hmmm 12 aug 2012
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THINGS THAT MAKE YOU GO
HmmmA walk around the fringes of nance
13 August 2012 1
For AFREE Subscription to Tings Tat Make You Go Hmmm..... clickHERE
Come you back to Mandalay,
Where the old Flotilla lay:Cant you ear their paddles chunkin romRangoon to Mandalay ?
On the road to Mandalay,Where the yin-fshes play,An the dawn comes up like thunder outer
China crost the Bay! RuDYARD KIPLINg, MANDALAY
Be careful about Burma. Most people cannot rememberwhether it was Siam and has become Tailand, or whetherit is now part of Malaysia and should be called Sri Lanka. Alexander Cockburn
The value systems of those with access to power andof those far removed from such access cannot bethe same. The viewpoint of the privileged is unlikethat of the underprivileged Aung San Suu Kyi
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2.THINGS THAT MAKE YOU GOHmmm...
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odays edition o Things ThatMake You Go Hmmm..... x be longer on histo-
ry than most and will form the background to
a short series of pieces I intend to write about
a country that is potenally on the
verge of the kind of growth the
enre world sorely needs and
yet only Asia seems capable of
providing.
Consequently, if history and
background arent really
your thing, Id recommend
skipping forward to page
10 where youll nd
arcles of a more
topical nature but for
those of you who, like
me, are fascinated by his-
tory and the world around us,
join me on a trip back in me to
a country thateven by Asian stan-
dardshas been one of the bas-
ket cases of history.
That history, though, could wellbe about to change in a profound
way.
he names osuch places as Ran-goon, Mandalay and Ir-
rawaddy evoke memorie of a
bygone era when the once-mighty
Brish Empire included many far-ung outposts
which inspired not only adventure but poetry.
One such outpost was Burma, a country of tre-
mendous strategic importance that was con-
quered by the Brish aer a series of Anglo-Bur-
mese Wars between 1824 and 1885.
With the fall of Mandalay in 1886, Burmas last
monarch, King Thibaw Min, abdicated, seng
the stage for a lile under 60 years of Brish
rule during which me the city of Rangoon was
anointed the countrys capital and grew into an
thriving port along the trade routes between
Calcua and Singapore.
Many of those years were fraught with unrest
as cultures clashed and seemingly insignicant
dierences such as the refusal of the Brish to
break with their own tradion and remove their
shoes when entering pagodas were enough to
cause severe riong and the loss of many lives,
but the quid-pro-quo was that Burma became
the most-developed and wealthiest country in
Southeast Asia under Brish colonial rule.
In April 1937, Burma became a separately ad-
ministered colony of Great Britain and Ba Maw
was installed as the countrys rst Prime Minis-
ter. Amazingly enough, Ba was a very outspoken
opponentof Brish rule in Burma (begging the
queson of how that lile fact escaped those in
Britain conducng the veng process) and, af-
ter strongly opposing Burmese parcipaon in
WWII, he resigned from the legislave assembly
in 1940 and was arrested for sedion.
It was at this me that an exiled Burmese acv-
ist with a family pedigree of resistance (his great
uncle had fought against the Brish annexaonof Burma in 1886) named Aung San formed the
Burma Independence Army from his base, curi-
ously enough, in Japan and these displaced Bur-
mese took up arms against the Allies.
Burma would be decimated by WWII as it be-
came a major baleground due to its geo-
graphical signicance and the richness of its re-
sources. Though many Burmese inially fought
on the side of the invading Japanese army, the
vast majority switched allegiance by 1945 and it
was in the aermath of the war that Aung Sannegoated the Panglong Agreement which guar-
anteed the countrys independence and rmly
established him as the father of modern Burma.
Aung San was tragically assassinated by polical
rivals six months before his dream of an inde-
pendent Burma was nally realised but, despite
this setback, on January 4, 1948, Burma nally
became an independent republic with Sao Shwe
Thaik as its rst President and U Nu as its rst
Prime Minister.
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3.THINGS THAT MAKE YOU GOHmmm...
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The next 14 years were relavely stable and rea-
sonably peaceful aer the turmoil that had gone
before. It was during this me that Burmas UThant became Secretary General of the United
Naons (a posion he would hold for ten years),
akin wih him o New York from hi homeland
a yon woman named An san s Kyi, dah-
er of An san, a
an administrave
aian. thi yon
woman wa laer o
win the Nobel Peace
Prize in 1991 and
play an enormousrole in shaping the
country - but that is
a story half-wrien,
to which we shall re-
rn horly.
In March of 1962,
however, darkne
descended uponBrma when a mili-
tary coup dtat, led
by General Ne Win,overhrew he ov-ernment, plunging the country into decades ofviolent misrule by an oppressive Junta. In 1974,a new constuon of the Socialist Republic ofthe Union of Burma was adopted which instut-ed a one-party socialist system. The good news?It led to the resignaon of the military rulers.The bad news? They connued to rule anyway,through the Burma Socialist Programme Party(BSPP) and decimated the countryturning itinto one of the most impoverished in the world
through a rule based on the toxic combinaonof Soviet-style central planning and supers-ous beliefs. I know, I know... how could such asystem that combined two such brilliant ideas
possiblygo wrong?
Periodic protests during this period wereswily and brutally suppressed, but on the 8thof August, 1988 (in perhaps something of aharbinger for those currently aempng to xEuropepay aenon mesdames et messieurs)it was, of all things, a bizarre piece ofeconomic
mismanagement by Ne Win that would nallylead to his downfall and the installaon of a
new military regime when he abruptly andfoolishly decided to demoneze several large-denominaon kyat bills - a move that instantlyaected Burmas middle class, turning many ofthem into paupers overnight and sparking whatbecame known as the 8888 Uprising (8th ofthe 8th 88). The bloody protests that sprangup across the country were eventually quelledaer yet another military coup in Septemberby the State Law and Order Restoraon Council(SLORC)which imposed even more draconiancondions upon the poor cizens of Burma
han hoe hey had endred nder Ne Win.
But amidst the turmoil it was the formaon,in September 1988, of the Naonal League forDemocracy under the leadership of that younglady who had le her home for New York adecade earlier, Aung San Suu Kyi, that was tomark this upheaval as a crucial turning pointfor Burma as it turned away from Socialism andinched towards a more democrac structure.Inched being very much the operave word.
The following year, the SLORC ocially changedthe countrys English name to The Union ofMyanmar and, in a move that would makethem the laughing stock of repressive regimeseverywhere, they promised that, in 1990, theywould hold free elecons for the rst me in 30
year.
Now, call me old-fashioned, but if Imhandicapping a free elecon between a brutal,
military junta and a democrac party of the peo-
ple, I am concerned with only one variable; arethe elecons truly free? If they are (and I think
its safe to say that such regimes have a fairly
spoy record when it comes to such things),
then Ill happily take the points and back the
democrats. Of course, such elecons are never
truly free (no, Mr. Pun, they are NOT. Weve
discussed this before. Im busy, leave me alone)
and o he mar money alway oe on he rl-
ing party.
But a funny thing happened on the way to the
Burma: The Facts
size: 676,578km2
Populaon: 55 million (2011 est.)
Literacy: 89.9%
Workin Ae
Populaon: 62%
Reion: 7
Ethnic States: 7
Reliion : Buddhist (89%)
Chrisan (4%)
Muslim (4%)
Lanae: Burmese (65%)
Currency: Kyat (870/$)
GDP per capita: US$840 (2011est.)
Myanmar: The Facts
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4.THINGS THAT MAKE YOU GOHmmm...
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ballot boxes asone can only imagineeach
of he rlin eneral amed ha one of he
others was going to x the result and, amaz-ingly, the NLD won an astonishing 80% of theea.
