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THINGS THAT MAKE YOU GO

HmmmA walk around the fringes of nance

15 July 2012 1

For AFREE Subscription to Tings Tat Make You Go Hmmm..... clickHERE

Finally, ater the matter has passed rom ashen-colored towhite and yellow, you will see the Philosophers Stone, ourKing and Dominator Supreme, issue orth rom his glassysepulcher to mount his bed or his throne in his gloriedbody. . . diaphanous as crystal; compact and most weighty,as easily usible by re as resin, as owing as wax andmore so than quicksilver . . . the color o safron whenpowdered, but red as rubies when in an integral mass...

H. KHuNRATH AMPHIT HEATRUM

Alchemy is the art of manipulating life, and consciousnessin matter, to help it evolve, or to solve problems of innerdisharmonies

Jean Dubuis

If o owe the bank $100 thats or probem.If o owe the bank $100 miion, thats thebanks probem

JP Getty

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2.THINGS THAT MAKE YOU GOHmmm...

15 July 2012 2

Fans o J.K. Rowings HarrPoer books will be vaguely familiar

with the name Nicolas Flamel, though,

nike the books eponmos hero,

his wizardly sidekicks and charac-

ters such as Professor Dumbledore,

Hagrid and, of course, He-Who-

Must-Not-Be-Named, Flamel has one

rather extraordinar (at east in the

context of the stories) disncon: He

actually existed.

Flamels birth is steeped in confu-

sion, bt the ater ears of his ife arewell-documented due, in large part,

to a book he wrote which was nally

pbished in Paris in 1613, some 200-

odd years aer his death. The book,

Livre des Figures Hieroglypiques or

Exposion of the Heiroglyphical Fig-

ures contained an introducon that

documented Flamels search for a

legendary substance that contained the most

magical of properes including the ability to

cure any illness known to man, and to turn base

metals into gold through the process of alchemy.

The substancesought fervently by men

throughout history, not just Messrs. Poer and

Flamelis known as lapis philosophorum; The

Philosophers Stone:

(Wikipedia): According to alchemical texts,

the philosophers stone came in two variet-

ies, prepared by an almost idencal method:

white (for the purpose of making silver),

and red (for the purpose of making gold),

the white stone being a less matured ver-sion of the red stone. Some ancient and me-

dieval alchemical texts leave clues to the

supposed physical appearance of the

philosophers stone, specically the

red stone. It is oen said to be or-

ange (saron colored) or red when

ground to powder. Or in a solid form,

an intermediate between red and

purple, transparent and glass-like.

The weight is spoken of as being

heavier than gold, and it is said

to be soluble in any liquid, yet incombusble

in re.

The physical properes of the Philosophers

Stone remain shroded in mster and some of

the more esoteric descripons of its appearance

throughout the years tend to make it even more

so:

(Wikipedia): Alchemical authors somemes

suggest that the stones descriptors are met-

aphorical. It is called a stone, not because it

is like a stone. The appearance is expressed

geometrically in Michael Maiers Ataanta

Fugiens. Make of a man and woman a

circle; then a quadrangle; out of the this a

triangle; make again a circle, and you will

have the Stone of the Wise. Thus is made the

stone, which thou canst not discover, unless

you, through diligence, learn to understand

this geometrical teaching.

Right then. So let me get this straight: we turn a

man and a woman into a circle, then a quadran-

gle, then into some kind of a triangle and nally

back into a circle again? Thanks Mike. Your seat

in the Eropean Pariament awaits.Leaving aside whatever the hell Michael Maier

was tring to expain to s, the Phiosophers

Stone was long believed to be the key to the

mythical process of alchemy; the science of

trning base metas into god.

According to legend, the Philosophers Stone is

created through the alchemical method known

as Magnum Opus (Great Work) and this pro-

cess is widely-held to consist of a series of four

very disnct stages which between them num-

ber twelve individual steps (the original -stepprogram). These have become

known as the Twelve Gates

of George Ripleya famed

th century alchemist

whose twenty-ve volume

work on the subject con-

tained the Liber Duodecim

Portarum, a tome that

brought him considerable

notoriet.

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The means to transform base metal to precious

metal that man has searched for since the begin-

ning of recorded me was laid out in simple andconcise terms in the progression through George

Ripleys gates:

. Calcinaon

. Soluon (or Dissoluon)

. Separaon

4. Conjuncon

. Putrefacon

6. Congelaon

7. Cibaon8. Sublimaon

. Fermentaon

. Exaltaon

. Mulplicaon

. Projecon

This convoluted process would drive many men

to distraconincluding amongst them, one

Isaac Newton, physicist, mathemacian, astron-

omer, philosopher, theologian and alchemist

who, as Britains Master of the Mintmanaged a-chemy of a slightly lower quality when he moved

the Pound Sterling from the silver standard to

the gold standard by adjusng the bimetallic re-

laonship between the two.

Newton suered a nervous breakdown during an

extended period of alchemical work which had

nevertheless resulted in his producing substan-

ve wrien research. That wrien research was

later purchased by none other than John May-

nard Keynes who, aer studying it, proclaimed

Newton was not the rst of the age of reason,

he was the last of the magicians.

Bt I digress.

Twelve disnct steps seems an awful lot of work

jst to trn ead into god. Its far easier these

days to just turn paper into money which only

takes a couple of steps:

. Plugging

. Pushing

Now, I am certain that there are those amongst

you who, based on past performance, would, at

this point, feel extremely condent in placing asizeabe wager that we are abot to go wander-

ing o down a path strewn with references to at-

tempts by central banks to turn paper into gold

through the process of alchemy but I am afraid

I am going to srprise/disappoint o b taking

a turning of a dierent kind altogether and will

concentrate my eorts believe it or noton

the last of Ripleys twelve steps; Projecon.

Projection, in alchemicterms, was the coup de grace, the nal step

in a long process whereby a small amount of the

Philosophers Stone would be cast into a molten

base metal most commonly the nd element

in the periodic table, Lead - and, hey presto, that

lowly element would be transmogried into its

nearneighbour just three steps higher in the

tabe; #79; god.

Projecon was the moment when, despite all

the work that went into geng to that last point

in the program, hope and faith took over as the

alchemist found himself having to rely on just alile bit of magic in order to get the outcome he

so desperate wished for.

Throughout history, in all the annals of recorded

me, every single alchemic projecon ever at-

tempted has turned out to be unsuccessfula

track record which gives alchemists only a mar-

ginally less-successful record than the Fed, the

BoE, the Troika, the EC, the Erogrop, the uS

Congressional Budget Oce, the combined gov-

ernments of the UK, Greece, Spain. I could go

on, but weve all got things to do so I wont.

Over the last ve years, there have been so

many projecons from the economic and po-

lical gliera that have failed spectacularly as

to be almost unbelievable. In fact, as I sat and

thoght abot what to write this week, I strg-

gled to think of a single major projecon that

hasntcome in on the bad side of good.

From Chairman Bernankes condently-deliv-

ered projecon that subprime is contained in

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15 July 2012 4

March , to Mariano Rajoys promise upon

being elected last November that Spain would

stop being a problem and instead form part ofthe soluon [to the debt crisis]the hits have just

kept on coming, so today we are going to look at

the modern version of alchemy whereby nanc-

es are turned to farce and examine a few of the

most otrageos poor projecons of recent

mes. If me allows, I will even make a couple of

projecons of my own (thereby seng me up

for ridicule at an as-yet-to-be-determined point

in the future).

Ladies and gentlemen, in place of The Twelve

Gates of George Ripleyand using Greece andSpain as examplesI give you The Seven Fates

of Grant Williams, a series of steps that are cer-

tain to take place one aer another, in sequence,

once the primary stage has been iniated:

1. GreecicationThis is the process whereby ordinary people are

given esmates of important economic metrics

by impressive-looking policians who, when

delivering said gures, sound condent and as-sured:

(CNN, September , ): The Greek gov-

ernment announced budget cuts Wednesday

aimed at securing addional aid from its Eu-

ropean partners as the debt-stricken naon

struggles to dig itself out of a deep hole.

Elias Mossialos, a government spokesman,

said in a statement that the cuts demon-

strate Greeces commitment to meet its ob-

ligaons and remain a member of the Euro-pean Union.

The measures will enable Greece to achieve

its budget targets for this year and next, and

allow the full

implementa-

on of the

support of the

Greek econo-

my by 4,

said Mossi-

alos.

(Bloomberg, November 7, ): Span-

ish Finance Minister Elena Salgado said the

economy will grow about .8 percent thisyear, less than the governments target, and

its too early to know if the regions will meet

their decit goal this year.

The new forecast is below the . percent

government target that Salgado had said

since August would be hard to meet, and

is in line with the esmate of .7 percent

published by the European Commission last

week.

