or they don’t. Yes, it has no intrinsic value.

SOURCE: CPM GOLD YEARBOOK 2011

4.THINGS THAT MAKE YOU GO Hmmm...

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Yes, it pays no interest (unlike cash of course......ahem). No, you can’t eat it. Yes it HAS quintupled in price in the last 10 years..... hang on, it’s quin-tupled in price in the last ten years... while the S&P has gone precisely nowhere? OK, so maybe THAT goes in its favour, but what else is there to prove gold isn’t in a ‘bubble’? Well, for starters, let’s take a look at this chart courtesy of Dr. Marc Faber and Casey Research {right}:

As you can see, the percentage of gold held by pen-sion funds - the stickiest of investors - is de mini-mus which is why the actions of the US’s second-largest college endowment fund in buying a billion dollars of physical gold is a hugely significant devel-opment.

UTIMCo’s actions will do two things; it will legitimize the idea of this type of fund taking a significant position in gold bullion and it will encourage many who have not yet looked at the idea to give it more than a cursory glance. Funds of a longer-term nature looking to buy significant amounts of bul-

lion however will encounter some serious competition in the shape of those most captive of buyers - Central Banks.

As the names highlighted in yellow in the table (left) show, there are a few conspicuous names list who hold considerably less gold than might be con-sidered prudent given a) the times we live in and b) their exposure to a rapidly-de-preciating dollar.

Let’s start at the top with China.

China, as always, dances to the tune of the band playing inside its own head with regards to reporting its gold holdings. The last such report, in the summer of 2009, shocked the world when it was announced that China’s holdings had exceeded 1,000 tonnes - virtually double what it had re-ported for years. Such reports are sporad-ic and timed to suit China.

As at December of 2010, the People’s Republic held a whopping 1.7% of its $3 trillion in gold. To put some perspec-tive around that, the recent purchase by UTIMCo would increase gold’s share of China’s forex reserves by a MASSIVE 0.03%. Scary, huh? SOURCE: WIKIPEDIA

SOURCE: CASEY RESEARCH/MARC FABER

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Think China hasn’t been buying more gold since the summer of 2009? Think again. They just haven’t reported it - yet.

The second country on our list-within-a-list, Russia, is far more friendly when it comes to reporting THEIR gold holdings - in fact, they do so every month which is both useful and educational to the in-

trepid follower of such things.

Russia has stated its intention to increase it’s gold holdings by 100 metric tons each year until further notice. Last year alone, they upped their position by 23% to roughly 790 tonnes (the chart left, missed the December announcement). Some observers feel Russia is doing the groundwork to enable the Ruble to be convertible into gold at some point, thus ensuring its status as the world’s NEW reserve currency (a process that took an interesting turn last night when S&P downgraded the US’ credit outlook to negative).

What of our next contestant, Japan?

Japan’s 3% holding, or 765.2 tonnes is exactly the same as it was in 2005 so they are one country who has yet to be bitten by the gold bug. In fact, in the wake of S&P’s ‘unexpected’ action last night, the Finance Minister of the 2nd-largest foreign holder of US Treasuries said today that Japan:

“...continue[s] to see US debt as an attractive investment.”

Really? So you continue to think that the asset in which you have invested $885.9 billion of your dol-lars is a good investment and you’re happy to tell the world? Well that’s nice to know.

Let’s move swiftly on to our next port of call - India.

As the world’s biggest consumer of gold, one thing India DOESN’T need is convincing of the gold story. What they DO need, however, is some more gold.

In 2009, India relieved the IMF of 200 tonnes of gold (8% of annual mine production) in a one-off transaction that meant the IMF’s first sale in nine years failed to even touch the market, despite that overhang being long considered a major impediment to any further appreciation in the gold price. India’s purchase price of $1,045 was, at the time, widely thought to signify a top by non-believers in the gold story but yet again, the yellow metal confounded the naysayers and kept powering higher. So far, in a little over 15 months, India has made a mark-to-market profit of $2.8 billion.

Which brings us to the last name on our list, and the one so few people mention when discussing this aspect of the gold story - Saudi Arabia.

