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

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“Everybody knows that the dice are loadedEverybody rolls with their fingers crossedEverybody knows that the war is overEverybody knows the good guys lostEverybody knows the fight was fixedThe poor stay poor, the rich get richThat’s how it goesEverybody knows”

– LEONARD COHEN, EVERYBODY KNOWS

“ Yes and no. Yes that did happen, and no, that did not, not happen”– Jack Donaghy, 30 Rock

“ ”– Bernard Stonehouse

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With the Sendai Quake now a full fourteen days behind us, this coming week marks the 32nd anniversary of America’s most infamous brush with nuclear disaster when Unit 2 of the Three Mile Island Nuclear Generating Station in Dauphin County, Pennsylvania suffered a partial core nuclear meltdown.

The accident began (as these things tend to) at 4am with failures in the non-nuclear secondary sys-tem, followed by a stuck-open pilot-operated relief valve (PORV) in the primary system, which allowed large amounts of nuclear reactor coolant to escape.

Human error compounded the problems (as it always tends to) when poorly-trained staff misunder-stood ambiguous control room indicators in the plant’s control room.

Remarkably, there was a hidden indicator light (I’d insert a somewhat sarcastic comment in here, but the designers of the plant, Babcock & Wilcox have done that for me be allowing me the scope to write the words ‘hidden’ and ‘indicator light’ in immediate proximity in the same sentence) which led to an operator mistakenly believing there was too much coolant in the system and acting accordingly.

Amidst the confusion, The Nuclear Regulatory Commission sanctioned the release of 40,000 gallons of radioactive waste directly into the Susquehanna River.

The entire crisis (not to mention the amount and nature of media coverage it received) wasn’t exactly helped by the release, a mere 12 days before the hidden indicator started flashing, of a movie star-ring Jane Fonda and Jack Lemmon (winning Best Actress and Actor nominations for the two of them respectively).

The movie told the story of a reporter and cameraman who discover safety coverups at a nuclear power plant when they witness an emergency shutdown, triggered by a malfunctioning gauge that fails to identify dangerously low coolant levels in the reactor.

In the movie, secretly-taken film of the event, captured by Fonda’s cameraman (played by a youthful Michael Douglas), reveals that the plant came close to disaster as the core threatened to melt down into the earth, hitting groundwater and contaminating the surrounding area with radioactive steam - an event that gave the film its name : “China Syndrome”.

China Syndrome was the codename given for a nuclear meltdown in which reactor components melt-ed through their containment structures (and then ‘through the Earth until reaching China’).

In the film, a physicist says that the China Syndrome would render “an area the size of Pennsylvania” permanently uninhabitable.

Freakish in the extreme.

In the wake of the Sendai Quake and subsequent nuclear scare, as we have discussed in these pages earlier this week, life has rapidly returned to normal in the financial world as, despite alarming new home sales figures out of the US, dreadful inflation numbers out of the UK, downgrades of Spanish banks and an impending bailout of Portugal which could reach $99billion (no, NOT $100bil-lion. Definitely NOT $100billion) in Europe, equity markets continued drifting gently upwards seem-ingly without care. Even a ‘surprise’ 25bp increase in the Central Bank Rate being instituted by the Monetary Policy Committee in Kenya failed to dampen enthusiasm.

The decision to raise the Central Bank Rate by 0.25% to 6%, came as a surprise to the financial markets which had taken a cue from governor Njuguna Ndung’u’s position that he would not defend the shil-

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ling because he believed it was a temporary issue.

“The move by the Central Bank of Kenya to increase the bank rate by 0.25 per cent to 6 per cent came as a surprise,” said Ms Razia Khan, the head of research in Africa at Standard Chartered Bank “not because there was any doubt that it was needed, but because the move followed an unexpected 0.25 per cent cut at the MPC meeting just prior to this one, at the end of January 2011.”

Interestingly enough, it turned out that the members of the Kenyan MPC were afraid that ‘the negative impact of rising food and fuel process was likely to halve consumers’ buying power which could see the middle class and the poor-est members of the society cutting their spending.’

What a quaint concept.