Salgado said that while the central govern-

ment will meet its budget-decit target, its

not clear whether the regional governments

will do so, casng doubt on the overall bud-

get- decit goal of 6 percent of gross domes-

c product.

I maintain 6 percent as the priority, Salga-

do said in an interview.

Mariano Rajoy of the opposion Peoples

Party, the favorite to win a majority in the

vote, has pledged not to stray from the de-

cit goal of 4.4 percent of GDP next year un-

der any circumstances.

2. BacktrackicationThis is the process whereby, shortly aer the

Greecicaon process has been completed and ,

oen, the promise of a bailout secured, the fore-

casts made in the rst stage are altered to re-

ect a new and completely unexpectedreait.

The process can take anywhere from a maer of

weeks to a maer of hours:

(CNN, October , ): The Greek cabinet

announced late Sunday that it adopted a

dra budget for , but the debt-ridden

naon will miss key decit targets for this

year and next.

According to this preliminary budget,

Greeces budget decit will be 8.6 billion

euros, or 8.% of gross domesc product, in

. Greece had originally agreed to a de-

... Mariano Rajoy o the oppositionPeoples Party, the avorite to wina majority in the vote, has pledgednot to stray rom the decit goal o4.4 percent o GDP next year under

any circumstances.

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15 July 2012 5

cit of 7. billion euros, or 7.8% of GDP, with

the Internaonal Monetary Fund, European

Commission and the European Central Bank.

The Greek cabinet said in a statement that

the main reason it would miss the decit tar-

get is due to a deeper-than-expected reces-

sion.

The Greek economy is now expected to con-

tract by .% this year, according to the

statement. Thats worse than projecons of

a .8% decline in May.

(Fundweb, March , ): Spanish prime

minister Mariano Rajoy has warned that thecountry will miss the decit reducon target

it agreed with the European Union (EU).

Rajoy says the government will seek to bring

its decit down from 8.% of GDP in to

.8% this year. The Spanish government pre-

viously agreed to a target of 4.4%.

The news comes

aer all but two of

the EUs 7 mem-

bers signed a scaltreaty to prevent

countries from run-

ning up the kind

of large debts that

pushed Greece,

Portugal and Ireland into needing bailouts

from the internaonal community.

The Spanish prime minister said he has not

discussed the decit with fellow EU leaders

at the rst session of the European Council.

We will present our proposals according to

what we consider to be reasonable and sen-

sible, but this is not closed here, nor nego-

ated here nor discussed here, he told report-

ers.

Nobody has asked me about the public de-

cit in Spain.

3. ransmission

The third part of the process is the conveyance

of blame onto either external pares or a set of

condions that were completely unforseeableat the me Greecicaon commenced:

(BBC, October , ): The [Greek] govern-

ment, which on Sunday adopted its

dra austerity budget, blamed the shorall

on deepening recession.

(WSJ, October , ): The missed target

was mainly the result of the deeper-than-

ancipated recession of the Greek economy

that aected tax revenue and social security

contribuons, the Greek government said in

a statement...

(Hungton Post, February , ): Last

Thursday, Spains minister of economy admit-

ted that the budget decit had missed

the 6% of GDP target by about percentage

points and doubted that Spain could comply

with the EU-imposed decit target for .

With its debt risk sll at high levels, the strat-

egy of the new Spanish government is to shi

the blame to the regional governments, like

Catalonia, and at the same me use the crisisto grab back the power that was devolved to

the regions in the 8s.

(UK Guardian, April , ): Rajoy had in-

sisted that all of Spains economic troubles

were the fault of his predecessor, the So-

cialist Jos Luis Rodrguez Zapatero. So now

what? You cant change horses in a storm,

but you can change scapegoats, the poli-

cians favourite pet. Another culprit had to be

found, and there we have it: Spains regions

and their reckless over-expending.

4. RestatigenceThe fourth stage is the announcement of a new,

improved esmate that will undoubtedly prove

to be the very worst-case scenario now that all

problems are in the past and a completely realis-

c set of esmates have been made. It is the ba-

sis upon which the connuaon of the process is

underpinned:

...Te missed target was mainlythe result o the deeper-than-

anticipated recession o theGreek economy that afectedtax revenue and social securitycontributions,

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15 July 2012 6

(Marketall, February , ): Greece re-

vised its budget targets in a dra bill

which was submied to parliament. The newesmates include the full impact of the .%

haircut on Greek government bonds.

Budget decit target is revised to 6.7% of

GDP from .4% before. The government now

looks for a primary decit of .% of

GDP from a primary surplus of .% of GDP

previously. Budget revenues are seen at

6.6 billion euros compared to . bil-

lion euros before, on deeper than expected

recession. Interest payments are expected to

reach . billion euros, up million eu-ros from Novembers esmates.

(WSJ, May 8, ): Spains Budget Minis-

try said late Friday it has revised its budget

decit esmates for last year to a wider 8.%

of gross domesc product, largely because of

more red ink reported by four regional gov-

ernments.

In a press release, the ministry said it is main-

taining its budget decit target of .% of

GDP for .Spain inially report-

ed a budget decit

equal to 8.% of GDP

for last year, far in

excess of the 6%-of-

GDP target it had

commied to with

the European Union and internaonal inves-

tors. Much of the overrun was the fault of the

regions, which have moved to the center of

the countrys scal crisis.Spains regions control almost half of spend-

ing, including socially sensive areas like

healthcare and educaon, and have a long

history of budget overruns. They are now

grappling with plummeng tax revenue in

a weak economy aer the collapse of a tax-

rich housing boom and have encountered in-

creasing dicules to obtain nancing from

internaonal capital markets, and more re-

cently, even from local banks.

The revised budget decit esmates released

on Friday are mostly linked to higher debt re-

ported by the regional governments of Ma-drid, Valencia, Andalusia and Caslle-Leon.

The Budget Ministry said that the higher

level of debt was uncovered by a program

the central government launched this year to

help the regions pay an esmated billion

in overdue bills to their suppliers. In exchange

for credit lines to help them to pay the bills,

the government required a full accounng of

their outstanding debts. Many business lead-

ers and economists had long suspected there

were hidden debts at Spains regions.

Under intense pressure from European au-

thories to slash spending, Spain has also

pledged to cut its decit to the %-of-GDP

limit for euro zone countries in .

5. BullycationThis stage occurs when, having added a su-

cient amount of OPM (pronounced Opium but

standing for Other Peoples Money, this com-pound is crical if the chain reacon is to con-

nue to its end point), the policians involved

use the leverage already built up in the rst four

stages to alter the dynamics of the process:

(UK Daily Telegraph, May 8, ): Stock

markets around the world fell sharply as

fears grew that Greece was moving towards

a euro exit following Sundays general elec-

on, where pares rejecng internaonally-

imposed austerity measures made major

gains.

Alexis Tsipras, the head of Greeces radical

Le-wing Syriza party, said that the result

nullied bail-out deals with the European

Union and Internaonal Monetary fund...

Greece has received billion in aid. In ex-

change, it is required to make deep cuts in

public spending. Mr Tsipras called the loan

agreement policy barbaric.

(Bloomberg, May , ): Tsipras tells vot-

... Much o the overrun wasthe ault o the regions, whichhave moved to the center othe countrys scal crisis...[theregions] have a long history obudget overruns...

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15 July 2012 7

ers he has no desire to bring back the drach-

ma. But neither does he believe that staying

in the euro requires the massive cuts in gov-ernment spending to which Greeces leaders

have agreed as a condion of receiving inter-

naonal assistance over the last two years.

The case that Tsipras and his colleagues make

is that its those austerity measuresknown

in the country as the memorandumthat

are the biggest threat to Greeces member-

ship in the euro. By crippling the economy,

Tsipras contends, austerity has brought

Greece closer to insolvency and default,

heightening the risk of a nancial catastro-phe throughout the European periphery, as

panicked markets bring down country aer

country.

(AP, July , ):

Greek government

spokesman Simos

Kedikoglou told

reporters on Tues-

day that Greece in-

tended to present

troubling data toEU debt inspectors

throughout the course of meengs this week.

We will present informaon that is astound-

ing. It is alarming in terms of the recession

and unemployment, and it shows beyond any

doubt that the current policy does not bring

results. It brings the opposite results, Kedik-

oglou said.

(Bloomberg, June , ): Economy Minister

Luis de Guindos said late yesterday that the

future of the euro is at stake, as data showeda net 66 billion euros ($8 billion) of capital

le Spain in March. I dont know if were on

the edge of the precipice, but were in a very,

very, very dicult situaon, he said at a con-

ference in Sitges, Spain.

(UK Daily Telegraph June , ): Mr Rajoy

has become the latest European polician to

call for countries to, in eect, abandon their

sovereignty in a last-ditch aempt to save

the beleaguered currency

Mr Rajoy said a new central authority would

go a long way to alleviang Spains economic

crisis as it would send a clear signal to inves-tors that the single currency is an irreversible

project.