The Saudis, perhaps more than anyone else on our little list, have reason to diversify their dollar hold-ings as they receive Federal Reserve Notes for every barrel of oil they pull out of the ground; roughly 10 million per day at the end of 2010 which equates, at $100 per barrel, to $1,000,000,000. Per day. Every day. In nice, crisp, depreciating dollars. If I were Saudi Arabia (which I’m not), I couldn’t swap my dollars for gold fast enough quite frankly - even at $1,500/oz. Interestingly enough, Saudi Arabia’s paltry 3% holding of gold is up from 2008’s reported 1.2% so perhaps even the Saudis are getting the joke.

A look at a world map of gold per capita shows a conspicuous lack of the barbarous relic in the nations for whom gold has the most cultural significance - nations who also happen to have an awful lot of dollars. That is changing and it will continue to do so:

...Think China hasn’t been buying more gold since the summer of 2009? Think again. They just haven’t reported it - yet.

6.THINGS THAT MAKE YOU GO Hmmm...

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The pullbacks in gold have been getting shorter and shallower in the past couple of years and I feel fairly certain that the reasons for that are captive Central Bank bids following the gold price up the curve some 5% bellow spot, just waiting to take advantage of any corrections. In days gone by, that tactic would have paid off handsomely but now, as more and more individuals discover what it feels like to swap money for wealth (believe me, the second you hand over your Dollars or Yen or Euros

in exchange for some physical gold, you will instantly understand the difference be-tween the two) and even pension and en-dowment funds like UTIMCo are begin-ning to understand the benefits of owning physical bullion, any-body waiting for the big correction is likely to be waiting a while.

The chart {left} shows how pre-QE1 pull-backs in the gold price averaged around 16% while those that have taken place after the

CLICK TO ENLARGE SOURCE: WIKIPEDIA

SOURCE: BLOOMBERG/TTMYGH

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printing presses were switched to warp speed have averaged just below 5% (4.99% for those amongst you keeping score).

The very nature of the captive bids as well as the fact that there are new buyers like UTIMCo who are looking at gold as a long-term capital preservation instrument that also seems to provide capital appreciation in excess of just about any other asset, allied to the fact that the printing presses are likely to stay firmly on for the foreseeable future no matter WHAT the ‘talk’ is from governments and Central Bankers means that the gold ‘bubble’ may well prove to be anything but when we get to look at the next few years through the prism of hindsight.

Want to understand the gold phenomenon? Want to know the difference between money and wealth? Well, it’s a lot easier to do than you might think..... but, as I type this, you’ll need $1,501.73 to find out.

Don’t have that kind of money? Well then, there’s always silver.....

Today’s fun and games kicks off with an ‘Oh Please Moment’ as a fellow skeptic looks at the S&P warning earlier this week, before we revisit a story from last year that several large banking institutions no doubt hoped had gone away - yes, that’s right, the LIBOR-fixing accusations are back!

We read the fascinating story of the REAL Bernanke Put (a subject that gets double focus in our ‘Words That Make You Go Hmmm’ section), find out how The Chairman plans on avoiding Cold Turkey by playing the infinite rollover card and learn how a recent summit on the tiny island of Hainan could spell BIG trouble for the G20.

Comrade Kuppy wonders aloud what a flash crash to the upside would look like, we dig a little deeper into the fallout from the Finnish elections and check in to see how things are shaping up as the Middle East situation remains fluid. Unfortunately, a couple of former enemies seem to be playing much nicer together in the sandbox now - and that may NOT be such a good thing.

Indian inflation is soaring and the World Bank President warns us we’re one shock away from a food crisis, Rick Rule talks about gold, silver and uranium amongst other things, Max Keiser (yes, him) visits Ireland and gives us a pretty harrowing look at how the Emerald Isle is faring post-austerity and we have charts on income tax levels, competing budget proposals, the S&P’s Lost Decade and Jeff Gund-lach’s presentation on the ’Inevitable American Default.

Shiny, happy people? Laughing?

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Contents 20 April 2011

An ‘Oh Please!’ Moment:...

Twelve Banks Face US Libor Proceedings

On Actually Writing The (Currently Implied) Bernanke Put

Bernanke May Reinvest Maturing Debt To Avoid ‘Cold Turkey’ End To Stimulus

The BRIC Countries’ Hainan Summit Could Make The G20 Redundant

Approaching The Eraser

Flash Crash To The Upside In Gold

How Dangerous Is Finland To The Euro?

Iran-Saudi Arabia Rift Widens Over Bahrain

India’s Inflation Accelerates To 8.9% In March

World Bank President: ‘One Shock Away From Crisis’

Charts That Make You Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally.....