It seems to me that SOMEBODY needs to sit Mr. Ndung’u down and explain to him how ‘core inflation’ works. Imagine how much better his numbers would look without those pesky fuel and food price increases messing things up. “It’s OK Njuguna, all the big boys do it. Go on…. Just try it once. Who’s going to know?”

Elsewhere in Africa, Nigeria’s Central Bank Governor went one better than his Kenyan counterpart by raising interest rates a full percentage point to 7.5%. Announcing the hike, Lamido Sanusi said:

“The fiscal stance is unduly expansionary... there is serious concern of the heightened inflation risk”

But none of that matters, right? I mean, it’s only Africa.

Has it really come to this? African Central Bankers showing the way to their peers in the ‘developed’ world. Of course, the main reason the African nations are having to raise their interest rates so aggressively is that the one thing they fear most - runaway food inflation - is staring them full in the face. And why are they having to confront these problems? Because, if they tried to float the concept of ‘core inflation’ past the good people of Nigeria and Kenya, if they attempted to explain why food and energy don’t actually count when weighing up REAL inflation, there would be plenty of tears before bedtime.

The concept of ‘core inflation’ is central to the great inflation debate and, as the prices of the super-fluous items that are stripped out of the actual number to generate the ‘core’ figure so popular with Central Bankers around the world such as, oh, food and err…. oh yes, energy, continue to skyrocket, the public at large are growing increasingly unsettled with the curious dichotomy they face in their everyday lives.

A couple of the reasons for the poor reception to NY Fed Chairman William Dudley’s ill-judged iPad2 comment last week (TTMYGH March 21) were unfortunately laid bare by his colleague at the Cleve-land Fed, Daniel Carroll in the two simple graphs overleaf which demonstrate not only the importance of food and energy costs to households’ bottom lines, but the inequity of their distribution across the wealth spectrum. One look at these charts and it’s not so hard to see why the Fed is so utterly enam-oured with the concept of ‘core inflation’. Why on earth wouldn’t they be?

John Williams of Shadowstats has long been the best place to go to get a sense of ‘real’ numbers - be they inflation-, unemployment- or monetary base-related - and his most recent chart of his so-called ‘Alternate CPI’ (which tracks the CPI level using the same methodology as that with which it was con-

It seems to me that SOME-BODY needs to sit Mr. Ndung’u down and ex-plain to him how ‘core inflation’ works. Imagine how much better his num-bers would look without those pesky fuel and food price increases messing things up.

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stituted in 1980 - before ‘hedonics’ and ‘substitution’) versus the government number lays out in no uncertain terms the Fed’s ‘Credibility Gap’ which currently stands at a little under 8%.

And so the shell game goes on.

A neatly-managed inflation number has so many benefits for a government that it is harder to make a case as to why they WOULDN’T want a ‘sanitized’ number and to point the focus at the ‘core’. The constant reassurance that any spikes are only temporary highlights some unusual longer-term action - as Lee Quaintance & Paul Brodsky of QBAMCO wrote recently in their truly excellent piece ‘Apropos of Everything’,:

”… the CPI over time paints a fascinating portrait of naïve indifference among professional observ-ers intent on using it. In fact, the graph (left)showing the CPI over the last forty years illustrates a cu-riously slow and reliable increase in the index that implies a level if consistency normally not found

in physical science, let alone behavioral economics. It is the ‘science’ of winking and nodding that makes contemporary economics so dismal. The graph also im-plies a fascinating attribute of modern money -- an engrained acceptance of the loss of the dollar’s purchasing power.”

Dismal indeed.

So where does that leave us? Well, in the Central Bankers’ engine room, where stable iPad2 prices are cause for celebration and where sub-stitution and hedonism are

the orders of the day, everything is just dandy. The one switch they seem to have at their disposal is switched to the ‘on’ position, prices are rising gently and there is ample liquidity to promote renewed growth.

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Should there be any signs that inflation pressures are getting out of control, the Central Bankers will immediately hit button 2 and all excess liquidity will be drained more or less instantaneously from the global economy, allowing the gentle upward journey to continue.

Simple. Straightforward. In fact, when asked as recently as December 2010, how confident he was about the Fed’s ability to control infla-tion, the Central Bankers’ Central Banker, Ben Bernanke gave a simple, straightforward answer:

“One hundred percent”

Except.... if you look closely in parts of Africa, or at Venezuela in South America, Pakistan on the sub-continent, or tiny Asian countries like Laos, those hidden indicator lights of the kind that caused all the problems at Three Mile Island are flashing more urgently every day.