He said: The European Union needs to re-

inforce its architecture. This entails moving

towards more integraon, transferring more

sovereignty, especially in the scal eld.

And this means a compromise to create a

new European scal authority which would

guide the scal policy in the eurozone, har-

monize the scal policy of member states

and enable a centralised control of [public]

nances.

6. RenegotiationStep six is when the power generated b the in-

tensifying heat that is a by-product of the pro-

cess switches sides, leading to a substanal shi

in the molecular structure of the compound:

(Al Jazeera, June , ): Greeces new

government has said it wanted to review sev-

eral austerity measures that the debt-ridden

country agreed as part of bailout packages.

The government on Saturday said it wanted

to bargain for a two-year scal adjustment

extension as it prepared for an EU-IMF audit

next week.

A policy document released by the conser-

vave-led coalion said eorts to revise

Greeces bailout deal in talks with creditors

starng on Monday include the extension ofthe scal adjustment by at least two years,

to 6.

The aim would be to meet scal goals with-

out further cuts to salaries, pensions and

public investment and new taxes, it said,

announcing a freeze on further civil-service

layos, sales-tax cuts and longer unemploy-

ment benets.

The aim is to avoid layos of permanent

... We will present inormationthat is astounding. It is alarmingin terms o the recession andunemployment, and it shows be-

yond any doubt that the current

policy does not bring results...

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15 July 2012 8

sta, but to economise a serious amount

through non-salary operaonal costs and

less bureaucracy, the three-party coaliondocument said.

(Firedoglake July , ): Finance Minis-

ters meeng in Europe agreed on a series of

measures for Spain. First, they authorized a

rst installment of billion euros for lending

to Spanish banks, subject to approval from

Eurozone governments. The money will be

distributed by the end of the month, a fast-

er schedule than previously considered. The

real queson is who is held responsible for

the lending, the Eurozone bailout facility orthe sovereign government. The assumpon

at the EU summit was the former, but talk

that governments are actually ulmately re-

sponsible caused Spanish debt yields to soar,

leading to this emergency acon.

Second, the nance ministers agreed to slow

down the austerity demands for the Spanish

government.

At the same me, Spains targets for cung

its gaping budget decit will be eased as thecountry sinks deeper into its second recession

in three years, with an unemployment rate

of almost percent. But the ministers de-

manded that Spain squeeze its austerity bud-

get even ghter to meet the new targets.

I would expect that some addional mea-

sures will have to be taken rather soon, the

European Commissions vice president, Olli

Rehn, said at the news conference.

For its part, the European Commission had

proposed that Madrids decit target this

year be relaxed to 6. percent of gross do-

mesc product, from . percent earlier.

Madrid also would get an addional year

unl 4 to bring the decit below per-

cent of G.D.P., which is the target for all euro

zone countries.

7. RealizationNow we reach the part where the truth nally

dawns that the words spoken ong ago b JP Get-

ty are actually not justan amusing mof t for

the front of a t-shirt or a fridge magnet:

If you owe the bank $ thats your prob-

lem. If you owe the bank $ million, thats

the banks problem

The sum total of bailouts oered to Europes

prodigal ospring is mounng daily, but the

Achilles Heel of the enre construct connues to

be the Target payment system which has beenso assiduously ignored by most observers yet

followed so closely by my friends at Zerohedge

for man months now.

This probem remains beow the radar of most

observers but, I suspect, will turn out to be the

straw that breaks the camels back

(Zerohedge, 6 July, ): We have some

good news for our German readers: in the

month of June, your implicit cost of preserv-

ing the Eurozone (read the PIIGS) via TAR-GET funding of current account and various

other public sector decits and imbalances

amounted to only billion/day, down from

billion in June. We also have some bad

news, which is that Europes negave con-

vexity cking inaonary me bomb, which

guarantees that with every month in which

nothing is done to undo the Bubas onboard-

ing of liquidity risk, the risk for an out of con-

trol implosion of German, and implicitly all

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European monetary instuons, rises expo-

nenally, and just hit an all me high of 7

billion.

To everyone who naively believes that a deus

ex can come out of stage le and somehow

reverse this guaranteed loss to German tax-

payers in the form of even more guaranteed

inaon down the road, we suggest you

short the chart [previous page].

(For good measure, the chart above shows

the debits on the peripheral side of the bal-

ance sheet versus Germanys credits).

And so you can see that the steps are the same

in every crisis. They really are. Poor projecons

are made and in every case, as is the wont of

human nature, the most palatable esmate

is always given because it is far easier to keep

people as happy as possible in the present. Aerall, maybe they dont actually needto be disap-

pointed in the ftre. Things mayjst work ot,

and if they dont, well it can always be played o

as an unseen set of circumstances that led to

the poor projecon and the painf adjstment

necessary to meet reality.

Unfortunately, as the events in Greece and Spain

are proving, one such situaon can be masked

and dealt with, but mulple situaons occurring

simultaneouslyeach bigger than the lastis

guaranteed to bring the house of cards tumbling

down.

Along time ago now, I promisedo a ook at some of the more feebepro-jecons of the last several years so, leaving aside

those of Greek and Spanish policians, lets kick

things o with the US Congressional Budget Of-

ce (CBO).

The CBOs projecon record is second-to-none

in terms of its ineptude and the distance away

from the mark that the regar manage to

achieve is nothing short of wondrous; parcu-

larly for a body which is described thus on its

own website:

Since its founding in 74, the Congressional

Budget Oce has produced independent,

nonparsan, mely analysis of economic and

budgetary issues to support the Congressio-

nal budget process. The agencys long tradi-

on of nonparsanship is evident in each of

the dozens of reports and hundreds of cost

esmates its economists and policy analysts

produce each year. CBO analyses do not

make policy recommendaons, and each re-

port and cost esmate discloses our assump-

ons and methodologies.All CBO employees

are appointed solely on the basis of profes-

sional competence, without regard to poli-

cal aliaon

Thats professional competence.

(WSJ, August , ): In , the CBO pre-

dicted that the decit would soar to $6 bil-

lion in . This week, they said that same

budget will be in surplus by $7 billion. Lileof that $8 billion revision can be explained

by legislaon or luck. Nearly all of it reects

the magnitude of past forecasng blunders.

Errors are unavoidable, but perpetual bias

is another maer. CBO errors always lt in

a specic direcon. Aside from the rst year

of recessions, the CBO always exaggerates

future budget decits and underesmates

surpluses.

CLICK TO ENLARGE SOURCE: ZEROHEDGE

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Past forecasts oen overstated decits by

huge amounts even for the current year

-- by $78 billion in and $ billion in

7. In early 8, the CBO thought the

next years surplus would be $ billion, but

it turned out to be $ billion. Looking fur-

ther ahead, CBO errors have been stagger-

ing. Next years budget, now esmated tobe in surplus by $76 billion, had once been

expected to show decits of $7 billion (per

the CBOs forecast), $4 billion (

forecast), and $88 billion (7 forecast).

In January , the CBO famously projected

that cumulave surpluses in the United States

wod be $5.9 triion throgh 2011. Instead, the

United States ended up with cumulave decits

of $6.0 triion dring this period.

Yes, I know, who could have seen the

GFC coming in ?, right? Well take

a look at the chart (le) to see just howo the mark the CBO has been since the

very day it made the projecon:

But its not just the projecon that

is o. As Casey researchs Bud Conrad

pointed ot ate ast ear, some peope

just never learn:

Looking at the future of government

decits, the Congressional Budget Oce

(CBO) starts with a baseline projecon of

the expected government budget decit

based solely on laws already enacted.

In other words, the baseline doesnt ac-

count for new laws, which invariably ex-

pand spending. Not surprisingly, as you

can see in the chart [below, le] of previously

published baseline forecasts, the CBOs de-

cit projecons are always opmisc about

the expected decit.

Well at least we can take solace in their profes-

sional competence.

How about our od friends inthe UK? Specically Her Majestys Trea-sury, who have some wonderful -year projec-

ons all of their own as we discussed in these

pages a short while ago by picking the brains of

the marvellous Greg Weldon (www.wedonon-

line.com).:

(TTMYGH): UK government spending will

increase, every year, including an expansion

of +.8% scheduled to be implemented this

year.

The UK government is banking on growth in

Revenue that will exceed the rate of growth

in Expenditures, including growth of +.%

cooked-into-the-books for this year.

But, the margin for error is slim, with year-

over-year Revenue forecast to grow by more

than the growth in year-over-year Spending,

by a mere .4 billion.