9.THINGS THAT MAKE YOU GO Hmmm...

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Today’s breathless anxiety-inducing headline was that Standard & Poors, the rating agency, has issued a “negative outlook” warning on US sovereign debt, claiming that the US, in comparison with other countries with a top AAA credit rating, has “very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us”. S&P warned that there was a “a one in three chance that the US could lose its AAA rating in two years because of its mounting debt.”

The ratings firm--one of three global companies that Wall Street relies upon to establish the credit ratings of companies and nations around the world--said its analysts had “little confidence” that the Obama administration and the divided Congress would reach any agreement on a deficit-reduction plan before the next national election in the fall of 2012, and that they doubted that any such plan would be adopted until after 2014, two whole Congressional elections away.

So far, the other two ratings agencies, Moody’s and Fitch Ratings, have not followed suit. Moody’s is-sued a statement saying, ““Moody’s rating for the US is Aaa and remains stable,” though the company

warns that “an upward debt trajectory and increasing fiscal pressures could increase the likelihood of an “outlook change” within “the next two years.”

Meanwhile, Fitch Ratings, which unlike Moody’s and S&P, is based in Europe, took an even more sober stance, saying, “In Fitch’s opinion, the likelihood of the U.S. gov-ernment failing to honor its financial obligations and in particular make due and full payments on U.S. Treasury securities is extremely low. Ultimately, the recognition of the dire consequences of failing to raise the debt ceiling in a timely manner will pre-vail over differences on the more fundamental issue of how best to place U.S. public finances on a sustainable path over the medium- to long-term.”

So what’s going on here?

There would seem to be only two possibilities:

Either S&P has been pressured by powerful Republicans and/or Wall Street Bankers to issue this warning, in order to add to national hysteria about the national debt and win more drastic cuts in social programs, or S&P is simply blowing it again.

“Political shenanigans cannot be ruled out,” says Galbraith. “That’s what lawyers would call the ‘re-buttable presumption.’ After all, who benefits? The Republicans and perhaps the banks. But of course the other possibility is that S&P doesn’t know what it’s talking about, and after their disastrous miss-ing of the mortgage bubble, that’s quite possibly what it is.”

O O O THISCANTBEHAPPENING / LINK

A European fund manager has launched court proceedings in the US against 12 banks it alleges manipulated Libor, the inter-bank lending rate, between 2006-2009.

FTC Capital, which is based in Vienna, claimed the banks colluded to artificially depress the cost of borrowing and limit trade in Libor-based derivatives during the period.

About $350 trillion (£214 trillion) worth of derivatives and other financial products are based on Libor.

The 12 banks accused of manipulating the rate are Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JP Morgan, Lloyds Banking Group, Norinchukin Bank, Royal Bank of Scotland, UBS and West LB.

...Either S&P has been pressured by powerful Republicans and/or Wall Street Bankers to issue this warning,... or S&P is simply blowing it again

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“During the most significant financial crisis since the Great Depression, US dollar Libor rates submitted by contributor banks did not vary markedly, nor did they increase or decrease sharply,” FTC said in its complaint filed in the federal court in Manhattan on Monday.

“In a market not artificially suppressed, Libor rates should have increased significantly during this period. In addition, because different banks were experiencing different levels of severe stress, the banks should have been receiving markedly different borrowing rates.”

News of the proceedings come one month after Swiss Banking Group UBS admitted US, British and Japanese regulators were investigating whether it had manipulated Libor.

Barclays, along with Citigroup, Bank of America and West LB were also reported to have received sub-poenas as part of the investigation. West LB later denied this, although none of the other banks have since commented on the regulatory investigation.

O O O UK DAILY TELEGRAPH / LINK

FT Alphaville has been looking at the chances of the Federal Reserve pulling out the last weapon in its unconventional monetary arsenal: the writing of put options for the purpose of suppressing yields.

While the theory does appear extreme, a fair bit of academic research has been done on the matter.

And it turns out it might not be quite as crazy as it first seems.

For example, back in 1998 a paper entitled “Short rate expectations, term premiums and central bank use of derivatives to reduce policy uncertain-ty” by Peter A. Tinsley, raised exactly this sort of solution to an extreme deflationary threat.

And there were some really interesting points raised in the research too. Especially with respect to variance.