So today we kick things off with a look at why neither the continued fall from grace of the US housing market nor the projected further slide predicted by experts such as Robert Schiller appear to trouble Wall Street any longer, before heading to Syria to hear how growing unrest in that corner of the Middle East is creating a ‘bomb, ready to explode’.

In precious metals-related news, we hear from the always excellent Dylan Grice as to why $7,500 is a key price for one of his favourite assets - gold, Ted Butler gives us his overview of where the silver market stands and we check out updated charts on both metals, courtesy of regular contributor Jesse.

The ripples that the Sendai Quake has set off in the global economy come under the microscope, Gonzalo Lira ponders the likelihood of QE3 and Jeremy Warner has some words of caution for us con-cerning the UK’s £200 billion ‘time bomb’ of debt interest.

The Bank of Spain has seriously underestimated the funding gap faced by its nation’s banks, according to Idealista (as well as most other observers of both the Spanish financial sector and human nature), we check out the cost of things on a per-gallon basis (to the chagrin of a few Revlon scientists), look at the terrifying rise of tuition costs in the US and put some much-needed perspective around nuclear safety issues with an admittedly somewhat morbid graph.

Finally, we have a link to a great interactive chart of open interest levels in commodities, take a look through Australian eyes at the incredible amount of surplus housing in China and hear the wise words of one of my personal favourites, Bill Fleckenstein.

Enjoy the weekend.

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Contents 26 March 2011

Why Isn’t A Further Fall In US House Prices Troubling Wall Street?

Syria ‘Ready To Explode’ As Desperation Grows

Commodity Prices, World Demand & Fun With Government Data

Silver Review And Outlook

Dylan Grice Explains Why He Likes Gold, And Why $7,500/oz Makes A Gold Standard Possible

How Likely Is QE3?

Bank Of Spain Underestimates Funding Gap Faced By Lenders, Idealista Says

Disaster In Japan Sends Ripples Through The Global Economy

Britain’s £200bn Time Bomb Of Debt Interest

Charts That Make You Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally.....

The Gonnie, Gonnie Banks

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

26 The Bank of Commerce, Wood Dale, IL 163.1 161.4 41.9

Total Cost to FDIC Deposit Insurance Fund 41.9

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America’s housing market is again falling but investors appear untroubled.

Firstly, a health warning to the more than 500,000 people who live in Portland, Oregon. A bus full of estate agents will pull into town tomorrow, and they’ll all want to tell you about the benefits of own-ing a home.

Journalism has many purposes, but safeguarding someone’s Saturday morning from an unwanted conversation with a realtor, as they are known here, should always be one of them. Conscience now clear, it’s worth asking why The National Association of Realtors (NAR) has embarked on the catchily titled ‘Home Owner-ship Matters Tour.’ This week’s housing data is a good place to start.

Monday’s newsflash was that average prices are now at their lowest since 2002. Tuesday’s news was also gloomy. If homeowners hadn’t ripped out their broad-band, on Wednesday they’ll have learnt that the volume of new homes being sold is at a record low. The American housing market isn’t used to this. It’s been the engine of almost every economic recovery since World War Two.

Since the economy started growing again in 2009, it’s been a flat tyre, at best. Two statistics help make the point - one economic and the other largely psychological.

At its peak in 2006, residential investment amounted to 6.2pc of gross domestic product. It’s now at 2.3pc. After reaching its own peak of 69.4pc in 2004, the level

of home ownership has dropped to a current level of 66.6pc, according to the Census Bureau. This is not news to most Americans.

They’ve also known that the market’s mini rally, helped by a tax credit from the government, expired with the incentive last summer. However, what’s become clearer in 2011, and was underlined this week, is that rather than stagnating, prices are hunting for a new bottom.

It’s also the conclusion of a poll this week of experts questioned by Professor Robert Schiller, the man behind America’s leading housing index. Almost half now expect prices to extend their 30pc fall to beyond the low reached in the spring of 2009. Just 15pc had that forecast in December.

