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

09 June 2011 1

“[A] great Empire, like a great Cake, is most easily diminished at the Edges.”– BENJAMIN FRANKLIN

“ To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget, whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again, and above all, to ap-ply the same process to the process itself -- that was the ultimate subtlety; consciously to induce unconsciousness, and then, once again, to become unconscious of the act of hypnosis you had just performed. Even to understand the word ‘doublethink’ involved the use of doublethink”– George Orwell, 1984

“It’s all about the Benjamins baby,Now, what y’all wanna do?”

– Puff Daddy

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“A Tale Of Two Benjamins”

In 1752 there was no shortage of leaders in America – just leadership positions.

On June 10th of that year, one of America’s Founding Fathers, Benjamin Franklin, stepped out into a storm-tossed Philadelphia night armed only with a kite and a Leyden jar in an attempt to prove the electrical nature of lightning.

In 2011, there is an acute shortage of leaders – but plenty of leadership positions.

On June 7th of this year, one of America’s Fumbling Fa-thers, Benjamin Bernanke, stepped out into the audito-rium at the Ritz-Carlton, Buckhead in Atlanta, Georgia armed only with a bunch of trial balloons, in an attempt to prove the persuasive nature of rhetoric.

Franklin was a truly remarkable man who, from modest beginnings, accumulated wealth and wisdom in equal measure. His biography describes him as a statesman, author, publisher, scientist, inventor and diplomat. During the American Revolution, he served in the Second Continental Congress and helped draft the Declaration of Independence in 1776. He also negotiated the 1783 Treaty of Paris that ended the Revolutionary War (1775-83). In 1787, in his final significant act of public service, he was a delegate to the convention that produced the U.S. Constitution.

An entrepreneur who built a successful printing business before entering into public service, one Ben-jamin stands apart from the other, who seamlessly turned a career in academia into a career in public service without spending a day in the real world.

One Benjamin set out to prove his theories on the electrical nature of lightning and change the world for the better.

The other Benjamin set out to prove his theories on monetary theory and change the world for the debtor.

As the ‘recovery’ stalls in plain sight, we were treated this week to a simultaneous masterclass in both hyperbole and understatement as the Fed Chairman stood at the microphone and began his address to the International Mon-etary Conference.

As I read the text of Chairman Ber-nanke’s speech, I was struck by the frequent use of the words ‘likely’, ‘somewhat’, ‘suggest’, ‘seems’ and ‘appears’. If The Chairman is to be be-lieved, all the negative factors affect-

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ing the struggling economy either aren’t quite as bad as the data would suggest or are ‘expected’ to persist for less time than would be a problem.

One by one, Bernanke ticked off a list of the headwinds besetting the US economy and proceeded to explain why they weren’t really a problem or were under control thanks to the actions of the Federal Reserve.

It was obvious that someone had spent an age ‘sanitizing’ the statement to ensure there was zero culpability for any slowdown that could be aimed at the Fed directly, whilst ensuring that maximum play was given to the impending recovery and scant attention was paid to the ever-growing list of negatives.

On my way back from Sydney last week, I picked up a copy of George Orwell’s master-piece, ‘Nineteen Eighty-Four’ and, sitting on the plane reading it, with distant afternoons at the back of Mr. Loader’s English Literature class in my mind, I couldn’t help but smile to myself as, 30 years too late, I realised just how right Mr. Loader had been about the book. The appearance this week of ‘The Chairman’ just reinforced how painful it all seemed 30 years ago - how prescient now:

(Wikipedia): Orwell explains that the Party could not protect its iron power without degrading its people with constant propaganda. Yet, knowledge of this brutal deception, even within the Inner Party itself, could lead to collapse of the state from within. Though Nineteen Eighty-Four is most famous for the Party’s pervasive surveillance of everyday life, this control means that the popula-tion of Oceania—all of it, including the ruling elite—could be controlled and manipulated merely through the alteration of everyday thought and language. Newspeak is the method for controlling thought through language; doublethink is the method of directly controlling thought.

Newspeak incorporates doublethink, as it contains many words that create assumed associations between contradictory meanings, especially true of fundamentally important words such as good and evil; right and wrong; truth and falsehood; justice and injustice.