Over the next ve years things get even more

interesng.SOURCE: CASEY RESEARCH

CLICK TO ENLARGE SOURCE: US DEPT. OF THE TREASURY

http://www.weldononline.com/http://www.weldononline.com/http://www.economicsfanatic.com/2012/06/how-foolish-bush-made-cbos-projections.htmlhttp://www.weldononline.com/http://www.weldononline.com/

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In order to support a sizable EXPANSION in

SPENDING over the next ve years (pegged

at +.7%), the UK Treasury is RELYING on anastronomical rise in Revenue over that same

ve year period, pegged at +.4%.

Revenue is forecast to rise by +84. billion

over the next ve years, or by nearly +4 bil-

lion per year.

Ahem, excuse me perhaps the UK Treasury

overlooked the FACT that Revenue in Febru-

ary, pegged at 8.6 billion was (-) .%

BELOW the year-ago February revenue of

.8 billion.

A decline of nearly billion is FAR from the

projecons calling for a near +4 billion per

year increase over the next ve years.

Oh Bo.

Moving right along wereach more topical ground with JP Mor-gans recent CIO loss which, on April was

famously described by CEO Jamie Dimon as a

tempest in a teacup. In the space of two weeks

it baooned to a

$2bn oss that

Dimon projected

could possibly

grow frther to

$3bn dring the

quarter.

(Bloomberg, July , ): Botched trades

by a JPMorgan Chase & Co. unit that Ja-

mie Dimon had pushed to boost prot were

masked by weak internal controls and mayulmately saddle the bank with a $7. billion

loss.

JPMorgans chief investment oce has lost

$.8 billion on the trades so far, and that g-

ure may climb by $.7 billion in a worst-case

scenario, Dimon, the banks chairman and

chief execuve ocer, said yesterday

Not great, Jamie, not great.

This most recent example is the perfect illustra-

on of the point I have so laboriously been try-

ing to make.

At the very moment the potenal loss was an-

nounced as possibly as high as $bln, com-

mentators began speculang as to the REAL

magnitde of that oss. Projecons as high as

$9bn were mooted in the bogosphere and so,

when the loss came in at a mere $.bln (or,

put another way, roughly double the worst-case

esmate of a mere weeks ago), it didnt look

quite so bad and the stock rallied. Oh so quiet-

, the tota oss projecon was increased from

$bln to $.bln in a worst-case scenario.

Worst-case, folks. More worst than the previ-

ous worst-case, admiedly, but denitely worst-

case.

And so, with me and space run-ning short, I could hardly take pot-shots ata and sndr for their poorprojecons withot

making a couple of my own so that my feet may

also be held to the re in the months to come

and I shall begin with my friends in France and M.

Hollandes recentprojecons abot the amont

of money his new tax increases will generate for

the countrys coers.

Hollandes recent moves to raise income taxes,

taxes on foreign-owned second homes, rental

income and capital gains on property sales were

instantprojectedby the French Treasury to add

a signicant amount to their income:

(UK Daily Telegraph): The tax rises are part

of a wider package of increases that are in-

tended to raise 7. billion (.8 billion) to

meet a budget decit target of 4. per cent

aer the government of Nicolas Sarkozy lethe French exchequer with an expenditure

black hole.

An addional . billion (.8 billion) will be

raised from a levy on those whose net wealth

is . million ( million)...

The French nance ministry said the new rule

would aect about 6, rental properes

in France whose owners made an average

prot of ,.

... A decline o nearly 1 bil-lion is FAR rom the projectionscalling or a near +40 billionper year increase over the nextve years...

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12.THINGS THAT MAKE YOU GOHmmm...

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It said this would add million (4 mil-

lion) to French revenue this year and

million in .

M projecon? This scheme will fail miserably

and will end up reducing the overall amount of

tax collected in France.

I base m ownprojecon pon man simiar ef-

forts that have been tried over the years, but will

pick on two specic examples; the ill-fated Crude

Oil Windfall Prots Tax Act, signed into law by

Jimmy Carter on April , and, most recent-

, in Britain where a new 50p top tax rate was

projected to increase tax revenues by more

than 1 billion. The outcome?:

(UK Daily Telegraph): The Treasury received

10.35 billion in income tax payments from

those paying by self-assessment last month,

a drop of 509 million compared with Janu-

ary 2011... The self-assessment returns from

January, when most income tax is paid by the

better-off, have been eagerly awaited by the

Treasury and government ministers as they

provide the first evidence of the success, or

failure, of the 50p rate... Although the officialstatistics do not disclose how much money

was paid at the 50p rate of tax, the figures

indicate that it is falling short of the money

the levy was expected to raise.

Bt wh were theprojections so er-

rant, I wonder? Well, it appears that

hman natre is far more reiabe

than governmentprojections:

(UK Daily Telegraph): Senior

sources said that the rst ocial

gures indicated that there hadbeen manoeuvring by well-o

Britons to avoid the new higher

rate. The gures will add to pres-

sure on the Coalion to drop the

levy amid fears it is forcing en-

trepreneurs to relocate abroad...

A Treasury source said the rela-

vely poor revenues from self-

assessment returns was partly

down to highly-paid individuals

arranging their aairs to avoid paying the

p rate.

Its true that SA revenues are a bit disap-

pointing its still early, but it looks like

theres been quite a lot of forestalling and

other manoeuvring to avoid the top rate,

said the source.

Worse still was the money spent on increased

taxation projects in the UK that failed to deliver

theprojectedreturns:

(Hungton Post): A public spending watch-

dog has found two projects cosng 8 mil-

lion that were set up to boost tax colleconrates failed to help rake in any extra cash.

The new systems at HM Revenue and Cus-

toms (HMRC) were expected to bring in

74m by the last nancial year but had not

delivered any addional benets...

Two projects - Caseow and Spectrum -

received 8m of programme funding and

were originally forecast to achieve net yield

increases of 74m by /.

At the end of 2010/11, the two projects hadnot delivered any additional benefits.

Carters attempts to increase revenues through

taxation were even farther from projections as

this one, simple graph demonstrates:

CLICK TO ENLARGE SOURCE: CONGRESSIONAL RESEARCH SERVICE

http://taxfoundation.org/sites/taxfoundation.org/files/UserFiles/Image/Facts%20and%20Figures/Figure2.jpg

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If Monsier Hoande thinks things wi be an

different in France he is, as they say in that neck

of the woods, en dsordre.

Projection number twois that, when QE3 finally arrives (and arriveit will), it will mark the top of the S&P500 for a

VERY long time and its positive effects will be far

shorter-lived than manyincluding the Fed

areprojecting.

Far from an overwhelming rising tide that will

foat a boats,

QE3 will be a dis-

ma faire and

the ast bet in

the Federal Re-

serves gun will

trn ot not to

be the hoow-

point that man

are projecting,

bt instead a

simp a bang

fag.

In the course of the conversations I have whilst

performing my day-job, I am constantly search-

ing for anbod who is bing and hoding

stocks as an asset class because they offer tre-

mendous long-term value, but I have yet to find

them. yes, there absote are some wonder-

ful companies out there that offer tremendous

long-term value. Corporate balance sheets have,

by-and-large, never been healthier, companiesare sitting on a heap of cash and, at ground level,

bsinesses are doing extreme we. The prob-

lem comes with the fact that 99% of the people

I speak to and 99% of the commentaries I read

are either holding stocks per se or recommend-

ing doing so for one reason and one reason on;

the are terrifiedof missing ot on theprojected

strong ra that wi undoubtedly come once

QE3 is unleashed by Ben Bernankes Merry Band

of Brothers.

That is a terrible, terrible reason to hold stocksand, when the correction comes, those good

companies with strong, healthy balance sheets

will be sold right alongside all the overpriced,

overvalued stocks that take turns as the dar-

lings of the analyst crowd (you know who you

are, stocks). The only difference will be that the

better companies share prices will recover far

faster once appetite for value and risk returns.

2008 is still too fresh in the collective minds of

investors for there to be any other reaction to

another major market swoon and, as the wordnears the closest thing we have ever seen to a

tr globalrecession, its incredibly hard to see

where the growth is coming from to justify buy-

ing stocks on 2% yields on multiples in the teens.

The 1982 bull market began with the S&P500

trading on 7x earnings

and yielding 6.3% (green

dotted line, left). It ended

in the tech blow-off at

30x earnings and a 1%

ied (red dotted ine,left).

As we stand toda, the

S&P is yielding 2.5% and

is trading at roughly 11x

earning (be dotted ine,

left). Expensive? Maybe

not, bt hard the stff

dreams are made of.

SOURCE: BLOOMBERG

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So there we have it, folks; a wanderthrough the process that both begins and

ends inprojecons of one kind or another. His-

tory will either look upon the two I have made

kindly or with the type of scorn usually reserved

for Central Bank governors or the CBO, but the

one thing that gives me comfort in making them

is that I have gone for the darkest end of the pro-

jecon spectrum which will keep me nicely dis-

tant from those I desire NOT to emate.

Be nice. Aer all, theyre onlyprojecons.