This is important because to all extents and pur-poses anecdotal evidence suggests something very odd may be happening with volatility and variance surfaces — possibly on account of QE side-effects. So, while the US Treasury yield curve has been suppressed, the exact opposite seems to have happened to the volatility curve.

Note the... chart [left] – compiled for us by Chris Cole of Artemis Capital Management using iVola-tility data — which shows the degree to which the volatility curve has steepened since QE was first

released:

As Cole tells us, if you short volatility you eventually have to displace that convexity risk elsewhere.

So with everyone currently feeling very comfortable shorting spot volatility — possibly as a funding strategy — the cost of tail-risk protection much further down the volatility curve is rising.

CLICK TO ENLARGE SOURCE: ARTEMIS CAPITAL/IVOLATILITY

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What’s more, the sheer volume of demand for tail-risk protection is reportedly skewing far, far off variance — up to five and 10 years out — to even steeper rates than can be detected via the Vix fu-tures curve alone. Arguably, something that could be setting up the volatility market as the source of a new black-swan event.

The fear, if you will, is being displaced from the Treasury bond market and into the volatility asset class.

Not exactly the ideal result of any central bank’s intervention.O O O FT / LINK

Federal Reserve Chairman Ben S. Bernanke may keep reinvesting maturing debt into Treasuries to maintain record stimulus even after making good on a pledge to complete $600 billion in bond purchases by the end of June.

The Fed chief’s top two lieutenants said this month the economy and inflation are too weak to war-rant the start of a monetary-policy reversal. Investors and economists including David Kelly at JPMor-gan Funds see that as a signal the Fed will keep its balance sheet at current levels by replacing about $17 billion a month in maturing mortgage debt with Treasuries.

Ending the reinvestment policy and the $600 billion program at the same time would be like quitting stimulus “cold turkey,” said Kelly, who is based in New York and helps oversee $400 billion as chief market strategist at JPMorgan. “It does make sense to reinvest for a while,” he said. “Then they could watch how bond yields react to that.”

Yields on 10-year Treasuries declined to 2.49 percent from 2.76 percent in the two weeks following the Fed’s Aug. 10 decision to begin reinvesting payments on assets purchased during the first round of bond buying from December 2008 until March 2010. An end to the reinvestment policy should be seen by inves-tors as the first step in a tightening of credit by the Fed, said Neal Soss, chief economist at Credit Suisse Group AG.

Soss is among economists who say the Federal Open Market Committee at the end of its April 26-27 meeting will probably affirm its plan to halt Treasury purchases on schedule.

Fed officials are starting to debate what steps to take after completing the purchases, a program dubbed QE2 for the second round of quantitative easing. Policy makers were divided at their last meeting on March 15, with a “few” officials saying tighter credit may be warranted this year, while a “few others noted that exceptional policy accommodation could be appropriate beyond 2011.”

Janet Yellen, the Fed’s vice chairman, said April 11 that surging commodity costs over the past year are “unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy.”

O O O BLOOMBERG / LINK

The West’s political and financial elite is still a very long way from grasping the ex-tent to which the global centre of economic gravity is now shifting – and the implications in terms of relative and absolute living standards.

On Friday, at its latest summit in Washington, the G20 group of nations issued a communiqué. I don’t

CLICK TO ENLARGE

...surging commodity costs over the past year are “un-likely to have persistent ef-fects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy.”

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know why anyone bothered. The document was meaningless.

The G20’s membership in theory includes the biggest Western economies, plus the most commer-cially important emerging markets. At the 2009 Pittsburgh summit, this grouping dubbed itself “the world’s premier forum for international economic co-operation”.

The global economy hasn’t yet fully emerged from the “sub-prime” fiasco. The Doha trade talks are disgracefully stalled. Western banks remain riddled with massive liabilities that haven’t been “fessed up” – an inconvenient truth that could yet cause another “Lehman moment” on skittish global equity markets. Several of the world’s “advanced economies” are anyway in intensive care, their sovereign debt markets propped up only by “printed money”.

Faced with such vast challenges, and the dangers they pose for the future pros-perity and security of the human race, the G20 came up with no specifics. The communiqué managed only vague promises about member states “aiming to promote external sustainability” and “pursuing the full range of policies required to reduce excessive imbalances”. As I said, I don’t know why anyone bothered.