Normally that might be a problem for a regime,but not in Myanmar.
The military junta simplyrefused to step down thenquietly set about repressingthe populist NLDimprison-in many of i leader and
placing Aung San Suu Kyinder hoe arre whereshe remained for 16 of thenext 21 years. The SLORCchanged their name to theState Peace and Development Council (SPDC)in 1997 but the old switcheroo failed to foolanybody. Nevertheless, the junta remained inpower unl 2007 under the leadership of Gen-eral Than Shwe, whose claims to fame includebeing ranked No. 4 on Parade Magazines 2009Worlds Worst Dictators list and placing an
impressive No. 2 on Listverses Top Ten WorstLiving Dictators list (seriously). Shwe was de-scribed thus by the Democrac Voice of Burma:
(Democrac Voice of Burma): ...He tends to
be seen as being sullen, humorless and rath-
er withdrawn, a hardliner, skilled manipula-
tor and an opponent of the democrazaon
of Burma.
According to his eHarmony prole he also likedlong walks, 1940s lm noir and labradoodles.
B I dire.
Tere must be something about theheat of August in Myanmar because, aer the
8888 Uprising nineteen years previous, the situ-
aon boiled over once again in August of 2007
and, amazingly enough, despite the repressive
brutality of the regime to that point, it was once
aain economic missteps that nally brought
about an angry revolt amongst the people of
Myanmar (pay aenon, Brussels... pay aen-
on). The course of events was described bril-
liantly by the US Instute of Peaces Priscilla
Clapp in a must-read, November 2007 report en-tled Burmas Long Road To Democracy:
(Priscilla Clapp): On August 15, 2007, Bur-
mas military government announced that
all government subsidies would be removed
from imported diesel and natural gas, which
power the countrys modes of
transportaon and electricity
generaon. The cost of diesel
fuel immediately doubled,
and the cost of natural gas
rose as much as 500 percent,creang a wave of inaon in
other essenal commodies,
such as rice, cooking oil, and
other foodstus. Transporta-
on became so costly that many people, un-
able to aord the commute to work, started
bunking on city streets. Polical acvists who
had been leading small and sporadic urban
demonstraons over the past year to protest
rising prices and poor economic condions
reacted immediately, calling on the govern-ment to engage in dialogue with the people
about such dramac unilateral economic de-
cisions.
By August 19, people were marching in the
hundreds through the streets of Rangoon,
led by acvists from the 88 Students group
and the Naonal League for Democracy
(NLD)... Within two days, the regime arrested
a large number of 88 Students leaders, but
similar marches had already spread to sever-
al other cies around the country, suggesngthe existence of an extensive underground
organizaon. In late August, Buddhist monks
in the western city of Siwe began to join the
marches. On September 5, a group of some
six hundred monks marching in the town of
Pakkoku in central Burma were brutally at-
tacked by Swan Ah Shin (SAS),[ a group of
pro-government street toughs], who ed
several monks to poles and beat and dis-
robed them. When local ocials visited the
monastery to discuss this incident, they were
... He tends to be seen asbeing sullen, humorless andrather withdrawn, a hardliner,
skilled manipulator and anopponent o the democratiza-tion o Burma
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5.THINGS THAT MAKE YOU GOHmmm...
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taken hostage by the monks, their cars were
burned, and they were given an ulmatum
for the government to deliver an apology bySeptember 17 for the aack on the marching
monks.
Within days, the All Burma Monks Alliance
(ABMA) surfaced for the rst me and de-
manded that the government apologize to
the monks for the Pakkoku incident, reduce
commodity prices, release all polical prison-
ers, and enter into dialogue for naonal rec-
onciliaon with the democrac forces. The
ABMA pledged to boyco the State Peace
and Development Council (SPDC) by refus-ing to accept alms from them (thus keeping
them from earning Buddhist merit) if they did
not meet these demands by September 17.
When no apology was forthcoming, tens of
thousands of monks, surrounded by sympa-
thec cizens, marched through the streets
of several Burmese towns and cies during
the week of September 17, channg bless-
ings for the people. By now it was apparent
that the regime faced a far more organized
opposion that it had imagined.As the monks invited the public to join the
peaceful, disciplined marches during the fol-
lowing week, the crowds burgeoned, and
the regime began to clench its st. Military
reinforcements were sent to Rangoon, and
on September 27, police, army, and USDA
forces began raiding monasteries, prevent-
ing monks from going out, and rounding up
marchers in the streets by force. Thousands
were hauled o to makeshi prisons, and
the Sangha (the Burmese order of Buddhistmonks) was stripped of its polical power.
This me, however, unlike in 1988, the world
witnessed the oppression in great detail via
cell phones, digital cameras, and the Inter-
net.
Long aer the protests were quelled, the re-
gimes security forces, armed with pictures of
marchers found on the Internet, connued to
comb city neighborhoods in the dead of the
night, arresng suspects as they slept and
hauling them o to jail.
In the wake of what became known asthe Saron Revoluon, a constuonal referen-
dum was held in May 2008, which promised a
discipline-ourishing democracy and bestowed
yet another name-change upon the Union of
Myanmar which would henceforth be known as
he Republic of the Union of Myanmar (evoking
Monty Pythons Judean Popular Peoples Front)
but perhaps most importantly it set the stage
for a full and free general elecon in 2010 (the
rst to be held in Myanmar in 20 years) which,
despite being decried as fraudulent by many
Western naons in the wake of a resounding win
for the military ruling party, looks to have poten-ally been the beginning of real reform aer so
many fale dawn.
Aer the 2010 elecon, Myanmars aging mili-
tary rulers began a series of reforms towards a
more liberal democracy and a mixed economy.
Their moves were likely selsh as, aer years
in absolute power, they were wealthy beyond
imaginaon with ospring who wanted to travel
the world (which was prohibited by EU, US and
Swiss sancons) and they had most likely de-
cided that an orderly, self-determined transioninto quiet rerement was innitely preferable
to the alternave. Whatever the reasons, they
maer lile as, if you talk to cizens of Myan-
mar now, the feeling amongst the populaon is
very much that the reforms are both real and
irreversible and the success of the NLD in by-
elecons held on 1st April of this year (I know,
right?) was a graphic illustraon of this as Aung
San Suu Kyis party swept 43 of the 45 constu -
ency seats available and she herself took her
seat in the Pyithu Hluaw (Lower House) of theBurmese parliament represenng the constu-
ency of Kawhmu.
Such events had been inconceivable only
months earlier but, with the visit of Hillary Clin-
ton to Myanmar in December 2011 (the rst visit
by a US Secretary of State in 50 years), the immi-
nent liing of sancons and Myanmars elecon
to the chair of ASEAN in 2014, progress is prov-
ing swi and sweeping. Myanmars prospects
havent looked this good in a generaon.
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So, ater an unusually lengthy, but con-textually important
hiory leon oday,
we now reach the
stu that will make
you want to reach for
a notebook and jot
down a few facts and
gures because, be-
lieve me, those facts
and gures will de-
niely make yo o
Hmmm.....
Lets start by placing
Myanmar in context
with its neighbours
and fellow members
of ASEAN (Associaon
of sohea Aian Na-
ons); Indonesia, Ma-
laysia, the Philippines,
Singapore, Brunei,
Thailand, Cambodia,
Laos, and Vietnam.
Myanmar is situated
on the west coast of
Indochina and shares
a border with India,
China, Lao and i
chief trading partner, Thailand (see map).
Myanmars coastline stretches for some 3,000km
and, in the Irrawaddy River, its borders enclose
Asias only self-contained river network as the
source, middle course and mouth of this great
waterway are all within Myanmar. The river is
1,550km long and by far the most important wa-
terway in the country.