In the case of workers at the Records Department in the Ministry of Truth, doublethink means be-ing able to falsify public records, and then believe in the new history that they, themselves, had just written. As revealed in Goldstein’s Book, the Ministry’s name is itself an example of doublethink: the Ministry of Truth is really concerned with lies. The other ministries of Airstrip One are similarly named: the Ministry of Peace is concerned with war, the Ministry of Love is concerned with torture and the Ministry of Plenty is concerned with starvation. The three slogans of the Party — War is Peace, Freedom is Slavery, and Ignorance is Strength — are also examples.

Moreover, doublethink’s self-deception allows the Party to maintain huge goals and realistic ex-pectations:

If one is to rule, and to continue ruling, one must be able to dislocate the sense of reality. For the secret of rulership is to combine a belief in one’s own infallibility with the power to learn from past mistakes.

In the wake of Bernanke’s speech though, the scathing criticism evident in the media (particularly those free spirits of the blogosphere) was enough to suggest that perhaps the grip on the hearts and minds of the population was weakening.

Mike Shedlock certainly had plenty to say about Bernanke’s speech and the resultant word-cloud of his translation of the Chairman’s words was sheer poetry:

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Bernanke did everything possible to mitigate his role and the Fed’s role in this crisis. His unmitigated gall comes through loud and clear with this bald-faced lie:

“The Federal Reserve’s actions in recent years have doubtless helped sta-bilize the financial system, ease credit and financial conditions, guard

against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.”

For starters, were it not for the complete ineptitude of the Greenspan and Bernanke Fed the US would not be in this mess in the first place. Second, there most assuredly is a cost to the Fed’s policies.

Prices are higher, wages are not. Banks were bailed out at taxpayer expense. The Fed pays interest on reserves. That interest comes from taxpayers. The Fed’s bal-

ance sheet is loaded to the gills with garbage from Fannie Mae and Freddie Mac. The Fed is not at risk on that garbage because Congress approved unlim-

ited backing for GSE debt. That unlimited backing is over $300 billion and count-ing. Those losses are not all on the Fed’s balance sheet of course. However let’s not

ignore the Fed’s role in getting Congress to pass that blatantly stupid bill.

Let’s also not forget the Fed cheerleading fiscal stupidity in Congress, not wanting Congress to do anything about monstrous deficits now. Keynesian and Monetarist clowns never want to do anything now. They always want to do it at the “appropriate” time, which in practice means never.

Most importantly I would like to point out the very real cost of those on fixed income, attempting to get by with higher food prices, higher gasoline prices, etc. I dare Ben Bernanke to face senior citizens and tell them there is no cost associated with interest rates at 0%.

Bernanke spent a great deal of his speech trying to mitigate the Fed’s role in the inflationary episode currently enveloping the rest of the world outside the safety of the Fed’s ‘core’ and for him to state that the dollar has ‘only’ fallen 15% since 2009 whilst the oil price has:

“...risen 160 percent and non-fuel commodity prices are up by about 80 percent...”

is disingenuous at best - particularly coming from the head of an organisation that indisputably missed the most glaringly obvious housing bubble for a generation.

For Bernanke to state publicly that he is not in the camp of economists who are concerned about a double-dip recession when he has no doubt seen the recent deterioration in both the housing market and the jobs market is, frankly, ridiculous.

I have no idea who Bernanke thinks his soothing words are fooling, but the Fed has a history of playing the Confidence Game, and the explicit connection made in January of this year between QE and the feel-good factor of a rising stock market is clearly designed to entice consumers into spending to jump-start the economy:

“Our policies have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program...”

Hardly a part of the ‘dual mandate’, Mr. Chairman...

If you print a couple of trillion dollars of paper money, prices somewhere are likely to rise, I’d say.

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However, the list of prices that need to rise, one would reasonably as-sume, includes houses which, if the chart on the following page is any indication, I will wander out onto a limb and venture to say are ‘double-dipping’ like George Costanza at a wake.

Another man who WASN’T soothed by Bernanke’s words yesterday was my fellow Singapore resident Jim Rogers who had this to say on CNBC:

“Since the first day Mr Bernanke went to Washington I knew he was going to be a disaster. He has never been right about anything in the 7 or 8 years he has been there. I hope he doesn’t come back with QE3 but

that’s all he knows. The only thing he knows to do is to print money. He doesn’t understand fi-nance, he doesn’t understand currencies, he doesn’t understand economics. He understands print-ing money. It’s the wrong thing to do but that’s what he’ll do... They’re gonna bring QE back because he will be terrified and Washington will be terrified... There’s an election coming in No-vember 2012. Washington’s gonna print more money.”