The G20 is clearly failing as an effective decision-making body. Its member states disagree entirely about the reasons behind recent global financial instability, so have no shared analysis of what to do. The big emerging markets, in particular, are furious that the US seeks to wield the dollar’s reserve currency status as a “weapon”, using so-called “quantitative easing” to export inflation and debase the value of America’s debts to the rest of the world. The “emerging giants” also complain that, while broader than the G7, the G20 is still run by Western powers essentially to promote their own interests.

No surprise, then, that the fast-growing economies of the non-Western world are establishing rival summits.

This latest G20 gabfest was overshadowed by a simultaneous gathering on the Chinese island of Hain-an, attended by the leaders of Brazil, Russia, India and China – the so-called BRIC group. China is the world’s second biggest economy. India, Russia and Brazil are all well inside the top 10. By 2016, the International Monetary Fund predicts the GDP of these four will total $21,000bn (£12,860bn), out-stripping the US.

O O O UK DAILY TELEGRAPH / LINK

Two months ago, I noted that the surprise resignation of Wells Fargo’s Chief Financial Officer had caught the eye of a number of shareholders, who noted my comment several quarters ago that we could observe a wave of fresh risk aversion “at the point where the first bank CFO resigns out of refusal to sharpen his pencil any further.” My impression is that the underlying state of mortgage debt is no better than it was quarters ago, and indeed may be worse in the sense that there has been no meaningful decline in the backlog of delinquent and unforeclosed homes. While foreclosure filings certainly fell significantly in the first quarter, the decline was driven by record-keeping problems and legal moratoriums.

As Realty Trac observed, “Weak demand, declining home prices and the lack of credit availability are weighing heavily on the market, which is still facing the dual threat of a looming shadow inventory of distressed properties and the probability that foreclosure activity will begin to increase again as lend-ers and servicers gradually work their way through the backlog of thousands of foreclosures that have been delayed due to improperly processed paperwork.”

It’s fascinating to hear JP Morgan’s Jamie Dimon complaining “We have homes sitting there for 500

...I don’t know why anyone bothered. The document was meaningless.

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days rotting that we can’t do anything about” while at the same time reducing loan loss reserves on those assets. But of course, that’s precisely what the FASB has allowed banks to do. Specifically, there is no longer any need to mark to market, and the FASB appears to have dropped any plan to restore it. The standard instead is “amortized cost” (on which basis you can continuously make the mortgages whole simply by tacking the delinquent payments on to the back of the loan). Little wonder half of all mortgage modifications re-default. The modifications themselves don’t materially change the present value of the payment stream, and frequently don’t reduce the payments themselves beyond the first year. Meanwhile, it’s equally fascinating to observe how much bank earnings for the first quarter (thus far) have been driven by trading profits from commodities and fixed income (thanks Ben).

While the S&P 500 is slightly lower than it was when Wells Fargo’s CFO resigned, it’s probably worth noting that the CFO of Bank of America also resigned last week. The press releases focused on per-sonal reasons in both cases, but then, those press releases on CFO departures invariably have a posi-tive spin. We’re reminded of how Citigroup reported that it had “promoted” its CFO to Vice Chairman in 2009, which the Financial Times later reported was part of an agreement with regulators that in-cluded the provision “Citigroup will initiate a process that will result in a decision on (a) whether the CFO for Citigroup ... can be more effectively utilized in other Citigroup responsibilities, and (b) if so, on replacements by a person ... with relevant financial, accounting or other experience acceptable to the agencies, with the results publicly announced by ... publication of Citigroup’s third quarter 2009 earnings.”

Maybe it’s nothing. In any event, given that the FASB has moved in the direction of permanently dis-abling transparency, it’s not clear that problems with bank balance sheets - even if significant - need to actually work their way through to regulatory events. What is more likely, though, is that credit conditions may be more sluggish to normalize than the upbeat bank reports of recent quarters may suggest. So my concern isn’t so much a replay of the banking crisis and customer runs of early 2009, as much as it is with the headwinds for the banking system and the economy as a whole from continuing debt burdens that have not been materially restructured.

O O O JOHN HUSSMAN / LINK

Traders like to talk about panics or crashes--“The Panic of 1907” or “The Crash of 1929.” Usually crashes involve something dropping in price. I have this funny feeling that the panic of 2011

will be upwards. There has been a slow move into hard assets for years now. One by one, investors are beginning to under-stand the meaning of what the Federal Re-serve intends to do to our currency. Even more importantly, investors are beginning to understand that most Western govern-ments are effectively bankrupt. None of this should be news to anyone. What is shocking is our government’s blasé atti-tude to the mess it has created.