Myanmar is the second-largest country by area
in ASEAN, the h largest by populaon and one
of the richest in terms of the natural resources it
possesses. It is also the poorest.
According to IMF esmates, Myanmars GDP percapita in 2011 is esmated to have been $804.
To put that into perspecve, it is roughly one
sixth that of Thailand and less than one sixeth
of the country I call home, Singapore (chart, be-
low, le).
Amazingly enough, Singapore has basically no
natural resources but has parlayed a crical geo-
graphical locaon, a stable, democrac polical
system, sound nancial management, an ab-
sence of corrupon and an incredibly pro-busi-
ness, low-tax regime into a ranking of third in percapita GDP behind only Qatar and Luxembourg
according to IMF esmates.
What makes this disparity between the two
Asian naons all the more staggering is the
sheer level of natural resources that Myan-
mar possesses. The country produces coal,
mber, lead, copper, zinc, n and limestone
in relave abundance, but it is in teak, oil &
gas and precious stones that Myanmar nds
itself punching a long way above its weight.
Over 75% of the worlds teak is produced in
Myanmar, along with over 90% of the worlds
jade and 90% of the worlds rubies. It has the
worlds 4th-largest proven reserves of natu-
ral gas with 11.4 trillion cubic feet and has
the 65th largest oil reserves on the planet
(Myanmar has been exporng oil since
1853). Amazingly enough, only half of the
countrys land area has been geographically
surveyed so further riches undoubtedly lie
beneath Myanmars ferle soil.
$0
$10,000
$20,000
$30,000
$40,000
$50,000
60,000
ASEAN
Myanmar
Cambodia
Laos
Vietnam
Philippines
Indonesia
Thailand
Malaysia
Brunei
Singapore
50,713
36,532
8,617
5,2813,469
2,2551,362 1,204 912 840
3,476
ASEAN GDP Per Capita (US$)
2011 Estimates (IMF)
SOURCE: IMF
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The agricultural sector in Myanmar employs
over 60% of the workforce and, along with being
the worlds 7th-largest rice producer, Myanmar
farms over 50 dierent crops as well as being
home to a burgeoning aquaculture industry.
Over the past 10 years, Myanmars GDP has
grown at an astonishing 9.7% CAGR (chart,above), outpacing every one of its ASEAN neigh-
bours and, in fact, if ocial stascs are to be
believed, despite heavy sancons, during the
period 1998-2007, its economy grew at 12.7%
faster than both India and China.
If ocial stascs are to be believed.
Myanmars GDP was US$20bln in 1989 but, af-
ter the abandonment of socialism and a series
of economic reforms in the wake of the 8888
Uprising, it was re-based to US$3bln in 1990. Itook almo weny year for he former level o
be reached but, between 2007 and 2011, GDP
soared 150% to stand at US$50bln in 2011 ac-
cording to the IMF.
It is mouth-watering to imagine the possibili-
es in Myanmar should it be truly freed from
the polical shackles under which it has been
operang for most of its existence and, through
a simple comparison with its closest neighbour
and main trading partner, Thailand, those possi-
bilies become only too clear all-too quickly
as a recent report from UBS highlighted:
The average life expectancy in Thailand
is 10 years longer than Myanmar and in-
fant mortality rates are ve mes lower.
Electricity consumpon and car owner-
ship per capita in Thailand is 20 mes
that of Myanmar.
In Thailand, mobile phone penetraon
exceeds 115%. In Myanmar today it is
just 1%.
Tourist arrivals to Thailand are 40 mesthat to Myanmar. Given the range of at-
tracons in Myanmar (including 100 sq
km of temples in Bagan and several hun-
dred islands in the Andaman Sea), the
growth potenal is signicant.
Tourist arrivals to Myanmar for the whole
of 2011 were only equivalent to arrivals
to Thailand for a single week.
Myanmar has three internaonal air-
ports but 93% of arrivals sll land in Yan-
gon (Rangoon).
There are more hotel rooms in Bangkok
than in the whole of Myanmar
In 2009, Myanmar exports totalled
US$9bln as opposed to Thailands
US$225bln
But thats not all. Want some more? How about
we look at Myanmars property market where
there has been minimal development of any
kind over the past 10 years?
Currently, just one oce building on
Sathorn Road, Bangkok contains more
space than for the whole of Yangon.
The retail space in Central World in Bang-
kok exceeds the total retail space for all
of Yangon.
Yangon only has 740 serviced apart-
ments, compared to 15,000 in Bangkok.
Or the automove market?:
0%
2%
4%
6%
8%
0%
ASEAN
Brunei
Thailand
Philippines
Malaysia
Indonesia
Singapore
Vietnam
Laos
Cambodia
Myanmar
9.7%
7.6%7.5%
7.1%
6.3%
5.5%5.8%
5.1%4.9%
4.5%
1.4%
ASEAN Real GDPCAGR (%) 2001-2011
SOURCE: IMF/UBS
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Myanmar does not manufacture vehicles
domescally. Rather, they are imported
under permit. The relavely few permitsawarded each year means that the num-
ber of registered vehicles in Myanmar is
very low; approximately 300,000 com-
pared to 5,400,000 in Thailand.
As you can probably imagine, Foreign Direct In-
vestment in Myanmar has soared (chart, below)
aer the new President, Thein Sein declared af-
ter taking oce that, in Myanmar, it was ...no
longer business as usual.
Sein pledged to root out corrupon, boost trade
and aract foreign investmentbut the story
surrounding that is something for next me!
So thats a poed history of Myanmar and a look
at some of the staggering potenal for growth in
a country that once sat astride Asia but, through
a series of disastrous polical choices, foreign
sancons, economic mismanagement and mili-
tary oppression, disintegrated into poverty andchaos. Next me we will take a look at some of
the US$91 billion of infrastructure projects be-
ing developed and hear from a good friend of
mine who moved to Yangon to be in the heart
of perhaps the biggest story to emerge in Asia
in decades.
*******
In this weeks edion of Things ThatMake You Go Hmmm..... we spend some con-
siderable me in Europe (where else?) as things
connue to slowly fall apart just as the elected
heads of the Eurozone return from the beachin me for next weeks Greek repayment to the
ECB (look for some clever tricks to be pulled in
order to get through that date and to the (hope-
ful) racaon of the ESM by the German Con-
stuonal Court on September 12.)
Belgiums nance minister decides not to play
ball as he declares buying Italian and Spanish
debt makes no sense, John Hussman returns
aer a long absence as he takes a look at pro-
jected earnings and nds that cheap is a maer
of debate, former BoE MPC members encourageMervyn King to step on the gas and Nomuras
Alistair Newton coins the
term Brixit .
Germany considers an EU
referendum (but probably
not seriously), we look at
the Chinese Golden Ele-
phant, get a Postcard From
The Edge in Greece and nd
out a lile about Chinas Af-
rican Money Tree.
The euro cannot possibly
survive as it currently ex-
ists (at least according to a
Reuters special report), we
check out US sugar intake,
Chinas African resource grab and look at health-
care costs and the ethanol crush spread in the
wake of he us droh.
Last but not least, we hear from two Nigel Far-
ages, have the US decit explained to us as onlyan accountant can and Bert Dohmen of the ter-
ric Wellington Leer sees tremendous oppor-
tunies in the gold market.
Thats all from me. Unl next me, as they say
in Myanmar:
kyeethu go yothei, ywedu go layza, ngethu
go thana
Google it!!!