I will leave you with a story, beaufully told by

David Stockton that was culled from the tran-script of an FOMC meeng in September

and demonstrates the absrdit ofprojecons

(parcularly in government-run instuons).

*******

his weeks edition is ratheronger than sa thanks to m dementedramblings Im afraid so Ill run you very quickly

what you will nd in the pages that follow...

Two ooks at the Endgame in Erope; one from

the Wall Street Journals Simon Nixon and one

from m good friend John Madin, two stories

on Libor-rigging; one that implies the Fed knew

exactly what was going on a long me ago and

one that suggests Barclays are about to turn tur-

tle and point ngers at their peers, along with

an examinaon as to why Treasurys may just bethe worst investment in the world (personally, I

would argue that disncon goes to French sov-

ereign debt, but...).

China becomes a tool with which Mi Romney

and Barack Obama can beat each other about

the head, Germany connues to play hardball

with Greece and we take a look at exactly how

Jamie Dimon hid the CIO loss.

Chinas economic miracle has slowed some but

Tom Stevenson argues that it is sll humming

along, we look at the phantom eect that FOMC

meengs have on equity prices and there are

charts of Stockton, CAs bankruptcy, consumer

senment, Chinese commercial bank loans and

the popularity of the rich in various countries

arond the word.

We have interviews with my very good friend

Simon Mikhailovich on derivaves and correla-

on (dont miss that one) and Roger McNamee

on the Facebook IPO scam as well as Janet Tava-

koli schooling a poor business news anchor onthe JPM CIO oss.

Finally, as Britain readies itself for the Olympic

circus to hit town, we see a Chinese athlete who

Im happy to project wontbe compeng.

From Harry Potter to apoy hurdler; my work here is done.*******

During World War II, [Nobel laureate, Ken]Arrow was assigned to a team o statisticiansto produce long-range weather orecasts. Atera time, Arrow and his team determined thattheir orecasts were not much better than pull-ing predictions out o a hat. Tey wrote theirsuperiors, asking to be relieved o the duty.Tey received the ollowing reply, and I quoteTe Commanding General is well aware thatthe orecasts are no good. However, he needsthem or planning purposes.- David Stockton, FOMC Minutes Sep 2005

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15.THINGS THAT MAKE YOU GOHmmm...

15 July 2012 15

Contents 15 J 2012

The Theor on Ita and Germans Endgame for the Ero

US knew of Lloyds role in Libor scandal

The Beginning of the Endgame

Barclays Implicates Libor Rivals

Are Treasuries The Worst Investment In The World?

The China-bashing sndrome

Germany Rejects Greek Plea for More Time

Chinese economic miracle, slowed yes, but sll humming

How Jamie Dimon hid the $ billion loss

Charts That Make yo Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally.....

The Gonnie, Gonnie Banks

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

33 Glasgow Savings Bank, Glasgow, MO 24.8 24.2 0.1

Total Cost to FDIC Deposit Insurance Fund 0.1

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Feeling more relaxedabout the euro crisis since last months

summit? Think again. The risk of a euro-zone

breakup may actually be rising rather than fall-

ing, according to Bank of America Merrill Lynch

strategists David Woo and Athanasios Vamvaki-

dis. Using game theory to consider how the situ-

aon might evolve, they believe the crisis will

boil down to a game of blu between Italy and

Germany in which neither country has an incen-

ve to back down.

That doesnt mean this wod be the best ot-

come for either side; in game theory, the mostlikely outcome isnt always what economists call

Pareto opmal, one that will bring maximum

benet to all players. Instead, the Nash equilib-

rium for the euro zonethe situaon in which

no player has an incenve to change strategy

because to do so unilaterally would leave them

worse ois that Italy refuses to undertake the

overhauls needed to enable its economy to grow

and Germany refuses to provide the bailouts to

persade it to sta.

To reach this con-clusion, Messrs.

Woo and Vamva-

kidis ndertook a

simple cost-ben-

et analysis for

each of the euro

zones 17 mem-

bers. This ooked

at which countries

were best-placed for an orderly exit in terms of

the size of their scal and current-account po-

sions. They also looked at the likely impact ofan exit on growth, borrowing costs and naonal

balance sheets.

The results make interesng reading: Italy and

Ireland emerge as the countries with the great-

est incenve to exit. In Italys case, this is because

it aread rns a bdget srps before interest

payments and has only a small current-account

decit. At the same me, its companies have the

most to gain from devaluaon. Surprisingly, the

country with least incenve to exit is Germany

since the cost-benet analysis suggests a soar-

ing currency would lead to lower growth, higher

borrowing costs and big losses on overseas bal-ances.

If this is right, then the euro crisis boils down to

a simple calculaon: Is Germany willing to pay

to keep Italy in the euro zone? Game theory

says no, say Messrs. Woo and Vamvakidis. The

problem is that even if Germany did pay, Italy

would sll have a strong incenve to exit even-

tually rather than undertake overhauls, leaving

Germany worse o. And if Italy knows Germany

will never pay to keep Italy in the euro, it is in Ita-

lys interest to exit. This is a higher stakes versionof the Greek impasse over the last two years, ex-

cept that Italy has more reasons to leave and the

euro zone faces a bigger bill to persuade Italy to

sta.

Does that make a euro breakup inevitable? Not

necessarily. In the real world, the game is com-

plicated by history and polics. This analysis may

not fully capture the true costs of a breakup for

all countries. For the moment, there is lile po-

lical pressure in Italy to exit the euro. Besides,

one thing could decisively alter the equaon, sayMessrs. Woo and Vamvakidis: A much weaker

euro would signicantly reduce the incenve of

any country to exit. One way or another, policy

makers are ike to bring that abot.

O O O SIMON NIXON (WSJ) / LINK

Lloyds Banking Groupmay have been rigging its Libor submis-sions as early as August , explosive docu-

ments released tonight by the Federal Reserve

of New york sggest.

The documents, which li the lid on the evi-

dence gathered by US invesgators into the

scandal, contain an email in which a Barclays

trader warns a New York Fed employee that the

Libor submissions for Aug , , including

one from lods, ook too ow.

The whistebower expains the improbabiit of

the submission before saying: Draw your own

conclusions about why people are going for un-

realiscally low libors.

... I this is right, then the eurocrisis boils down to a simplecalculation: Is Germany willingto pay to keep Italy in the eurozone? Game theory says no, sayMessrs. Woo and Vamvakidis

http://online.wsj.com/article/SB10001424052702303644004577523090813458030.html?mod=markets_newsreel

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The claims about part-naonalised Lloyds, which

is the second Brish bank to be implicated by US

regulators aer Barclays, emerged hours aer SirMervyn King was drawn into the middle of the

Libor scandal by a leak from the same batch of

documents.

Emais reeased in New york showed that Tim

Geithner had wrien to the Governor of the

Bank of England in , warning him about the

risk of deliberate misreporng of Libor. The

then head of the New York Fed, which acts as

a Wall Street watchdog, included a memo of six

recommendaons needed to establish a cred-

ible reporng procedure instead.

The documents raise quesons about how the

Banks senior management apparent managed

to remain naware of the abses in the libor

market unl the last few weeks. Sir Mervyn is

to be grilled by the Treasury select commiee on

the Libor scandal on Tuesday.

The documents were released aer US poli-

cians demanded that the New York Fed reveal

all its correspondence with Barclays ned

290m ast monthover the rigging of

interbank ending

rates amid the es-

calang scandal that

has shaken the Cit.

The evidence shows

that the New york

Fed gathered a mass of informaon about Libor

rigging from sources inside Barclays in and

. On April , , one Barclays trader told

Fabiola Ravazzola, a New York Fed ocial: So,we know that were not posng, um, an honest

Libor... And yet and yet we are doing it, because,

m, if we didnt do it, it draws, m, nwanted

aenon on ourselves.

Mr Geithner told Sir Mervyn of the concerns

about Libor misrepresentaons at a meeng in

May . He then wrote his memo on May ,

, urging Sir Mervyn to overhaul Libor.

In the memo Mr Geithner, who is now uS Trea-

sury Secretary, implies that he mistrusts the

bankers who are le to choose Libor submis-

sions themselves and has lost faith in the Brit-

ish Bankers Associaon (BBA), the body chargedwith overseeing the system.

To improve the integrity and transparency of

the rate-seng process, we recommend the

BBA work with libor pane banks to estabish

and publish best pracces for calculang and re-

porng rates, including procedures designed to

prevent accidental or deliberate misreporng,

the memo sas.

The memo calls for banks internal and external

auditors conrm adherence to these best prac-

ces and aest to the accuracy of banks Libor

rates.

It adds: To further enhance the percepons of

the BBA as an objecve intermediary in the rate-

seng process, we recommend greater trans-

parency. On June , Sir Mervyn replied that the

recommendaons seem sensible to us. He said

he had passed the note to Paul Tucker, deputy

governor, and asked him to talk to Bill Dudley, a

senior execuve at the US Federal Reserve, and

the BBA, which was about to launch its own re-view of Libor.