So, with fresh smoke coming from the usual recovery engine, how has the stock market reacted? The Dow Jones Industrial Average and the S&P 500 are on course to end the week up.

O O O UK DAILY TELEGRAPH / LINK

A prominent Syrian opposition figure says the country is “a bomb, ready to ex-plode” as protesters demand freedom and an end to president Bashar al-Assad’s “cancerous regime”.

Tens of thousands of Syrians have once again poured onto the streets of the city of Daraa in protest after security forces were accused of storming and massacring people in the city’s main mosque on Wednesday.

Witnesses say security forces opened fire on hundreds of youths at the northern entrance to Daraa on Wednesday afternoon, in a dramatic escalation of nearly a week of protests in which at least 44 civilians have been killed.

As anger mounts around his country, Mr Assad has made a rare public pledge to look into granting Syrians greater freedom.

The American hous-ing market isn’t used to this. It’s been the engine of almost ev-ery economic recovery since World War Two... At its peak in 2006, residential investment amounted to 6.2% of gross domestic product. It’s now at 2.3%.

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But a prominent opposition figure has told The World Today the concessions do not go far enough.

Haitham Maleh, who was released from prison earlier this month under an amnesty for older political prisoners, says his countrymen are ready for a revolution.

The 80-year-old lawyer is one of Syria’s most prominent human rights campaigners, and he has suf-fered for it.

“They punished me many times, yes. I spent eight years and a half of my life in jails,” Mr Maleh said.

Released from his latest prison sentence as part of government concessions in early March, Mr Maleh says the Syrian government has been promising change - and failing to make it - for 10 years.

He says Syria is about to explode.

“We are like a bomb, it’s nearly to explosion,” he said.

“They said that they will do something. We heard this speech since 10 years and they did not do any-thing on the ground.”

Mr Maleh says Syria has 15 intelligence services which serve to repress the people, and its jails are full of political prisoners.

He says he does not expect anything to change if Mr Assad remains. He compares the regime to a cancer.

“Through this regime nothing will be changed. This regime [is] like cancer and they want no medical. It needs surgery,” he said.

He says a full scale revolution is needed across all Syrian cities - not just Daraa.O O O ABC / LINK

There’s this chart going around (left) courtesy of the San Francisco Fed that supposedly shows how commodity prices are not being at all influenced by Fed policy and specula-tors. In short, it shows a near perfect correlation between world industrial production and commodity prices.

At first glance you might think: “gee, this really is entirely funda-mentally driven and the Fed is having zero impact on everything”.

But when one looks at the chart closely you notice that the scales are entirely manipulated to give the appearance of a close correlation. When one backs out the scaled manipulation you get something that looks like this (right):

All of the sudden it looks like commodities and world industrial production have little

SOURCE: SF FED

SOURCE: PRAGMATIC CAPITALIST

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to no correlation. What’s the conclusion? Don’t believe everything you see – especially when it comes from an outfit whose job it is to protect Fed policy at any cost.

Of course, this doesn’t mean that all of the conclusions based on the original chart are wrong. Indeed, demand really is having an important impact on prices. And the arguments about the Fed “money printing” not leading to commodity inflation are all true – as I’ve shown in detail the Fed isn’t really flooding the economy with money. More importantly, the arguments backing the China + “money printing” + growth = commodity boom, are likely all close to spot on. But to trot out this chart as a defense for the Fed and conclude that speculation is playing no role in the current run-up in com-modities is sheer nonsense. Especially when we have visual proof that speculators are hoarding com-modities due to their belief in future higher prices….The Fed is intentionally manipulating investor expectations of inflation and it is working. Whether it is having a positive or negative impact on the economy is the real meat of the debate and that’s for another discussion.

O O O PRAGCAP / LINK

Today, the allegations of a silver manipulation are not received with the universal rejection of 25 years ago. Of course, not everyone accepts the silver manipulation argument. Cer-tainly, the COMEX and their new owner, the CME Group, continues to look the other way and tries to ignore the growing awareness of a crime in progress. The CFTC, under Chairman Gary Gensler, seems to be coming around, but is still ham-strung by past denials of a silver manipulation. And those who strongly denied a silver manipulation existed in the past are loathe to change their minds due to hav-ing to admit to being wrong. But more people seem to grasp the issue daily.