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
800
700
600
500
400
300
200
100
0
Foreign Direct Investment (FDI)
Net Inows 1980 - 2010
(US$m)
SOURCE: WORLD BANK/UBS
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9.THINGS THAT MAKE YOU GOHmmm...
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Contents 13 A 2012
Buying Spain And Italys Debt Makes No Sense
Germany Considers Holding EU Referendum
Postcard From The Edge
Chinas Answer To Subprime Bets: The Golden Elephant
Why The Eurozone Cannot Possibly Survive Intact
It Starts: First Asian Bank Mulls Brish Exit From The EU
Chinas African Money Tree
No Clue Bank Of England Urged To Drop Anguished Religious Ethics Over QE
Begging For Trouble
On GRExit, SPAilout, And Draghis White Knight
Charts That Make You Go Hmmm.....
Words That Make You Go Hmmm.....
And Finally.....
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10.THINGS THAT MAKE YOU GOHmmm...
13 August 2012 10
Te European Central Bankshould not buy Spanish and Italian debt because
it makes no sense and will take away the pres-
sure on policians to act, Belgiums central bank
overnor ha aid.
Luc Coene told Belgian newspapers De Tijd and
LEcho that buying the bonds of these countries
would only serve to weaken the ECB and do
nothing to resolve underlying issues of compe-
veness.
It makes no sense for the ECB to start nanc-
ing those countries, said Mr Coene, It would
only lead to the ECB taking on the whole publicdebt of Spain and Italy onto its balance sheet,
he aid.
That would in turn weaken the ECB and do
nothing to resolve the underlying problems.
Mr Coene also said that the
central banks eorts to calm
marke la mmer wih
around 135bn of addional
debt purchases on the sec-
ondary market via its Secu-ries Markets programme
took away the pressure on
policians to act.
We havent forgoen what
happened in August of last year: We bought Ital-
ian bonds and right aer that the Italian govern-
ment reneged on its pledges, he said.
The conclusion is clear: When you take away
the market pressure, you take away the pressure
on policians to act.
Spanish and Italian borrowing costs edged up on
Friday, following a week of steady falls on hopes
that Spanish PM Mariano Rajoy would make a
formal request for EU aid, which would then trig-
ger acon from the ECB.
President Mario Draghi inially disappointed
markets at his monthly press conference by re-
iterang that the ECB cannot replace govern-
ments, and that countries would have to re-
quest assistance from the European Financial
Stability Facility (EFSF) before the ECB could step
in.
Even if we were ready to act now, there would
not be the grounds for doing so, he said.
O O O UK DAILY TELEGRAPH / LINK
A bottle oliquor and a half-empty glassstand on the table next to Angela Merkel, who is
studying a condenal document with a sullen
expression. How to Break Up the Euro, is the
tle.
That, at least, is how Britains Economist imag-
ines the chancellors predicament these days.Tempted, Angela? is the headline on the cover
of the current issue.
Indeed, the chancellor is in a tricky posion at
the moment, as she fails to get the euro crisis
under control. Of course,
the Economists noon of a
secret plan to break up the
euro zone is purely cous.
But it ts into the current de-
bate, where more and more
policians from Germanys
coalion government are
talking about radical steps to
solve the euro crisis.
Ocially, though, Merkels line is that she wants
more Europe, not less. In the chancellors bid to
save the common currency, she is willing to go
to the very limits of what is permissible under
the German constuon. That was made clear
by her support for the permanent euro rescue
fund, the European Stability Mechanism (ESM),
and her pet project, the scal pact. But Merkel
sll wants more. We need a polical union,
she recently said on German public television
staon ARD. That means we have to give up
further competencies to Europe, step by step, in
an ongoing process.
But that will probably not work, given the lim-
its of the German constuon, something that
members of the opposion have been poinng
out for some me. In the meanme, more and
... It makes no sense or theECB to start nancing thosecountries, said Mr Coene, It
would only lead to the ECB
taking on the whole publicdebt o Spain and Italy ontoits balance sheet
http://www.telegraph.co.uk/finance/financialcrisis/9468862/Debt-crisis-ECB-buying-Spanish-and-Italian-debt-makes-no-sense-says-Belgian-bank-governor.html -
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more people within the governing pares have
been talking about holding a referendum in Ger-
many on the European Union. Rainer Brderle,the oor leader of the business-friendly Free
Democrats, Merkels junior coalion partner,
said on Friday that there could come a point
when a referendum on Europe becomes neces-
sary.
Horst Seehofer, head of the Chrisan Social Union
(CSU), the Bavarian sister party to Merkels Chris-
an Democrac Union (CDU), has even called for
several referendums. Finance Minister Wolfgang
Schuble has also talked about holding a naon-
al vote on the EU.
Such a vote could indeed be a way to get the
much needed legimacy for a transfer of naon-
al competences to Brussels. But how would it
actually work in pracce? SPIEGEL ONLINE pres-
ents an overview of some possibilies.
There are three conceivable opons for a refer-
endm:
1. The Voluntary Way
The German constuon, ocially known asthe Basic Law, does not make much menon of
direct democracy. Referendums are only speci-
cally foreseen for the case of a reorganizaon of
germany erriory and for he even ha he
Basic Law, which was originally supposed to be
temporary, is superseded
by a new constuon.
There have been repeated
calls to give the popula-
on a greater say beyond
ordinary elecons, espe-
cially from the opposion.In contrast to the CDU, the
CSU and FDP are open to
he idea.
Crics say that quesons about transfers of com-
petence or measures to save the euro are too
complex. But CSU leader Seehofer considers
those objecons to be pure arrogance towards
the people. In the newspaper Die Welt, Seehofer
listed three areas where people should have
more say. They include: the transfer of signi-
cant competencies to Brussels; the enlargement
of the European Union through new member
states; and German nancial support for otherEU states.
Wha i rikin here i ha he Csu wold an-
swer no to all of these quesons. And the par-
ty believes that an increasingly euroskepc Ger-
man populaon would also say the same. But
not even Seehofer himself appears to believe
that the constuon would really be amended
to include his proposed referendums.
2. The Forced Way
Even more likely than opening up the constu-on for referendums is that it comes up for dis-
cussion as a consequence of European integra-
on. And this, of course, would require Germans
to decide on a new constuon. Arcle 146 of
the constuon spulates that the current con-
stuon shall cease to apply on the day on
which a constuon freely adopted by the Ger-
man people takes eect....
O O O DER SPIEGEL / LINK
Te woman was from Patmos. Herhusband had lost his job and come back to the is-
land to be with their two children and nd work.
Aer he failed and she fell ill with cancer, they
ran out of money. The bank seized their house;
they could not pay the electricity bill. She was
ahamed, he old Lazaro
Papageorgiou, of Artos-
Drassi, a charity in Athens
that feeds the poor. Six
monh ao he wold nev-
er have dream he woldcome to depend on charity,
but today she needed help.
Under the brilliant blue
Ahenian ky, aner ha
iven way o wearine and loom. Oide
Greeces parliament, in Syntagma Square,
marchers once braved tear-gas and protesters
thronged a tented city. But it is quiet now. Sum-
mer ha lred greek wih money o he iland
and the beaches; the growing numbers who are
... Greece will have to slashits budget decit by a total o11.5 billion in 2013 and 2014.Failure would mean being cut ofrom European unds, leavingthe government with no choicebut to print its own currency
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without it have gone home instead. On Passion
Avenue, about 20 minutes away, shop aer shop
is barred. Nobody knows how many of them willopen again when Athenians return.