We are now wrapping up a very conten-tious period of debate about the budget. After threatening to shut down our gov-ernment, both sides agreed to cut a few

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dollars and go on with the status quo. It reminded me of an insolvent company deciding to save money by eliminating free coffee. If I were a creditor to the US, I’d be in a blind panic. I think many people are suddenly realizing that the system is broken and no one has any desire to fix it.

For the past few months, gold has gone up, even while Fed officials have threatened to stop QE2 before it was scheduled to end. I think that’s telling. Gold knows what’s going on. People are slowly waking up to its charms.

Fear is a strange emotion. Normally, when people are scared, they sell assets for dollars. What does a crash look like where people sell dollars to buy gold? “Get me something to own that the govern-ment will not destroy!!” If you think your currency will be worthless, there’s almost no price that’s too high to pay for gold. In the past, there was always another currency that you could buy. Argentines had dozens of options each time their currency collapsed. What if there are no other options? All the currencies are now bad.

I realize that the concept of an upwards crash is strange to people. Look at what happened to the CBOE volatility index (VIX) from late 2007 until 2009. I think gold is about to do something very much like that. The days of slow and contained gold moves are over. We are about to see some real volatile action. What will people do if gold has a $100 one day move higher? Will they panic out of other asset classes to buy more?

O O O ADVENTURES IN CAPITALISM / LINK

Across the 17-member euro zone, government heads had a hunch April 17 might not be a very good day for the future of Europe. The strong ballot box performance of the eu-roskeptic True Finns means it is very likely the party will be part of the next government. It appears that a country long seen as an EU anchor may soon become a source of irritation for Brussels and in capitals across the bloc.

During the election campaign, True Finn party head Timo Soini lashed out repeatedly against the European Union and bailout plans for debt-ridden euro-zone members. Bolstered by an election that saw the party more than quadruple its standing, with 19 percent of the vote, an emboldened Soini remained vocal on Monday, saying it was unacceptable that Finland “must pay for the mistakes of oth-ers.” And that “the content of politics must change. We have been too soft on Europe.”

Does the party represent a threat to the com-mon European project? Do Finland’s right-wing populists truly have the power to bring the euro to its knees? Or does it merely have the capacity to create a threat to the euro’s stability and thus protract the current cur-rency crisis?

If the party becomes part of Finland’s next government, that answer could come within a matter of weeks. A coalition between the conservatives, who drew the most votes, the opposition Social Democrats and the True Finns is one viable option currently being dis-cussed.

SOURCE: DER SPIEGELCLICK TO ENLARGE

15.THINGS THAT MAKE YOU GO Hmmm...

20 April 2011 15

Under current euro-zone rules, all 17 members must approve bailout packages for countries in need -- and next month, an €80 billion package for Portugal is up for approval. During the campaign, Finland’s major parties said they wouldn’t form a governing coalition with the True Finns if doing so would create a threat to the future of Europe’s common currency. As such, it seems likely that, should the True Finns join the government, the party’s euro-critical positions will be watered down. It remains possible, however, that a future Helsinki coalition could refrain from vetoing a bailout package for Portugal, but would then refuse to provide funding.

O O O DER SPIEGEL / LINK

The war of words between oil-rich Iran and Saudi Arabia is escalating dangerously follow-ing Riyadh’s military intervention in Bahrain, where a security crackdown against pro-democracy dis-sidents shows no signs of abating.

On Monday, Major-General Yahya Rahim Safavi, a top advisor to Iran’s Supreme Leader Ayatollah Khamenei, bluntly warned Saudi Arabia that its intervention in Bahrain could boomerang. “The pres-

ence and attitude of Saudi Arabia [in Bahrain] sets an incorrect precedence for similar future events, and Saudi Arabia should consider this fact that one day the very same event may recur in Saudi Arabia itself and Saudi Arabia may come under invasion for the very same excuse,” General Safavi asserted. Chairman of Iran’s Joint Chiefs of Staff Major-General Hassan Firouzabadi reinforced the warning on Tuesday by calling the movement of Saudi Arabian troops into Bahrain, “as a blun-der committed by the Saudi government”.