The very best thing about my allegations of manipulation in silver being ignored for almost 20 years is that the manipulation continued in force. Why this was so good was because the artificial low price did two things. It allowed regular investors to buy silver at bargain prices and it caused world invento-ries to be depleted because we continued to consume more silver than we were producing until 2006. The law of supply and demand is governed by price. Too high of a price and supply gets increased and demand is curtailed. Too low of a price and supply is restricted and demand gets increased. This is the basic cornerstone of any free economic system. Since the silver manipulation resulted in an artificially low price, we consumed way too much silver and produced less than we would have had the price not been depressed. While it was extremely frustrating for me to watch this evolve over the years, since I knew the price was manipulated but was unable to convince the regulators; I also knew, that the law of supply and demand would ultimately result in a shortage and soaring silver prices.

Since I knew that those investing in silver would be richly rewarded, I held nothing back in my pro-motion of silver. Since I was convinced about the facts and that the manipulation continued and still continues to this day, I concentrated on convincing people to buy silver. Thanks to the many hundreds of articles that Investment Rarities sent to their clients and published on the Internet, the word got out and people bought silver, quite literally by the ton. This has turned out to be the greatest win-win story in history. You have to remember that not only was silver not promoted by traditional invest-ment advisors, they openly discouraged its purchase. Despite the naysayers, over the past five and ten years silver has been the best practical investment anyone could have bought. Silver is up more than seven times from the lows. Based upon everything that I study, silver should continue to be the best investment going forward. Someday, it will be time to sell silver, but that day is not here.

Two years ago, I talked about the giant elephant in this room that represented the silver manipulation, and how too many industry observers pretended it didn’t exist. To a great extent, that is changing. As more evidence rolls in that silver has been subject to a long-term price manipulation, it will be harder

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for that manipulation to continue. Even if the growing evidence was not enough to end the manipu-lation, I pointed out last year that the manipulation would end due to an inevitable shortage. There are numerous signs that silver is experiencing a shortage in physical supply. The key takeaway here is that according to the immutable law of supply and demand, if a price of anything is suppressed low enough and long enough, a shortage must result at some point. It looks increasingly clear that silver is close to that point of shortage.

O O O TED BUTLER / LINK

... what is an inflation crisis if not a financial tragedy? Today our central bankers are as confident in their ability to control infla-tion (Mr. Bernanke claims 100% confi-dence) as they were in the soundness of the financial system in 2006. Yet history suggests they shouldn’t be, for inflation goes back almost as far as we do. In the ancient Greek comedy, The Frogs, writ-ten in 405BC, Aristophanes writes that “the full-bodied coins that are the pride of athens are never used while the mean brass coins pass hand to hand”. His reference to Gresham’s law predates Sir Thomas Gresham’s first observation during the medieval inflation of Henry VIII’s England by around two thousand years. As the play was written during

the closing years of the epic Peloponnesian Wars which would have stretched the government’s bud-get, we can assume that Aristophanes and his audience witnessed inflation first hand.

Like credit crunches, there is nothing new about inflation crises. It’s not something which happened in the past but which we now understand well enough to ensure it never happens again, any more than systemic banking crises were. Yet when we talk about past inflationary episodes, whether in classical times, medieval times or industrial times we read of the same two villains of the peace each time: financially pressured governments and the politicised issuance of money. With the festering off-balance sheet liabilities threatening public sector solvency throughout the developed world, and central banks little more than fiscal puppets and economic cheerleaders (with the exception of the ECB, for the moment), we’re set to reacquaint ourselves with those villains in the flesh.

Shorting mankind’s ingenuity isn’t a smart thing to do. But ingenuity isn’t wisdom. And shorting man-kind’s ability to absorb wisdom … well, aren’t you silly if you don’t? With less of the technological risk you’re taking when you buy any other part of the commodities complex, gold is the oldest, purest and simplest way.

O O O DYLAN GRICE (VIA ZEROHEDGE) / LINK

What we should look at is the simple, macro question: If the Fed ends QE-2 in June as they have said they will, who will take up the slack? Who will purchase between $75 and $100 billion worth of Treasury bonds at yields of 3.5% for the 10-year?