The only certainty is that life will get harder. Last
week the troika was in town. Represenng the
IMF, the European Central Bank and the Euro-
pean Commission, it must judge whether Greece
should receive the next 31.5 billion ($39 bil-
lion) of rescue funds, which the government will
mostly spend on recapitalising the banks and
paying debt interest. To qualify, Greece will have
to slash its budget decit by a total of 11.5 bil -
lion in 2013 and 2014. Failure would mean beingcut o from European funds, leaving the govern-
ment with no choice but to print its own cur-
rency. In eect, Greece would be out of the euro.
The troika le
Ahen on A-
gust 5th report-
ing good prog-
ress and saying
that it would be
back in Septem-
ber to nish itswork. A bond
payment falling
due before then
will be covered
by short-term
debt.
However, the re-
ality is as bleak
as the communi-
qu is bland. True, the economy is rebalancing.
Basic wages in Greece have fallen by 22%, therehas been scal consolidaon and the private-
sector labour market has been reformed. Yet the
public sector has not shed any of the 100,000
jobs it gained in a splurge of spending before the
crunch. The target for privasaon this year has
been cut from 3 billion to 300m. Unemploy-
ment is over 22% and climbing month by miser-
able month. And the economy, which has seen
only one quarters growth since the end of 2008,
is expected to shrink by more than 7% in 2012.
The glimmer of good news is that the mercu-
rial prime minister, Antonis Samaras, who has at
mes rejected the austerity deal with the rest ofthe euro zone, now seems fully behind it. As if
pinned to the spot by his impaired vision, the re-
sult of a detached rena, he seems to recognise
that his future is now based on Greece staying
in the euro. That means convincing a scepcal
euro zone that Greece really wants to change.
We will prove that we mean business, that we
are dedicated and mean to implement our plan,
he declares.
Credibility depends in turn on the nance min-
ister, Yannis Stournaras, a respected economist,whose technical experse might just alloy with
Mr Samarass polical guile to create a machine
that can get things done. The two men under-
stand that not a euro of fresh money is to be had
right nowindeed, they must know that plenty
of euro-zone countries would like nothing more
than to throw Greece out.
O O O ECONOMIST / LINK
Te Chinese investment vehi-cle known as Golden Elephant No. 38 promisesbuyers a 7.2 percent return per year. Thats more
than double the rate oered on savings accounts
naonally.
Absent from the products prospectus is any in-
dicaon of the asset underpinning Golden Ele-
phant: a near-empty housing project in the rural
town of Taihe, at the end of a dirt path amid rice
elds in one of Chinas poorest provinces.
They havent even built a proper road here,
said Li Chun, a car repairman, who said he livesin the project. The local government is holding
onto the ats and only wants to sell them when
prices go up.
Golden Elephant No. 38 is one of thousands of
wealth-management products, instruments
aimed at monied investors, which have shown
phenomenal growth over the last ve years.
Sales of them soared 43 percent in the rst half
of 2012 to 12.14 trillion yuan ($1.90 trillion),
according to a report by CN Benet, a Chinese
wealth-management consultancy.
SOURCE: EUROSTAT/ECONOMIST
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They are usually created in Chinas shadow
banking system - non-banking instuons that
are not subject to the same regulaons as banks- which has grown to account for around a h
of all new nancing in China.
Like the subprime-debt lending spree in the
United States that helped spark the 2008 nan-
cial crisis, the products are oen opaque, and
usually dependent on high-risk underlying as-
sets, such as the Taihe housing project.
Financial instability in the worlds second-largest
economy could have global ramicaons, and
warning bells have begun to sound about the
way these products are marketed in China.
It has become a mammoth industry, comprising
an array of nancial products. Analysts have dif-
ferent ways of measuring the size of the sector.
Barclays esmates some 22 trillion yuan worth
of wealh manaemen
products will be issued this
year. Fitch Rangs says Chi-
nas banks had about 10.4
rillion yan in wealh man-
agement product liability athe end of Jne hi year
Reuters reviewed more than 50 wealth-manage-
ment and trust loan products, available online
and at bank branches in China, with the aim of
tracking, for the rst me in certain cases, where
investors money in these products ends up.
All, except two, failed to explain or even display
the underlying asset behind the product.
the China Bankin Relaory Commiion,
which oversees banking products, said morethan 20,000 wealth management products were
now in circulaon, from a few hundred just ve
year ao.
In an email response to the quesons raised in
this story, the regulator told Reuters new bank-
ing regulaons require more transparency about
these products.
It is uncommon to nd wealth management
products that fail to clearly specify the underly-
ing securized assets, it said, adding that a reg-
ulaon issued last year clearly states that WMP
prospectuses must indicate how the money isbeing used, and the percentage of money that is
being put into each asset class.
The commission is looking into further strength-
ening the regulatory framework over these prod-
ucts, and will connue to encourage the wealth
management industrys growth under the princi-
ples of transparency and sucient risk control.
Aer a ve-year bonanza in sales of these prod-
ucts, signs of trouble are building. China Cred-
it Trust Co, one of the countrys biggest trust
companies, has disclosed that one of its wealth
funds, Jinkai #1, is at risk of default because of
money it lent to coal company Zhenfu energy
Group. Zhenfus boss has been arrested, amid
reports he owed a total of 500 million yuan.
O O O REUTERS / LINK
Last week the Fi-nancial Times had an edi-
torial, Polics is adding to
Spanish woes, which theyended wih he followin:
While they wait, Madrid should sck with the
policies it is pursuing but intensify its work on
the banking sector. If high yields persist, Spain
can bear it for a while no one should buy the
kabbalism according to which a certain level of
yields marks the entrance to a black hole. The
eurozone needs to convince investors it will be
able to act if panic persists, which it can best do
by giving the new rescue fund a banking license.
But the best remedy against panic is reassur-
ance. A greater sense of polical competence in
Madrid and of decisiveness in Brussels would do
wonder.
I see it very dierently. Policy is certainly adding
to the problems in Spain, but I dont think it is
because, as the editorial claims, Prime Minister
Mariano Rajoy has mismanaged the polical
process, and I am not sure that greater polical
competence in Madrid, or decisiveness in Brus-
... Chinas shadow bankingsystem... has grown to accountor around a th o all newnancing in China
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sels (!), will do anything at all, let alone wonders.
The problem, I think, is much more serious than
Rajoys unking hard choices, and I dont think
there was anything he could do to increase the
countrys credibility in a signicant way. We have
long passed that stage.
Why? Because, as I have
been suggesng for the last
six to twelve months, Spain
ha already ared on i
downward spiral and there
is almost nothing Rajoy or
anyone else can do to pre-
vent all parts of the economy
workers, small businesses,
large businesses, creditors,
depositors, and yes, policy-
makers from acng each
in their own way to increase
the debt burden, increase economic uncertainty,
make the balance sheet more fragile, and reduce
growth. These dierent economic agents by now
are simply behaving raonally in response to de-
clining credibility, and unless we expect from
them a huge burst of irraonal cheer, there is noreason to expect them to change their behavior.
All of their acons, of course, reduce credibility
further, and as credibility drops it simply rein-
forces the adverse behavior of all the raonally
misbehaving economic agents. This is the dread-
ed self-reinforcing loop typical of countries in
the nightmare stage of a debt crisis.
We have seen this process many mes before
in the history of sovereign debt crises, and it is
mind-numbingly mechanical. No maer howwell Rajoy implements scal austerity (assum-
ing that this is indeed the right thing to do),
no maer how many mes policymakers plead
with markets to give them me to implement
reforms, no maer how oen the government
begs workers and businesses to have more con-
dence, at this point it is going to be incredibly
dicult for Spain to escape from this cycle.