The Islamic Republic News Agency (IRNA) quoted him as saying that Saudi Arabia “has actually dealt a blow on its security and has to pay its consequences”.

Earlier, Prince Turki bin Mohammad, Saudi Arabia’s Deputy Foreign Minister threat-ened to pull out his country’s diplomats from Iran unless Tehran improved their security cover. “I hope we won’t be obliged to withdraw our diplomatic mission from Tehran if Iran fails to take the necessary measures to protect it,” he said, after protesting students last Monday hurled flaming Molotov cocktails at the Embassy building.

Around 1,000 Saudi troops last month moved into Bahrain at the invitation of the Bahraini govern-ment. They are part of a force belonging to the Gulf Cooperation Council, which also includes 500 personnel from the United Arab Emirates (UAE) and Kuwait. Within hours of their arrival, Bahraini forces launched a fierce crackdown at the Pearl Roundabout, where thousands of protesters demand-ing political reforms had encamped.

In a statement on Monday, Amnesty International quoting local human rights group said that since March, Bahraini authorities have detained 499 people “including opposition and human rights activ-ists, teachers, doctors and nurses, for their participation in the February and March protests calling for far-reaching political and other reform in Bahrain”. It added that the whereabouts of the great majority of detainees remain unknown. If prosecuted, the detainees “may face unfair trials before the National Safety Court of First Instance and a National Safety Appeal Court”. These courts were established after the King of Bahrain, Sheikh Hamad bin Issa Al Khalifa, declared emergency in the Kingdom on March 15.

O O O THE HINDU / LINK

“The presence and attitude of Saudi Arabia [in Bah-rain] sets an incorrect precedence for similar future events, and Saudi Arabia should consider this fact that one day the very same event may re-cur in Saudi Arabia itself and Saudi Arabia may come under invasion for the very same excuse,”

16.THINGS THAT MAKE YOU GO Hmmm...

20 April 2011 16

India’s inflation rate rose to 8.9% from 8.3% in February, driven higher by fuel and manufacturing costs, the government has announced.

The January inflation rate was also revised upwards to 9.35% from 8.23%.

Earlier this week the International Monetary Fund (IMF) warned about inflation building in Asia’s fast-growing economies.

The body said “boom-like dynamics” should not be allowed to get out of control.

The Reserve Bank of India has raised its key interest rate eight times since March 2010.

The cost of borrowing currently stands at 6.75%

Analysts believe another rate rise from the Indian central bank is now likely.

“It seems that inflation trajectory has changed. The expected decline in inflation is just not happening and looks like we have underestimated the underlying pressure on prices,” said Ashutosh Datar, an economist at IIFL in Mumbai.

“More monetary tightening is inevitable after today’s data and the case for a 50 basis point hike in May is strengthened,” he added.

Rising commodity prices are pushing up the rate of inflation across the world.

On Friday China revealed that prices rose by 5.4% in March compared with a year earlier. This was up from 4.9% in February.

The rate of inflation also rose in the eurozone and the US to 2.7%.O O O BBC NEWS / LINK

The president of the World Bank has warned that the world is “one shock away from a full-blown crisis”.

Robert Zoellick cited rising food prices as the main threat to poor nations who risk “losing a genera-tion”.

He was speaking in Washington at the end of the spring meetings of the World Bank and International Monetary Fund.

Meanwhile, G20 finance chiefs, who also met in Washington, pledged financial support to help new governments in the Middle East and North Africa.

Mr Zoellick said such support was vital.

“The crisis in the Middle East and North Africa underscores how we need to put the conclusions from our latest world development report into practice. The report highlighted the importance of citizen security, justice and jobs,” he said.

He also called for the World Bank to act quickly to support reforms in the region.

“Waiting for the situation to stabilise will mean lost opportunities. In revolutionary moments the sta-tus quo is not a winning hand.”

O O O BBC NEWS / LINK

17.CHARTS THAT MAKE YOU GO Hmmm...

20 April 2011 17

Here’s a fun game for all the family.

Brought to you by the folks who gave you BRICs, PIIGS and even CIVETS, that whole ‘MENA’ thing was quite a popular new topic for a while recently, wasn’t it? Don’t worry though, it hasn’t gone away and it’ll be back on the front pages REAL soon so in the meantime, what better way to prepare than to take a stab at this quiz that will test your knowledge of the latest geographical acronym?