O O O UK DAILY TELEGRAPH / LINK

While the problems inthe uS, Japan, the united Kingdom, andEurope all stem from too much sovereign (gov-

ernment) debt, there are very real dierences in

how the Endgame pas ot.

Europe has the basic problem of a being a mon-

etary union without scal union. By that we

mean that the eurozone naons have decided

to use the same currency and central bank but

have very dierent economies. Some countries

need economic smulus and the ability to lower

the value of their currency (because of the rela-

ve value of their labor), and dierent countries

have dierent inaon rates. One central bank

size does not t all.

There are three basic problems. All three must

be dealt with or there can be no balanced out-

come.

... im Geithner had writtento the Governor o the Bank oEngland in 2008, warning himabout the risk o deliberatemisreporting o Libor.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9399419/US-knew-of-Lloyds-role-in-Libor-scandal.html

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First, there is too much sovereign debt in the pe-

ripheral countries of Greece, Spain, Italy and Por-

tugal. Ireland had a monster banking crisis (dueto its housing bubble) and was forced to bail out

its banks, and thus acquired too much debt.

Spain had a hge hosing bbbe that at its peak

generated % of its economy in housing con-

strucon and real estate-related acvies. Given

the total collapse in that sector, is it any wonder

that unemployment is %? This has wreaked

havoc on the naonal budget, causing very large

decits. Plus, the Spanish banking system has

been completely bankrupt for some me. We

pointed a of this ot in or book. And were todthat we simp did not nderstand the probems

of Spain. Some of the Spanish press was not kind.

Up unl a few months ago, the Spanish govern-

ment ercely denied there was any problem in

its banking sector at all. Now they have had to

ask for a 100-biion baiot.

Sidebar: Many thought German Chancellor An-

gela Merkel caved in to Italian and Spanish de-

mands for relief.

Spanish Prime Min-

ister Rajoy said themoney would come

with no strings at-

tached. He was mis-

taken. This week the

agreement arrived,

with strings aached, some of which require

serious austerity measures. Spain is supposed to

cut its decit to the % range. It is closer to %

now. A 6% GDP cut in one year will reduce tax

revenues more than forecast, so the decit will

be worse than forecast, therefore requiring morespending cuts and taxes to be raised. Merkel

has been shown to be quite adamant in her de-

mands, and her approval rate in Germany has

gone up and is now at 66% for her handling of

the eurozone crisis. She will not win any approval

polls at all in Spain, Italy, or Greece; but those

voters dont keep her in oce.

Spain is now over the % level for its -year

debt. Its two-year bond is now at 4.%. Spain

cannot even switch to short-term funding to re-

lieve its debt pressure. It will soon lose access

to the bond market at any price less than %,

which is totally unsustainable. While Spain is notGreece, as the causes of its problems are very

dierent, the result is the same. Too much debt

means the loss of bond-market access. Spain will

soon need a major bailout. And that will come

it MUST come with defaults on at least a por-

on of the debt. The default may have another

name, like restructuring; but bond holders will

not get what the thoght the were bing. Ca

it what o wi, this wi be defat. Spain simp

cannot service the debt it must take on.

Italy has run up over % debt-to-GDP and its-year bond is in the % range, which is unsus-

tainable at current budget, tax, and spending

levels. Six percent is clearly beyond the potenal

growth rate of Ita. Moods jst downgraded

the country to only two notches above junk-

bond level and le it with a negave outlook.

Sean Egan had downgraded them aread.

O O O JOHN MAULDIN / LINK

Barclays Libor riggingtransgressions will be put in perspecve

by the nes handed out to other internaonal

banks, according to the rst direct comments by

the UK lender about the scandals potenal im-

pact on the rest of the industry.

In a memo sent to sta yesterday evening and

which has been leaked to me, the nine members

of the banks execuve commiee warned that

the Libor crisis should not distract them from the

core task of safeguarding Barclays vast balance

sheet.

The macro-environment remains febrile, espe-

cially in Europe. We have to remain vigilant on

balance sheet exposures and risk management.

In short, our focus must remain on capital, fund-

ing and liquidity; improving returns; and driving

income growth.

The memo, co-wrien by Marcus Agius, Bar-

clays outgoing chairman, apologised for the

impact of the rate-xing episode on the banks

sta, but hinted that its rivals were likely to be

... Spain will soon need a

major bailout. And that willcome it MUS come withdeaults on at least a portion othe debt

http://www.mauldineconomics.com/images/uploads/pdf/mwo071412.pdf

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19.THINGS THAT MAKE YOU GOHmmm...

15 July 2012 19

hit even harder than the m in nes imposed

on Barclays.

As other banks sele with authories, and their

details become public, and various governments

inquiries shed more light, our situaon will even-

tually be put in perspecve.

Approximately other lenders, including Lloyds

Banking Group and Royal Bank of Scotland, are

under invesgaon by authories probing a cri-

sis which has also cast doubt on the competence

of the Bank of Engand and

Financial Services Authority.

A string of inquiries has also

been triggered, including

one that wi examine the

business pracces and cul-

ture of Barclays.

I nderstand that 90m

emais and as man as 1m

voicemails will be made

available to the indepen-

dent gure being draed in

to spearhead that probe, the

details of which are being -naised this weekend.

last week, it was an-

nounced that Sir Mike Rake, our Deputy Chair-

man, would lead an external review of business

pracces across the bank, yesterdays memo

said.

That review will begin shortly, and the indepen-

dent reviewer will have access to every resource,

and all the co-operaon, he or she requires in

order to complete the work. This is an important

intervenon to ensure that appropriate valuesare applied consistently across Barclays, and the

Execuve Commiee will support and drive im-

plementaon.

O O O SKY NEWS (VIA ZEROHEDGE)/ LINK

Iadmit the headline is a lile sensa-onalisc, but aer Wednesdays WTF bondaucon, I feel like slapping the market around

the face with a roen sh. Now certainly there

are plenty of penny stocks headed to greater

losses far sooner. And certainly, lots of people

have made good prots on Treasuries by buy-ing them and ipping them to a greater fool or

a central bank. On the other hand, so did many

during the NASDAQ bubble, or during the s

ABS bubble. Bubbles are protable for some, and

thats why there have been so many throughout

history. But once the money starts to dry up they

become excruciangly painful.

Treasury yields are just going lower:

Aer a -year bull market, youd think that the

nancial media might have cooned onto the

idea that there is lile scope le for real gains,

either by holding bonds to maturity (inaon is

outrunning yields) and even by ipping it o to

a greater fool (or the greatest fool of all the

central bank).

In theor, there are no imits to how ow rates

could go. In theory, nominal yields could go deep-ly negave, so long as there are buyers coming

into the market read to b at a ower rate, and

a push a prot to bond ippers. In reality, even

Japan a naon that has adopted desperate

measures including forcing nancial instuons

to buy treasuries to keep rates depressed has

not managed to psh nomina rates beow zero.

The scope for great prots from ipping bonds

seems to be evaporang. And in any case, the

laer case of ipping bonds to a greater fool or

CLICK TO ENLARGE SOURCE: ST. LOUIS FED

http://azizonomics.files.wordpress.com/2012/07/10year.pnghttp://news.sky.com/story/960239/exclusive-barclays-implicates-libor-rivals

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the central bank balance sheet is a classic char-

acterisc of a bubble. The inherent value in a

bond is its yield; everything else is speculaon.

In the classic bubble mentality, more and more

nancial media hastened on by the prospect

of deaon (something which the Fed is abso-

lutely obsessed with prevenng, and is prepared

to print an nimited amont of mone to do

so) are calling Treasuries something that you

cant aord to not own.

The reality, though, is that even recent years trea-

suries have not really been a good investment.

Bond prices may have gone up, but theyve been

eclipsed by a harder kind of asset gold:

O O O AZIZONOMICS (VIA ZEROHEDGE)/ LINK

It is atruth universally acknowledged

that a man in possession of a major American

polical partys presidenal nominaon must be

in want of a more asserve policy on China. Bill

Clinton upbraided George Bush senior for cod-

dling dictators; Mr Bushs son went on to accuse

Mr Clinton, when president, of much the same

thing. Barack Obama, during his rst presidenal

campaign, called the younger Mr Bush a patsy

in his dealings with China. Now it is Mi Rom-

neys turn: in February he described Mr Obama

as a near supplicant to Beijing.

Mr Romney, as bets the author of a book called

No Apology: The Case for American Greatness,

says that if elected he would not hesitate to putChina in its place. On his rst day in oce, no

less, he has pledged to declare it a currency ma-

nipulator, a step that could lead to across-the-

board tari increases on Chinese imports. More

broadly, he says he will force China to play by

the rules of internaonal trade and investment:

no more the of intellectual property, no more

unfair subsidies for state-owned rms, no more

predatory pricing. And economics is not his only

concern: he promises to chasse China more

od for its hman-rights abses and to boster

Americas armed forces to counteract Chinas

growing military clout.