Is there someone?

SOURCE: SG CROSS ASSET RESEARCH CLICK TO ENLARGE

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Anyone?

The answer is, No one will take up the slack.

Who, Japan? They’ve got some well-known troubles of their own—they’re all about selling Treasuries and buying up yens, both now and for the foreseeable future.

The Chinese? They’ve been quietly exiting Treasuries for a couple of years now, and going into every commodity known to man.

Europe? Are you serious—Europe? Please don’t make me laugh that hard—it hurts.

The fact is, there is no one outside the United States that I can think of who would willingly buy Treasury bonds—not to the tune of +$75 billion a month.

Therefore, if no one outside the United States would willingly give money to Wash-ington to fund the deficit, then someone inside the U.S. will have to step up.

The obvious-obvious-obvious solution to this mess is for the Federal government to stop spending its way to oblivion—but does anyone realistically see this happening?

Therefore, as Spock always says, if you eliminate the impossible, whatever remains, however improb-able, must be the truth.

If foreign sources of funding will not cover the Federal government’s deficit after June 2011, and Washington will definitely not cut spending in any sort of realistic sense, then there really are only two—and only two—possibilities:

• The indefinite continuation of QE by the Federal Reserve.

• Or the requisitioning of private retirement accounts and pension funds.

Don’t dismiss the second possibility out of hand—think it over.

What pool of money is just sitting there, not doing much, while being legally barred from its owners? What pool of money is easily accessed, yet is large enough to fund the deficit?

The retirement accounts of the American people: Both individual private accounts, and pension funds.O O O GONZALO LIRA / LINK

Spanish lenders face a capital shortfall that’s “substantially” higher than an esti-mate by the Bank of Spain because they haven’t accounted for all of their real-estate losses, according to Jesus Encinar, founder and chief executive officer of Idealista.com.

As much as 15.2 billion euros ($21 billion) is needed by Spanish banks to meet new capital require-ments, the central bank said on March 10. Encinar, 40, said the eventual shortfall may be between 80 billion euros and 100 billion euros. A spokesman for the Bank of Spain declined to comment on his estimate.

“Property portfolios are still mostly valued at prices dating from the boom, rather than current val-ues,” Encinar said during an interview at his office in Madrid. Home prices in some parts of Spain have dropped about 40 percent since the market’s peak in 2007, according to his 10-year-old company, the country’s largest property website.

The Bank of Spain published its estimate after the lenders reported they have about 320 billion euros

...as Spock always says, if you eliminate the impossible, whatever remains, however im-probable, must be the truth.

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in property assets and loans to the real estate and construction industries. The central bank’s an-nouncement set in motion a timetable that gives lenders as long as a year to raise funds or risk being taken over by a government bailout fund.

Savings banks alone have taken on land worth 23 billion euros after borrowers defaulted on their loans, according to data from the Bank of Spain. Land prices have fallen as much as 80 percent in the past four years and the valuations used by lenders are “pure fantasy,” Encinar said.

Moody’s Investors Service cut its credit rating for Spain to Aa2 before the Bank of Spain’s announce-ment. Lenders may need as much as 50 billion euros to comply with the new balance-sheet rules, the ratings company said. Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc (RBS) in London, estimates the shortfall is about 52 billion euros.

On March 15, Spanish Finance Minister Elena Salgado said that estimates of lenders’ capital needs by rating companies aren’t comparable with those of the Bank of Spain and the firms should explain their methodology.

While the Bank of Spain does a “simple subtraction” to see how much capital is needed to meet the new rules, the rating companies make “presumptions on the amounts our lenders would need to cope with certain eventualities.”

Banks have until September to meet core capital requirements of 8 percent for listed lenders or 10 percent for banks without shareholders that also depend on wholesale financing. They can seek an extension until the first quarter of 2012 if they commit to listing shares.

Banks and other financial-services companies advertise homes at prices that are as much as 12 per-cent higher than privately owned properties, according to Idealista. In return, they offer better mort-gage terms, Encinar said. In some cases, banks only grant mortgages for homes that they own.

“We tried to inform the banks about the market value of their properties, but they won’t reduce prices because it would affect the data that the banks are giving to the Bank of Spain,” he said.