The problem is arithmec, not condence. Ba-
sic balance of payments math tells us that in or-
der to repay its external debt Spain must run a
large trade surplus. If it ends up however with
a trade surplus caused simply by a collapse indomesc demand and soaring unemployment,
which is the current path, domesc polics will
become unmanageable and Spain will eventu-
ally be forced to leave the
euro in order to regain com-
peveness in a less painful
way. One of he ood hin
about a well-funconing
democracy is that it simply
wont permit a debt crisis to
be resolved by forcing an un-
acceptable burden onto the
working populaon.
the reqiremen for a rade
surplus is the key point.
Even if there were no capital
ight, and assuming we are
unlikely to see large investment-driven private
inows into Spain for many years a prey safe
bet, I would think Spain must run a large trade
surplus in order to repay foreign debt holders
(technically Spain must actually run a current ac-count surplus, but in pracce this means a trade
surplus). Of course capital ight, which is already
large and rising, as I will discuss later, means that
Spain must run an even larger trade surplus than
otherwise if it is going to repay external debt.
O O O MICHAEL PETTIS (VIA MISH) / LINK
Expectaons of a new asset purchase program
by the Fed connue to persist as various pundits
ancipate its unveiled at the Jackson Hole gath-
erin.
CNBC: - Ebullient stock markets are increas-
ingly pricing in the possibility that the Feder-
al Reserve will soon unveil another round of
monetary smulus, Pimco Managing Direc-
tor Neel Kashkari told CNBC Wednesday.
The Fed is really in a box right now, said
Kashkari, who was an architect of the Trou-
bled Asset Relief Program that bailed out
major banks during the 2008 nancial crisis.
Inaon expectaons and stocks are at levels
... Spain has already startedon its downward spiral andthere is almost nothing Rajoyor anyone else can do to preventall parts o the economy...rom
acting each in their own wayto increase the debt burden,increase economic uncertainty,make the balance sheet moreragile, and reduce growth
http://globaleconomicanalysis.blogspot.sg/2012/08/problem-in-europe-is-arithmetic-not.html -
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that appear to be assuming imminent Fed ac-
on, he told CNBCs Squawk Box.
Those indicators have already priced in that
the Fed should act, Kashkari said. As a result,
the fund manager suggested Fed Chairman Ben
Bernankes hands appear to be ed ahead of
a closely watched speech on the economic out-
look later this month in Jackson Hole, Wyo.
Market parcipants are looking for a x, a repeat
of the high Bernanke delivered at Jackson Hole
in 2010 when QE2 was introduced. Markets how-
ever are in for a major disappointment because
no outright asset purchases will be announced.
There are mulple reasons for this, including the
fact that real rates are now deep in the negave
territory (as discussed here) and the policy as
expressed in long-term real rates is far more ac-
commodave than it was in 2010.
But what makes 2012 enrely dierent is that
the key concern that pushed the Fed into asset
purchases in 2010 no longer exists. The summer
of 2010 was marked by renewed fears of dea-
on driven by credit contracon. The Fed was
afraid of Japan-style deaonary pressures thatare extremely dicult to arrest as bank lending
shuts down. In the months preceding the 2010
Jackson Hole speech, credit was contracng
sharply with banks steadily shrinking balance
sheets. As discussed before, just the opposite
is true in 2012 - credit is expanding at a decent
pace. The chart below compares the trends now
and in 2010.
So what should we expect from Bernanke this
me around? It will likely be more of the same
things weve already heard recently:
1. US economic growth has lost some momen-
tum. Growth in employment has been slow and
the unemployment rate remains elevated.
2. Europe poses downside risks. A slowdown in
emerging markets is also a concern.
3. The Fed will remain vigilant and expects tomaintain a highly accommodave stance for
monetary policy.
4. The Fed is to connue with Maturity Extension
Program (Twist) and Reinvestment Policy (rein-
vesng in MBS to maintain constant balances).
Thats basically it. If the markets are pricing in
more from Jackson Hole - which the recent equi-
ty rally suggests may be the case - we are seng
up for a sharp sello in risk assets.
CNBC: - If he doesnt deliver in Jackson Hole youll see these risk markets react and fall
back, Kashkari said. Investors clamoring for
more quantave easing suggests theres
downside risk from here if the Fed doesnt
move,
O O O SOBERLOOK / LINK
So we have a new erm: BRIXIt.Japans biggest bank Nomura has issued an 11-
page study evaluang the likelihood that the UKwill leave the European Union enrely or partly.
Events could accelerate as soon as this autumn if
eurozone woes force the Government to commit
to a rm date for a BRIXIT referendum.
The eect a looser relaonship with the EU
would have on the UK economy in general and
on the nancial services sector in the UK in par-
cular is not clear at this me, even though Brit-
ish euroscepcs argue that being freed from EU
regulaon would be a booster. However, theSOURCE: SOBERLOOK
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prospect is, in our view, bound to raise concerns
indeed, is doing so already in the City.
The core point is that the eurozone may have to
take drasc steps in integraon (scal union, etc)
to save the euro, making it nigh impossible for a
fully sovereign state to remain part of the Proj-
ect.
In other words, it is not so much Britain leaving
the EU as the EU leaving the treaty-based club of
sovereign states it was supposed to be.
The report is part of the banks Issues which
keep me awake at night series.
I doe no ake ide.
Here are a few extracts, wrien by Alastair New-
ton (an ex-Brish diplomat, former head to Tony
Blairs G7 team, and intel-
ligence co-ordinator in the
rst Gulf War). Unfortunate-
ly, we cannot post the whole
report online because of
Nomuras compliance rules.
The bank emphasises that
this is his personal opinion.A deepening of the euro-
zone crisis in the immediate future remains
a real possibility despite the recent eorts of
the ECB in parcular to calm markets. This,
in turn, could spur acceleraon in integraon
in order to try to prevent the collapse of the
eurozone, thereby advancing projects which
are likely to prove dicult for the Brish gov-
ernment.
One thing which is clear is that (assuming
the eurozone does not collapse completely) it
is only a maer of me, in our view, before
crisis-related steps are agreed which necessi-
tate treaty changes. In those circumstances,
the Brish government will almost certainly
demand treaty change for treaty change in
an eort to repatriate powers, ie be looking
to win repatriaon of powers to London for
every concession on treaty reform sought by
the eurozone on a one-for-one basis. Howev-
er, in so doing the UK would likely be looking
to repatriate powers which EU partners may
be unwilling to concede within he context of
the single market.
Third, and nally, we do not rule out the pos-
sibility of a serious schism between the EU nd
the UK developing over non-crisis-related is-
sues, with the 2014-20 EU budget an obvious
potenal bone of contenon.
In the event of either the second or the third
of these scenarios occurring, Mr Cameron
could nd himself in a very dicult posion
indeed, ie, under even more intense pressure
from within the ranks of his own party to call
an immediate referendum but knowing that,
if he were to agree, this could be a bridge too
far for the pro-EU LibDems who would try to
force an early elecon rather than support
the legislaon necessary to
hold a referendum. Thus, if
there is to be a referendum
in the UK on EU member-
ship, it does indeed look like-
ly to be aer the next elec-
on, rather than before; but
this could be at the price ofthe elecon being brought
forward.
O O O AMBROSE EVANS-PRITCHARD/ LINK
Arican countries maynever feela hard pull on no strings aached loans from
China. Thats because for the past few decades,
aid has been tethered to infrastructure projects,
which experts say are only going to grow.
Since the rst Forum on ChinaAfrica Coopera-on (FOCAC) was held in 2000, China has oered
hundreds of billions of yuan to African coun-
tries in the form of interest-free and preferenal
loan.