Bernanke is clearly running out of dice-rolls if the reaction to his latest statement is anything to go by and the ever-increasing reliance on futile attempts to ‘talk’ things better are becom-ing more desperate by the day. Sadly, however, the Orwellian concept of ‘Doublethink’ seems to have taken a firm grip on the world’s most powerful Central Banker:

“...The power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them....To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth.”

The end of this month and the end of QE2 will undoubtedly demonstrate the strength of both the marketplace and the stomachs of investors. The reaction to the withdrawal of government stimulus will, in turn, examine the intestinal fortitude of the policymakers who find themselves putting out fires left and right whilst calming hysterical bystanders with ever-increasing frequency. When trying to determine any likely response, even by a non-political organization such as the Fed, the fact that we are soon to enter an election year is surely a factor that should be uppermost in every investor’s mind.

Before I take my leave, I yield the floor one last time to the clearly irate Mr. Shedlock who had in no way finished his Bernanke broadside when we cut him off a couple of pages ago:

CLICK TO ENLARGE SOURCE: CALCULATED RISK

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“...there is an unseen cost to the stupidity of Bernanke’s policies. That unseen cost is the cost as-sociated with fostering still more speculation in the financial markets. There is another bubble in the stock market, another bubble in junk bonds, and another bubble in commodities.

We have yet to feel the ramifications when those bubble pop, and they will. Bernanke cannot see those bubbles for the same reason he could not see the bubble in housing, the bubble in credit, the rapidly rising unemployment rate, and countless other things he missed.

Bernanke is a complete fool, trapped in academic wonderland, completely oblivious as to how the real world works. To top it off, Bernanke has the gall to knowingly lie about the real world effects of his blatant stupidity.

Ben Bernanke, you are disgusting.”

Any questions? Good. So to today’s fun and games then and we begin with an article on Chinese treasury holdings that appeared on a Chinese government website before hastily being taken down before moving onwards and upwards to an IMF warning to the UK banking sector, a stark declaration from Janet Tavakoli about the level of risk currently facing the world and a look at Germany’s attempts to escape the clutches of financial markets.

Greece continues to flounder and today we discover that the report released by the ‘Troika’ suggests the country is falling behind on the necessary reforms (shocker, I know) as well as taking a look at the massive resistance being mobilized by the citizens of the Aegean nation against the upcoming pillage by Northern European banks privatization program.

Jim Sinclair has a lofty target price for gold, David Kotok answers the question of whether the Fed printed money with QE1 & QE2 and Dan Norcini looks for clues as to what QE3 will potentially look like.

Yuan deposits in Hong Kong continue their meteoric rise while the American Empire continues its speedy fall, Gregor explains the ‘Energy Limit’, we hear from one of my favourite commentators, Bill Fleckenstein, look at charts of the Treasury market, the worrying deterioration of the NYSE inter-nals and both read and watch the wonderful story of the Florida couple who foreclosed on Bank of America.

Finally, in one astonishing question to the Master of Doublethink, Jamie Dimon gives Ben Bernanke the kind of mad props that one rarely sees outside a Kim Jong-Il press conference...

The hits just keep on coming.....

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Contents 09 June 2011

China Official Says U.S. Could Pursue Weak Dollar Policy

Escaping The Clutches Of The Financial Markets

Did The Fed Print Money With QE?

Florida Couple Forecloses On Bank Of America

IMF Warns On UK Banks Masking Bad Debts

Greater Global Risk Now Than At Time Of LTCM: Tavakoli

A Potential Signal For Further Monetary Stimulus, AKA, Quantitative Easing

Hong Kong Slips On Yuan’s International Road

Decline And Fall Of The American Empire

Greek Privatization Plan Faces Massive Domestic Resistance

Gold To Exceed $12,500 To Balance US Debt

Troika Insists Reforms In Greece At A Standstill

Charts That Make You Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally.....

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China should guard against risks from “excessive” holdings of U.S. assets as Wash-ington could pursue a policy to weaken the dollar, a senior currency regulator said in comments pub-lished on a website that briefly pushed the dollar lower.

However, the comments by Guan Tao of the State Administration of Foreign Exchange were quickly removed from the website at his request. He told Reuters the comments had been made in private academic discussions and represented his personal view only.