O O O BLOOMBERG / LINK

Japan once taught the world how a modern factory works. Now, though, it is the disaster in Japan that has brought the global supply chain to a standstill. The transmission Porsche installs into its Cayenne SUV is made by the Japanese manufacturer Aisin, where production has been hampered. A damaged Toshiba plant produces an important memory chip used in Apple’s iPad. Auto-maker Opel has announced plans to cancel some shifts at its plant in Eisenach, Germany this week due

to a shortage of compo-nents from Japan.

Trade routes have also been impaired. Container ships operated by Hapag-Lloyd can no longer dock at the destroyed port of Sendai. Lufthansa Cargo is no longer offering regular service to Tokyo because of the radiation risk. In a world in which factories CLICK TO ENLARGE SOURCE: DER SPIEGEL

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no longer maintain large inventories, constant supply is mandatory. Should that supply be interrupt-ed, they can often continue producing only for a few days.

The assembly lines at EBM Papst and Ziehl-Abegg now depend on a handful of electronic compo-nents from Japan, often costing little more than a few cents. But they the transformers, resistors and memory chips are vital components in products ranging from fans for laptops and car engines to the air-conditioning systems in New York skyscrapers and hotels in Mecca.

“There will be an impact,” says Ziehl-Abegg Chairman Fenkl. His order books are full but his ware-houses, unfortunately, are not. And even if he manages to obtain new parts quickly enough, the risks to the economy still exist. “What good would it do if we delivered our fans to an automaker on time, while a supplier of fuel pumps cannot because he is missing parts from Japan?” Fenkl asks.

The potential threat to German companies is relatively small compared to the problems faced by the Asian and North American economies. The volume of trade between Japan and Germany comes to about €35 billion a year -- a fraction of the trade between Japan and China.

Experts estimate that it will cost about $200 billion (€142 billion) to clean up and rebuild those parts of the country most affected. Expensive, to be sure, but possible. It cost about $100 billion to rebuild Kobe after the devastating 1995 earthquake -- but the effort proved to be an economic stimulus of sorts for the Japanese economy.

Should the situation become drastically worse in the damaged reactors in Fukushima, the future would look even bleaker. Significant areas in the Fukushima region would become permanently unin-habitable. The shock to the global economy would likewise be considerable.

“The situation would be comparable with Germany after World War II,” says Klaus-Jürgen Gern of the Kiel Institute for the World Economy. Michael Heise, chief economist at Allianz Insurance, predicts: “It would shake the financial markets and could bring the recovery of the global economy to a standstill.”

O O O DER SPIEGEL / LINK

A little bit of inflation is a good thing, right? Well, that’s one way of looking at it, and if you were being charitable, it might even provide a decent explanation of why the Bank of England appears to have given up on the inflation target.

One of the effects of relatively high inflation is to ease the burden of debt by reducing its real value. For a highly indebted nation such as Britain, inflation therefore seems to make sense as an economic strategy.

With no control over their own monetary policy, the Portuguese and other fiscally-challenged eurozone nations don’t have that luxury. Without inflation to do the work for them, the austerity required to get public debt under control becomes that much greater, which is one of the reasons why Portugal will soon be following Greece and Ireland into seeking a bail-out. Britain, by contrast, gets a relatively pain-free way out of the mire.

That’s the conventional wisdom, anyway, but it is also largely rubbish. Wednesday’s analysis of the public finances by the Office for Budget Responsibility provides further evidence of why elevated inflation can never be economically benign.

Three powerfully negative effects are identified by the OBR. As a result of higher than expected inflation, living standards will fall for longer than previously anticipated, pub-

...once private finance initiative payments, public sector pensions and other off-balance sheet liabilities are taken into account, the true size of the interest bill will be more like £200bn by the end of the Parlia-ment

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lic borrowing will end up higher, and real terms cuts in public spending will have to be deeper.

So adverse are the consequences that the Government may have to abandon its commitment to real increases in health spending over the Parliament.

Using the OBR numbers, the Institute for Fiscal Studies calculates that in fact real spending on the National Health Service will fall by 0.9pc unless the Government tops it up from somewhere else. In the round, the public spending cuts will have to be £4bn deeper, while borrowing will end up £46bn higher. So much for inflating away the nation’s debts...