On the h ministerial meeng of FOCAC on
July 19 in Beijing, the Ministry of Commerce an-
nounced that China had wrien o 391 overdue
loans owed by the most heavily indebted and
least-developed naons globally by the end of
2011. Of these, 14 debts of nine African coun-
... assuming the eurozone doesnot collapse completely it isonly a matter o time, in our
view, beore crisis-related stepsare agreed which necessitate
treaty changes
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tries were included.
At the 2006 FOCAC, China announced that it
would provide a total of US$ 5 billion to African
naons in the subsequent three years. By 2009,
the pledge was doubled to US$ 10 billion. China
followed hroh on he aranee and ha
now promised US$ 20 billion in so loans be-
tween 2012 and 2015.
Yet at home, crics say spending abroad has ne-
glected nancing for far more pressing domesc
need.
In response to such observaons, assistant Min-
ister of Commerce Zhang Lijin said at this yearsforum that Chinas aid to Africa is simply doing
the best it can, and that in proporon to GDP,
aid amon are marinal.
Chinas aid programs to Africa began in the
1950s through construc-
on projects in the explicit
promoon of an ideological
program. Support from Afri-
can countries in the United
Naons General Assembly
led to a crucial turning pointin China andin on he
global stage two decades
later a permanent seat on
the UN Security Council.
It is our African brothers that carried us into the
United Naons, Mao Zedong once remarked.
With the excepon of recognizing the one Chi-
na policy, the outcomes that Chinese foreign
aid disbursements seek to realize remain unof-
cially acknowledged, given almost zero condi-onalies for aid provision.
Unlike other countries that distribute foreign aid
through foreign aairs ministries or relief agen-
cies, the Ministry of Commerce is chiey respon-
sible for foreign aid funds.
But lile is known about the total amount of for-
eign aid that China has spent in Africa.
In April 2011, China released its rst white pa-
per on foreign aid. The paper stated that in 2009,
China provided a total of 256.3 billion yuan in aid
globally.
The white paper described three principal forms
of aid: non-reimbursable donaons, interest-
free loans and so loans. The former two are
provided by the Ministry of Finance, while the
laer is issued by the policy bank, Export-Import
Bank of China.
According to ocial data, by the end of 2009,
approximately 40 percent of Chinas foreign aid
was in the form of non-reimbursable donaons,
the majority of which were used for small- and
medium-scale social construcon projects such
as hospitals, schools, wells and aordable hous-
in.
O O O CAIXIN / LINK
Outgoing rate setter Adam Poenhas said the Bank of England
should drop its anguished
religious ethics over how
to smulate the economy,
while former MPC member
Danny Blanchower said ithas no clue about where
the economy is going.
Mr Posen, who for over a
year was alone in calling for more quantave
easing, said the BoE should not limit its asset
purchases to government bonds.
I personally view the teeth-gnashing and gar-
ment-rending about whats scal and monetary
as too much drama for too lile content, the
Financial Times quoted him as saying in an in-
erview.
Many central bankers believe only elected gov-
ernment can buy private sector assets.
Mr Posen said that provided the BoE did not buy
debt direct from the government, he didnt think
it maered that much what assets the central
bank acts on.
The Bank of England launched a third round of
quantave easing asset purchases in July tak-
... In April 2011, China re-leased its rst white paper onoreign aid. Te paper statedthat in 2009, China provideda total o 256.3 billion yuan inaid globally
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ing it to 375bn in an aempt to smulate the
economy. It is buying the debt on the second-
ary market, that is debt that has already beenied.
I have no queson in my mind that what were
doing with QE is prevenng things from geng
much worse, but that doesnt mean you couldnt
have an addional or beer instrument, he said.
Mr Posen also said austerity measures to tackle
Britains biggest peaceme debt has had a great-
er brake on recovery than the BoE and the gov-
ernment expected.
He felt the outlook for the economy could havebeen improved if the BoE has acted faster and
more decisively to signs of a slowdown.
Mr Blanchower echoed his view in the Inde-
pendent, wring: It is blindingly apparent that
the MPC should have done
much more monetary sm-
ulus a while ago, including
unconvenonal asset pur-
chases, as suggested by my
old friend Adam Posen.
He said the MPCs new
growth forecast with a central projecon of
growth of 2pc by 2013 and beyond with only a
slim prospect of zero or negave growth look
broadly similar to the one from May 2011 and
looks equally unlikely to be correct.
Mr Blanchower writes: The MPC didnt know
where the economy had been, didnt know
where it was when they made the forecast, and
had no clue where it was going and sll doesnt.
O O O UK DAILY TELEGRAPH / LINK
With the daily focus on Europeancrisis and the hope of central bank interven-
on, one of the essenal features of the invest-
ment climate at least for long-term investors
is easy to lose in the shue. That feature is
valuaon. Its an easy concern to overlook, be-
cause with corporate prot margins close to
70% above historical norms (largely because of
unsustainably large government decits coupled
with low private savings rates see Too Lile to
Lock In), Wall Street is quite happy to look at the
rao of prices to near-term earnings esmatesand conclude that valuaons are sasfactory.
But stocks are not a claim on one year of earn-
ings. They are a claim on a very long stream of
cash ows that will actually be delivered into the
hands of investors. Unfortunately, the conclu-
sion that stocks are appropriately valued rests
on the implicit assumpon that prot margins
will remain elevated into the indenite future.
We presently esmate a projected 10-year total
(nominal) return for the S&P 500 of less than
4.6% annually. Nothing in recent years, muchless the past decade, indicates any material
change in the relaonship between actual mar-
ket returns and expected market returns as we
esmate them using a range of fundamentals
including normalized earn-
ings. Indeed, the 5.1% total
return of the S&P 500 over
the most recent 10-year pe-
riod has been right on target
(see also my July 7, 2002
comment). Its notable thateven without compelling
valuaons a decade ago, we
lied 70% of our hedges several months later in
early 2003, at what turned out to be the start of
the next bull market something to remember
for hoe who minderand or wo-daa e
issue of 2009-early 2010 and assume that well
never li our hedges unl the market is deeply
ndervaled.
I ancipate that a decade from now, the S&P
500 will have achieved a total return that is veryweak from a long-term perspecve. Remember
also that you dont lock in a 10-year return.
You ride it out. I connue to expect that inves-
tors will have numerous opportunies to accept
risk in the coming years in expectaon of much
beer prospecve returns than are presently
likely.
Of course, with the yield on the 10-year Treasury
bond at just 1.6%, one might argue that a pro-
specve 10-year return of nearly 4.6% on stocks
... It is blindingly apparentthat the MPC should have donemuch more monetary stimulusa while ago, including uncon-
ventional asset purchases
http://www.telegraph.co.uk/finance/economics/9471703/No-clue-Bank-of-England-urged-to-drop-anguished-religious-ethics-over-QE.html -
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19.THINGS THAT MAKE YOU GOHmmm...
13 August 2012 19
is sll very good by comparison, and should be
enough to prevent any substanal adjustment
to lower prices and higher prospecve returns.
to inform ha armen, Ive added he 10-
year Treasury bond yield to our standard chart
[above]. Note that the correlaon between 10-
year S&P 500 returns and 10-year Treasury bond
yields (which reect both expected and actual10-year returns, provided no default occurs) is
just 0.1. There is virtually no relaonship at all,
with the excepon of the early-1980s, when the
prospecve and actual returns were quite high
for both as a result of inaon shocks.
While the simultaneous rally in both stocks and
bonds from the early 1980s through the late-
1990s gave the illusion that the 10-year bond
yields and forward operang earnings yields had
a precise point-for-point relaonship, spawning
an unfortunate lile coage industry of adher-ents to the Fed Model, this model is based en -
rely on the relaonship between stock yields
and bond yields during a specic 16-year period
of sustained disinaon, and there is no evi-
dence or even sound theory supporng that
spurious one-to-one correlaon more generally.