As in most things, Mr Romnes China-bashing

seems studied and methodical. He would like

rich countries to impose intellectual-property

sancons on China, to prevent it from acquir-

ing the advanced technology behind such things

as passenger jets unl it stops pilfering foreign

know-how. under the heading Confront China

Directly, his website pledges to end government

procurement from China unl China providesreciprocal access to American rms. Taiwan, he

says, should be allowed to buy whatever weap-

ons it wants. Meanwhile Americas navy, he cal-

culates, needs to build an extra six ships a year

to handle all the challenges it faces, including an

ppit China.

Mr Romney mocks the suggeson that he is gun-

ning for a trade war (let alone a convenonal

one). An undeclared conict is already under

wa, he sggests, and China is winning. More-

over, if America imposed punive taris on Chi-nese goods, he arges, China wod not dare

to retaliate in kind because it has more to lose

from an escalaon in hoslies. China is selling

America, he notes, $ billion more per year

than America is selling to China. If youre not

willing to stand up to China, youll get run over

b China, he insists.

The obvious response to all this is to shrug. Can-

didates may rage about China on the campaign

trail, but when in oce they become more tem-

perate. Four years ago Mr Obama promised to

CLICK TO ENLARGE SOURCE: AZIZONOMICS

http://azizonomics.files.wordpress.com/2012/07/tlt-2002.pnghttp://www.zerohedge.com/news/guest-post-are-treasuries-worst-investment-world

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do jst as Mr Romne now demands, and abe

China a currency manipulator. Twice a year since

then he has passed p the opportnit to doso. In part, that is because Chinas currency has

been appreciang in recent years, and its global

trade surplus shrinking. But mainly it is because

picking a ght with an all-important trading part-

ner, and the biggest foreign holder of American

public debt, does not seem a bright idea when

you are the one who will be blamed for the eco-

nomic consequences.

O O O ECONOMIST / LINK

Earlier this week,Greek ead-

ers sggested the wod ask for more

me to hit austerity targets demanded by their

creditors. Germany, though, is opposed, accord-

ing to Friday media reports. IMF head Chrisne

Lagarde also said it is premature to discuss ex-

tension.

The idea doesnt seem to have gone down

well. On Thursday, Greek Finance Minister Yan-

nis Stournaras indicated that the leaders of the

three pares represented in the countrys gov-

erning coalion had agreed to ask for more meto make billions in cuts that have been demand-

ed in exchange for emergency internaonal aid.

Greek Prime Minister Antonis Samaras aso said

this week that he would request that the dead-

line be pushed back.

But on Friday, the response from Germany and

esewhere wod seem to be a resonding no.

Chancellor Angela Merkels spokesman Steen

Seibert said that neither the content nor the

meframe of the memorandum are up for de-

bate, sing shorthand for the asterit agree-

ment between Athens and its creditors. Ac-

cording to a report in Fridays Rheinische Postnewspaper, the chancellor would consider a

postponement of a few weeks at the most. The

paper cites anonymous government sources.

The Chancellery was echoed by the other two

pares in Merkels governing coalion. Speaking

to German public radio staon Deutschlandfunk

on Friday morning, Economy Minister Philipp

Rsler, of the Free Democrats, said I have the

feeling that the troikas paence is slowly com-

ing to an end, referring to the trio made p of

the Eropean Commission, the Eropean CentraBank and the Internaonal Monetary Fund. He

also called into queson whether Greece is even

capable of being reformed to the degree nec-

essary. Our experience has, at the very least,

made me skepcal, he said.

Alexander Dobrindt, general secretary of the

Chrisan Social Union, the Bavarian sister party

to Merkels Chrisan Democrats, went even fur-

ther. From day to day, it is becoming more ap-

parent that Greece only has a chance if it exits

the euro, he told the daily Rheinische Post.

Greece has commied itself to saving an addi-

onal . billion ($4 billion) over the two-year

period from to 4, but is having dicul-

es coming up with ways to make further cuts in

addion to the massive austerity measures it has

aread passed. A dea of the kind that Athens

has requested would almost certainly necessi-

tate billions in addional internaonal aid.

One novel austerity idea that the Greek daily Ta

Nea wrote about on Fridayis that of cung by half the

amont the state pas for the

saaries of priests and bish-

ops in the country. At pres-

ent, the state pays the enre

salary of the , clerics in

the country. Were Athens to

make the Orthodox Church

responsibe for haf of their

saaries, some 100 biion

in taxpayer money could be

CLICK TO ENLARGE SOURCE: DER SPIEGEL

http://www.spiegel.de/international/europe/bild-844307-371385.htmlhttp://www.economist.com/node/21558581

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22.THINGS THAT MAKE YOU GOHmmm...

15 July 2012 22

saved annually.

The government is also considering an increase

in the length of mandatory military conscripon

from the current nine months to a full year as

a way of cung back on the number of career

soldiers that need to be paid. Furthermore, uni-

versity students whose period of study dras-

cally exceeds the norm might be asked to pay

signicant fees.

Most, thogh, Prime Minister Samaras is at

pains to show progress to both his Eropean

creditors and his voters. During the recent gener-

al elecon campaign, Samaras promised Greeks

that he would request a deadline extension, a

pledge that was largely ignored at the me due

to the compeng promise of his primary com-

petor, Alexis Tsipris of the leist Syriza party,

to cancel the austerity agreement with Europe

atogether.

O O O DER SPIEGEL / LINK

People dont tend to sit on thefence when it comes to invesng in China.Theyre either rmly for the economic miracleor the disaster waing to happen argument.

Beijing provided ammunion for both last week.

A sharp slowdown in inaon to its lowest level in

months has turned last years concern about

overheang on its

head. Two interest-

rate cuts in a month

and the broadest of

hints from Premier

Wen Jiabao that

heavy infrastructurespending is back on the agenda conrm the view

that the Chinese authories are more worried

about deaon these days.

GDP gures on Friday, on the other hand, indi-

cated an economy that may be slowing from its

previous super-charged rates of growth but is

sll humming, by the standards of the deleverag-

ing developed world. What would we give over

here for a growth rate of .pc?

I was amused recently by a chart claiming to

highlight the biggest bubble in China today it

tracked references in the media to menons of ahard landing for the Chinese economy, which

spiked higher at the end of 2011 and staed

there. It has become unfashionable these days

to make the case for China and de rigueur to

fret abot bad oans, ghost towns and propert

speculaon.

Negavity about China in the media may be a

relavely recent phenomenon but the love af-

fair with Chinese stocks soured some me ago.

A comparison of the MSCI China index and its

All World equivalent shows that Chinese shareshave under-performed their global peers in four

out of the past ve years. They out-performed in

ve of the previous six.

The long-term case for invesng in China has

been made many mes, frequently by me, but

its worth reminding ourselves briey because it

hasnt gone away. The investment backdrop con-

nues to be sustainably high economic growth,

increased urbanisaon, a growing middle class,

more domesc consumpon, infrastructure

spending and a vast populaon which meansthat investment themes once idened can con-

nue for a long me before they reach maturity.

But Im not blinkered to the bearish case, fo-

cused on an inability to trust government data,

a sll excessive dependence on exports to a

slowing West, a string of corporate governance

concerns, worries about the state of local gov-

ernment nances, over-investment (especially in

the property sector) and companies with nega-

ve cash-ows failing to even earn the cost of

capital.

All of these have more than a grain of truth in

them and yet I cant help thinking that there are

three reasons why now might be an interesng

me for investors to revisit China.

First, the long-term case is intact. Chinas GDP

per capita is roughly where Americas was in the

mid-1960s and demand for man goods and ser-

vices from cars, to air travel, nancial services

and mobile phones remains a fracon of that

... I cant help thinking thatthere are three reasons why nowmight be an interesting time orinvestors to revisit China,

http://www.spiegel.de/international/europe/germany-opposed-to-greek-plea-for-more-time-to-reach-austerity-targets-a-844307.html

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15 July 2012 23

in the US. The Chinese government has made it

clear that it is willing to tolerate a much higher

rate of wage inaon than in the past to driveconsumpon and improve living standards.

Second, in the short term the economy feels like

it is at an inecon point. With its usual lag, eas-

ier government policy is beginning to feed into

an increase in infrastructure projects, a stabilisa-

on of bank-loan growth and an improvement in

economic leading indicators.

Third, the markets have been pricing-in a dete-

riorang backdrop for a couple of years at least

now. The valuaon of the Chinese stock market

is near to its low with the average share

cosng less than mes earnings. Apart from

the boom of the market at the end of , this

is the lowest level in at least the past years.