One of the biggest shockers from the detail of Thursday’s OBR assessment is the escalating amount of money going straight down the drain of debt servicing costs. As public debt rises, these payments rise from £30.9bn last year to £66.8bn in 2015/16, or from 4.6pc to 8.8pc of all government spending.

Worse, these numbers are an understatement of the true position. According to data aired at a Tax-payers’ Alliance seminar on Thursday, once private finance initiative payments, public sector pensions and other off-balance sheet liabilities are taken into account, the true size of the interest bill will be more like £200bn by the end of the Parliament. I won’t trouble you with the projected costs of social security and tax credits, but they are little less alarming.

O O O JEREMY WARNER / LINK

15.CHARTS THAT MAKE YOU GO Hmmm...

26 March 2011 15

Seems there are a few more everyday things that cost more than a gallon of gasoline than there are that cost less.

Somewhere, deep in a Revlon research facility, the scientists working on Proj-ect X, a revolutionary new car powered by nail polish just threw their pencils on the floor in disgust...

For all those who are looking for a handy free, web-based resource providing the week-ly CFTC Commitment of Trader update, one focusing on disaggregated Managed Money positions

(not the Non-Commercial Speculative positions which Zero Hedge has traditionally followed), can now do so at the following Reuters site. Since commodities will certainly be an ever more important part of daily investing life, we urge everyone to get familiar with the weekly data release for speculative (the guys who will be blamed for price hikes) and commercial (the banks who will be doing the blaming and urg-ing exchange margin hikes) accounts from the CFTC.

O O O REUTERS (VIA ZEROHEDGE) / LINK

CLICK TO ENLARGE

CLICK TO ENLARGE SOURCE: CFTC/REUTERS

16.CHARTS THAT MAKE YOU GO Hmmm...

26 March 2011 16

“The government de-cides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits—self-disci-pline, the ability to defer gratification, etc.—that let you enter, and stay, in the middle class. Sub-sidizing the markers doesn’t produce the traits; if anything, it undermines them.”

MP: Another downside of government subsi-dies for middle class markers like homeowner-ship and higher education is that those subsi-dies have distorted those markets and help fuel housing and college tuition bubbles, see chart above.

O O O CARPE DIEM / LINK

A few days after the near-meltdown in Fukshima, Japan, the story had disappeared from the front pages of the world’s media. Interest-ingly, another story was being circulat-ed, albeit in MUCH smaller type. The headline read:

“52 dead in Pakistani Coal Mine Ex-plosion”

Funnily enough, this story got no real press coverage and yet, at the time, the number of dead in Southwestern Pakistan was ten times that of the Sen-dai reactor catastrophe.

Got to make you think bout how safe the various fuels really are, right

SOURCE: GOOGLE USER

CLICK TO ENLARGE

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17.CHARTS THAT MAKE YOU GO Hmmm...

26 March 2011 17

Au

Ag

SOURCE: JESSES CAFE AMERICAIN

SOURCE: JESSES CAFE AMERICAINCLICK TO ENLARGE

CLICK TO ENLARGE

18.

26 March 2011 18

WORDS THAT MAKE YOU GO Hmmm...

Dateline in Australia screened an amazing documentary about China’s 64 million empty apartments.

This is terrifying...

I am a huge fan of Bill Fleck-enstein, as regular readers are by now well aware. Fleck is one of the clearest thinkers around and has been right a LOT more than he has been wrong over the past decade or more.

Here he talks to Eric King about his fears that Ben Bernanke has become even more dangerous than his bête noir, Alan Greenspan, his concerns that strength in the Yen could un-leash a potential derivatives storm, the continued printing of ‘confetti’ money, the end of QE2/beginning of QE3 and, of course, gold and silver.

CLICK TO WATCH

CLICK TO LISTEN

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and finally…

26 March 2011 19

Hmmm…

For non-football (soccer) fans amongst you - meet Mario Balotelli.

Mario is 20 years old and currently earning £120,000 per WEEK playing football for Manchester City in England’s Premier League.

Mario may be a good person for the Fed to call when they begin looking for a buyer for their recently-acquired assets...

CLICK TO WATCH

© THINGS THAT MAKE YOU GO HMMM..... 2011