Why arent the 10-year returns of stocks and
bonds (prospecve or actual) more closely relat-
ed? The reason is simple, really. 10-year bonds
have an eecve duraon of only about 7-8
years, depending on the coupon, which means
that your ending wealth is nearly completely de-
termined within that horizon. In contrast, stocks
are very long-term assets, with an eecveduraon roughly equal to the price/dividend
rao*, which means that changes in valuaon
dramacally aect the terminal value of your in-
vestment even for horizons out to 30-40 years,
and somemes longer when valuaons are rich
and yield are low.
O O O JOHN HUSSMAN/ LINK
In March, the last gures that are avail-able, the Spanish banks lost $66 billion of capital
as the cizens of Spain moved their money tosafer havens. What the LTRO gave the populace
took away and the situaon is unsustainable.
Spain will soon be forced into a full-edged bail-
out in my opinion which will require money for
the regions and for the banks. My best surmise is
about $350-400 billion that will be required and
while it may come in tranches; that will be the
total. This will then shi the focus to Italy in the
short run and then onto France and Germany
and just how much can be aorded in this rush
into nancial imprudence dictated by trying tomaintain a Union that can no longer stand under
its own weight or naonal interests. The debts in
Europe are no longer trivial and someone has to
pay in the end. Free money, even printed money,
is never really free and always has consequences
which would be the downgrades of Germany and
France in the short term and all of the increased
costs of funding that would come with it.
I hink wha amaze me he mo i ha o many
people have the honest opinion that Sir Draghi
is going to come charging out from the roundtable, from the gilded gates of the ECB and
save Europe. That White Knight is subject to the
whim of germany and he re and all of he alk
of independence and the separaon of Church
and State is just that; talk. I fear these people
are hitching their wagon to some shoong star
ha won hoo. Blizen, Donner and he oher
reindeer are sll out in the pasture faening up
for their Christmas ride and are not available to
bring presents this early in the year.
O O O ZEROHEDGE / LINK
SOURCE: HUSSMAN FUNDS
http://www.zerohedge.com/news/grexit-spailout-and-draghis-white-knighthttp://www.hussmanfunds.com/wmc/wmc120813.htm -
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20.CHARTS THAT MAKE YOU GO Hmmm...
13 August 2012 20
Healthcare costs inFrance (red line) and the USA (blue
line). Sheesh.
Te so-called ethanol crush spread is calculated as follows:Crush Spread = (Ethanol price per gallon x 2.8) - Corn price per bushel
This decline in spread means that ethanol prices are suciently scky and will not rise in proporon
to corn prices. And the 3% expected reducon in ethanol prices will simply reduce ethanol exports.
EIA does not expect the current situaon in corn markets to have a signicant eect on the pump
price of gasoline. Given the year-to-date ethanol supply and the availability of banked renewable
idencaon number (RIN) credits, the current re-
laonship between the prices of ethanol and petro-
leum-based gasoline components, and the relavely
modest share of ethanol in the overall gasoline pool
[10%], we expect gasoline prices will connue to be
driven by crude oil prices and rening margins. The
impact of the forecasted decline in domesc ethanolproducon should be primarily reected in reduced
ethanol exports.
So when policians begin taking credit for reducing
gasoline prices by pressuring the EPA to relax the
ethanol rules, its nothing more than polical games-
manship. Changing the mixing rules will do lile to
impact the cost of gasoline because its not ethanol
but crude oil prices that determine how much we
pay at the pump.
O O O SOBERLOOK / LINK
CLICK TO ENLARGE SOURCE: FRED/JESSE/BUSINESS INSIDER
SOURCE: EIA/SOBER LOOK
http://soberlook.com/2012/08/is-ethanol-really-impacting-gasoline.htmlhttp://jessescrossroadscafe.blogspot.sg/ -
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21.CHARTS THAT MAKE YOU GO Hmmm...
13 August 2012 21
CLICK TO ENLARGE
http://www.onlinenursingprograms.com/nursing-your-sweet-tooth/ -
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22.CHARTS THAT MAKE YOU GO Hmmm...
13 August 2012 22
Chinas thirst or raw materials (and diversicaon from dollars into hard assets) is out-lined beaufully in this great graphic from Straor which details investment oers made by Chinese
rms since 2010.
Dont expect this to slow down any me soon.
(thanks Barry)
CLICK TO ENLARGE SOURCE: STRATFOR (VIA BARRY RITHOLTZ)
http://www.stratfor.com/sites/default/files/main/images/Africa_china_investments_v2.jpg -
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23.
13 August 2012 23
WORDS TH AT MAKE YOU GO Hmmm...
Hes back. wice.
Two doses of Nigel Farage for you this week as he take on an extremely con-frontaonal interviewer on the BBCs HardTalk programme an, in an interview
with Eric King, lays out, amongst other things, the extent of his feelings towards
Franois Hollande. As always, Nigel pulls no punches and leaves us in no doubt
a to where he stands on just about every issue.
Click either side of Nigel to listen to the interview of your choice...
Hal Mason is an accountant... ohBOY, is Hal Mason an accountant. Here in this
short video, Hal demonstrates why the US bud-
e cannotbe balanced.
I dont think this will come as a shock to any-
body who has been paying aenon, but when
it is laid out in such stark simplicity it becomes
even more sobering.
One day, this problem, that currently seems tomaer to nobody, will maer to everybody.
(courtesy of Tim Iacono)
Bert Dohmen believes that we are coming up on a tremendousbuying opportunity in the gold market as he sees much higher prices longer term.He also believes the general market is very dicult to short, as the risk-on, risk-o
trades, and increased volality make shorng very dicult.
Here, he talks to Jim Puplava about these and other thoughts. An excellent inter -
view.
HARDTALK
KWN
CLICK TO WATCH
CLICK EITHER TO LISTEN
CLICK TO LISTEN
http://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/8/11_MEP_Nigel_Farage_files/Nigel%20Farage%208%3A11%3A2012.mp3http://www.financialsensenewshour.com/broadcast/fsn2012-0811-1.mp3http://www.youtube.com/watch?v=EW5IdwltaAc&feature=player_embeddedhttp://www.youtube.com/watch?v=qetEtP4RWWQhttp://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/8/11_MEP_Nigel_Farage_files/Nigel%20Farage%208%3A11%3A2012.mp3 -
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SUBSCRIBE UNSUBSCRIBE COMMENTS
and fnally
13 August 2012 24
Hmmm
THING S THAT MAKE YOU GO HMMM..... 2012
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25.THINGS THAT MAKE YOU GOHmmm...
As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from me-to-me,
the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm..... may
reect the posioning of one or all of the Vulpes funds - though I will not be making any specic recommenda-
ons in this publicaon.
Grant
www.vulpesinvest.com
Grant Williams
Grant Williams is a portfolio and strategyadvisor to Vulpes Investment Managementin Singapore - a hedge fund running over$250million of largely partners capitalacross multiple strategies.
The high level of capital committed by theVulpes partners ensures the strongest possi-ble alignment between us and our investors.
In Q4 2012 we will be launching the VulpesAgricultural Land Investment Company(VALIC), a globally-diversied agricultural land vehicle which will provide truly diver-sied exposure to the agricultural sector through a global portfolio of physical farm-land assets.
Grant has 26 years of experience in nance on the Asian, Australian, European and
US markets and has held senior positions at several international investment houses.
Grant has been writing Things That Make You Go Hmmm..... since 2009.
For more information on Vulpes please visit www.vulpesinvest.com
*******
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California Investment Conference 2012 Presentaon: Simplicity: Par I : Par II
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