Here is Jeff Gundlach’s complete guide to the Inevitable American Default...

... for the reader who doesn’t have ENOUGH to worry about:

SOURCE: JEFF GUNDLACH

SOURCE: RETHINKING SCHOOLS ONLINECLICK TO PLAY

CLICK TO VIEW

18.CHARTS THAT MAKE YOU GO Hmmm...

20 April 2011 18

The Green line is the top marginal rate for married couples filing jointly (most years dividends were tax like ordinary income until 2003), orange is the top rate for income from capi-tal gains. The top corporate tax rate is included for comparison. Your marginal tax rate is the rate you pay on the “last dollar” you earn; but when you view the taxes you paid as a percentage of your in-come, your effective tax rate is less than your mar-ginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax.

Over the years, changing the amount of taxes people pay was accomplished not just by chang-ing rates but by changing the income limits of the tax brackets. Just looking at the top rates does not give the whole picture about who is paying taxes. Before the 1986 tax reform, the income tax had 15 brackets. In the 1930s, there were more than

50. The Wealth Tax Act of 1935, applied the top rate to income over $5 million and had only a single taxpayer: John D. Rockefeller, Jr. As the number of tax brackets decrease, the the top rate was applied to more people over the decades. Since 1987 the income tax brackets were combined so now more than a million people “qualify” for the top marginal rate.

O O O VISUALIZING ECONOMICS / LINK

Here is an update of a chart I posted last November to illustrate the total return perfor-mance of the S&P 500 since the Tech Bubble closing high on March 24, 2000. The chart shows the

value of $1000 invested in the index, including dividends, but excluding any taxes or fees, as of April 18th.

...For the sake of comparison and to validate the calculation method, we can compare Vanguard’s 500 Index Investor Fund (VFINX), which has had a return of $1,032 over the same timeframe The SPY ETF has returned $1,021. The chart also in-cludes the real value using the Consumer Price Index for the inflation adjustment.

We’re now over eleven years beyond the S&P 500 2000 high. This little charting exercise gives credence to the frequent reference to a “lost de-cade” for investors. It also offers support for the wisdom of diversification across asset classes.

O O O DOUG SHORT / LINK

SOURCE: VISUALIZING ECONOMICS

SOURCE: DSHORT

CLICK TO ENLARGE

CLICK TO ENLARGE

19.CHARTS THAT MAKE YOU GO Hmmm...

20 April 2011 19

I have been digging into the details of President Obama’s budget plan vs. Paul Ryan’s bud-get plan. What I found was so sickening that I asked my friend Ross Perez at Tableau Software for a display.

The interactive map below may take a few seconds. It will be worth your wait.

Select from the dropdown box for a list of items you can chart. You can also hover over any of the orange or blue boxes for a popup display com-paring the budgetary difference be-tween the Obama and Ryan propos-als for that year, for that item.

Boxes in blue are years in which Paul ryan has budgeted more for an item than President Obama. Boxes in Or-ange are the reverse.

Numbers for President Obama come from Whitehouse Budget Summary Tables page 174 (PDF page 6).

Numbers for Paul Ryan come from Path to Prosperity Table S-3 on PDF page 64.

The category items are identical except Ryan has an extra item for Global War on Terror. To equalize, we added Global War on Terror to Security.

O O O CALCULATED RISK / LINK

SOURCE: CALCULATED RISKCLICK TO ENLARGE

20.

20 April 2011 20

WORDS THAT MAKE YOU GO Hmmm...

This video was Previously referenced in this edition of Things That Make You Go Hmmm..... The so-called ‘Bernanke Put’ may well be quite literally being put to use if this sharp piece of investigative research is correct.

Of course, if this turns out to be true, there’s absolutely nothing wrong with it. Is there.

Is there?

Regular visitor Rick Rule, of Sprott AM talks to Eric King about gold, silver, Uranium and much, much more...

A double-dose of Max Keiser? Sounds like the last thing you’d ever want on a Wednes-day, but this time it really is different as Max travels to Ireland and produces a fascinating and terrify-ing portrait of what has happened to the Celtic Tiger economy...

CLICK TO WATCH CLICK TO WATCH

CLICK TO WATCH

PART ONE PART TWO

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and finally…

20 April 2011 21

Hmmm…

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