Measures of market senment are at levels that

have indicated turning points throughout the

past decade.

O O O TOM STEVENSON/ LINK

Here is perhaps the mostamazing thing abot JPMorgan Chases

(JPM) $. billion trading loss: Take a look at the

rms overall results, and its like the London

Whales misstep, one of the largest ubs in the

history of Wall Street, never happened.

Back in mid-April,

abot two weeks be-

fore tak of the trad-

ing osses emerged,

JPMorgan was ex-

pected to earn $.

a share in its secondquarter. On Friday,

JPMorgan reported

that it had, Whale and all, earned exactly that.

How the bank appears to have oset the huge

trading loss is a prime example of how complex

and malleable bank prots actually are, and how

much they should be believed. JPMorgans quar-

ter should give fodder for accountants to talk

about for some me.

Yes, I have seen these results, but I have also

seen how the sasage is made and I am worried

that I might get food poisoning in the ftre,Mike Mayo of Credit Agricole Securies and au-

thor of the book Exile on Wall Street told Dimon

in a meeng with analysts following the banks

earnings reease.

Sre some of JPMorgans bsinesses were strong.

Prots in its mortgage operaons, helped by fall-

ing interest rates, rose b near $1.3 biion. Bt

a good deal of JPMorgans earnings came from

some shiing of losses and an assumpon that

things for the bank, and the economy in gener-

al, are about to get a good deal beer. That as-sumpon might prove right, but it could also add

to osses in the ftre.

So how do o make a near $6 biion oss go

away? First stop taxes. The bank said that the

London Whales blunder cost the bank $4.4 bil-

lion in the second quarter alone. But thats be-

fore taxes. Aer it pays taxes, though, JPMorgan

says the loss will shrink to just over $. billion,

which means the bank plans to take a $. billion

write o from Uncle Sam. Like any loss, banks

are allowed to use trading blunders to oset tax-able prots elsewhere in the bank. The queson

is the rate. At $. billion, JPMorgan is wring

o roughly % of the loss. Thats not that out

of line with the U.S. corporate tax rate, but its a

far larger percentage of prots than most com-

panies actually pay. Nonetheless, on taxes alone,

the bank was able to shrink the London Whales

wake to $4.1 biion.

We havent le the rms vaunted chief invest-

ment oce yet. CEO Jamie Dimon has long said

the porolio is safe and that if he were to liqui-date it today he could produce an $ billion gain

for the bank. In the second quarter, he dipped

into some of that. London Whale aside, the CIO

took a $630 miion gain. Now were down to

$3.5 biion.

O O O FORTUNE/ LINK

... How the bank appears tohave ofset the huge tradingloss is a prime example o howcomplex and malleable bank

prots actually are, and howmuch they should be believed,

http://finance.fortune.cnn.com/2012/07/13/jpmorgan-hid-london-whale/http://www.telegraph.co.uk/finance/comment/tom-stevenson/9400114/Chinese-economic-miracle-slowed-yes-but-still-humming.html

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24.CHARTS THAT MAKE YOU GO Hmmm...

15 July 2012 24

For many years, econ-omists have struggled to explain the

equity premium puzzlethe fact

that the average return on stocks is

larger than what would be expected

to compensate for their riskiness. In

this post, which draws on our recent

New York Fed sta report, we deep-

en the puzzle further. We show that

since 4, more than percent of

the equity premium on U.S. stocks

has been earned over the twenty-four

hours preceding scheduled Federal

Open Market Commiee (FOMC) an-nouncements (which occur only eight

mes a year)a phenomenon we call

the pre-FOMC announcement dri.

The pre-FOMC announcement dri

is best summarized in the chart [top,

le], which provides two main take-

aways:

Since 4, there has been a large

and stascally signicant excess re-

turn on equies on days of scheduledFOMC announcements.

This retrn is earned ahead of the

announcement, so it is not related

to the immediate realizaon of mon-

etary policy acons.

The chart [boom, le] visualizes this

return decomposion. It shows the

S&P index level along with an

S&P index that one would have

obtained when excluding from the

sampe retrns on a 2 p.m.-to-2 p.m.

windows ahead of scheduled FOMC

announcements. In a nutshell, the g-

re shows that in the sampe period

the bulk of the rise in U.S. stock prices

has been earned in the twent-for

hours preceding scheduled U.S. mon-

etary policy announcements.

O O O LIBERTY ST/ LINK

CLICK TO ENLARGE SOURCE: THOMSON REUTERS/TICKDATA

http://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.htmlhttp://libertystreeteconomics.typepad.com/.a/6a01348793456c970c017742f4c013970d-450wihttp://libertystreeteconomics.typepad.com/.a/6a01348793456c970c0177432bf020970d-450wi

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25.CHARTS THAT MAKE YOU GO Hmmm...

15 July 2012 25

Consistent with otherrecent readings on the mood of the

American consumer, the Reuters/University

of Michigan consumer senment index fell

from . in June to . in the rst of two

readings for July, its lowest level since last De-

cember when it registered ..

There was some good news in that the current

condions index rose, from . last month to

., however, the expectaons component

fell from . to 4., also the worst reading

since last December. Lower gasoline prices

had a posive impact as one-year inaon ex-pectaons fell from . percent to . percent

and the ve-to-ten year outlook held steady

at . percent.

A weaker job market, concerns about a global economic slowdown, and growing anxiety about their

nancial future were clear to see as only percent of respondents said they expect to be beer o

a year from now, the lowest reading ever for this survey. Only percent said condions would be

beer in ve years.

Richard Curn, chief economist of the consumer survey, cited depressed wage and job growth as fac-

tors in the overall decline and went on to note, The June loss among higher-income households was

associated with a large drop in favorable rangs of economic policies and a growing recognion that

federal policies to bridge the scal cli will not even be discussed unl the very last minute.

O O O TIM IACONO/ LINK

he recent bankruptcyof Stockton, CA is thelargest such ling in US history.Accordingly, the Boston Review has put together a giganc infographic

that is well worth taking a look at. The scale of this default is enormousand one wod be hard-pressed to get a tre sense of that throgh the

coverage aorded it in the media.

(courtesy of Barry Ritholtz)

CLICK TO ENLARGE

SOURCE: IACONO

http://iaconoresearch.com/2012/07/13/consumer-sentiment-pushes-lower/http://www.bostonreview.net/BR37.4/susie_cagle_stockton_municipal_bankruptcy.php

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26.CHARTS THAT MAKE YOU GO Hmmm...

15 July 2012 26

Some 39% o adts thinkthat the rich in their country deserve

their wealth according to GlobeScan, a mar-

ket-research company which polled ,

people in countries. Top earners have at-

tracted more opprobium as their salaries and

the performance of the economy have head-

ed in opposite direcons. Europeans and Lat-

in Americans tend to have similar atudes to

the rich; the Anglo-Saxon world is a bit more

forgiving. The biggest contrast, though, is be-

tween emerging economies (a group in which

Russia sits, rather awkwardly). In China,

where m people were lied out of pov-erty between and , about half the

adults think their rich are righully so. But in

Russia, an economy dominated by oligarchs

who extract large windfall rents, only % do.

O O O ECONOMIST / LINK

Chinas commercial banks extended a total billion yuan in new loansin June, with small and medium-sized banks contribung most of that gure, data released bythe central bank on June showed.

The June loan gure was . billion

an more than in Ma.

O O O CAIXIN/ LINK

SOURCE: ECONOMIST

SOURCE: CAIXIN/BOC

http://english.caixin.com/2012-07-13/100410795.htmlhttp://www.economist.com/blogs/graphicdetail/2012/07/daily-chart-7?spc=scode&spv=xm&ah=9d7f7ab945510a56fa6d37c30b6f1709

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27.

15 July 2012 27

WORDS THAT MAKE YOU GOHmmm...

Regular readers will by now recognisethe rugged features of my friend Simon Mikhailovich. In

this interview with Lauren Lyster of Capital Account, Simon

gives a bravura performance discussing the vagaries of the

derivaves market in general, the CDS market in parcular

and does as good a job as anbod in expaining jst how

interconnected the nancial system really isand how dan-

gerous that situaon could be.

As well as being a leading tech-nology investor and the co-founder of

Silver Lake Partners, Roger McNamees

role as co-founder of Elevaon Partners

has given him an inside track on the re-

cent Facebook IPO. In this interview with

Bloomberg TV, McNamee is scathing in his

assessment of the IPO and the implica-

ons for the wider market.

I have my doubts that Chubby Wombat is

about to give his partner and friend, Bono,

a run for his money in the music world,

but then I wouldnt want Bono to chew

through tech companies Qs for me...

INTERVIEWER: This strategy generated $ billionin prots over the previous four years before this year. Deposit

money wasnt lost, and you know this. Crics, defenders say

this trading loss w