“We must be alert of economic and political risks in excessive holdings of U.S. dollar assets,” Guan, head of the international payment department at SAFE said in the article on the website of China

Finance 40 Forum, a Beijing-based think-tank of Chinese economists, bankers and officials.

“The United States has taken an expansionary fiscal and monetary policy to stimulate economic growth, and the United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home,” he said.

The dollar , broadly lower on the day over market worries about the health of the U.S. recovery, edged down slightly further after Guan’s remarks. It hit a one-month low against a basket of currencies and the euro and a record low versus the Swiss franc .

Chinese officials have blamed ultra-loose U.S. monetary policy for fuelling global inflation and asset bubbles but they tend to be less vocal about China’s huge holdings of U.S. assets for fear of roiling the currency market.

At times though, top Chinese officials, including Premier Wen Jiabao, have publicly called on the United States to ensure the safety of Chinese holdings of U.S. assets.

The U.S. federal budget deficit is expected to reach $1.4 trillion this year and stay high for several years. Congress is locked in tense negotiations over a deal to reduce the deficit and raise the $14.3 trillion debt limit under pressure from ratings agencies.

The deficit was built up in reaction to the global financial crisis, when the Federal Reserve also relaxed its monetary policy. Rates are virtually zero and the central bank has pumped cash into the economy by buying bonds, a programme that is due to end this month.

China has never published its holdings of U.S. Treasuries, but some economists have said as much as 70 percent of the country’s foreign exchange reserves, which hit a record $3.05 trillion at the end of March, are parked in dollar assets.

O O O REUTERS / LINK

We are doing well. In fact, we’re doing splendidly. The economy is booming, with 1.5 per-cent growth in the first quarter. We are as prosperous as we were before the crisis, which has finally been overcome. Congratulations are in order for everyone.

The banks, Deutsche Bank above all, deserve particular congratulations. In the first quarter, it earned €3.5 billion ($5.1 billion) in pretax profits in its core business, and by the end of the year the bank will likely report a record €10 billion in pretax profits, its best results ever. That number is expected to rise to €11 billion or even €12 billion in two or three years.

Less than three years after the peak of the crisis, it seems as if it never happened. That is true of the

... China has never published its holdings of U.S. Treasuries, but some economists have said as much as 70 percent of the country’s foreign exchange reserves, which hit a record $3.05 trillion at the end of March, are parked in dollar assets.

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economy, but it also true of us as economic sub-jects. But is that all we are?

No, we are also citizens and participants in a democratic society. As such, we have no reason to be celebrating. Instead, we ought to be sad and outraged. Democracy, after all, is not doing splendidly, or even well. It is gradually becoming a casualty of the financial crisis.

Trouble is brewing all over Europe. Young people with little hope for the future are protesting in Spain. In France, 1.4 million copies were sold of a manifesto titled “Be Outraged.” Young French-

men and -women are devising utopias that extend well beyond civil society because they no longer expect anything from it. A deep depression has descended upon Greece, combined with a rage di-rected at politicians and the rest of Europe.

In Germany, this is what politicians are hearing from their citizens today: “You spent billions to rescue the banks, and now I’m supposed to be footing the bill? Forget it!” Hardly anyone is willing to put up with their politicians any more. And German leaders have lost support -- and some of their own legitimacy.

They seem helpless, unable to come to grips with the euro crisis. They meet in Brussels, and they talk, argue and adopt resolutions, and yet nothing improves. Greece isn’t getting out of its hole, Ireland and Portugal are teetering on the brink, and Spain and Italy are heavily indebted to a dangerous de-gree. And no politician is providing leadership.

And then there were the lies. Jean-Claude Juncker, the prime minister of Luxembourg, had his spokes-man deny that a meeting of European Union finance ministers on the Greek crisis was taking place, even though that meeting was in fact taking place. It wasn’t the kind of lie that frequently crops up in politics: the broken campaign promise. Rather, it was more crass type of untruth: the denial of a reality. Juncker no longer had the courage to speak the truth. He was guided by fear of the financial markets. His lie was a capitulation of politics.

O O O DER SPIEGEL / LINK

The IRA: So David, the Irish government seems slowly to be moving toward some type of debt haircuts. How is the situation in EU seen by your colleagues at the GIC conference?

Kotok: Greece and the other peripheral states of Europe are an evolving crisis to the point where they can rival a Lehman Brothers type event in the US.

The IRA: As usual, right to the point. So the comfortable assumption that Geither and Trichet are driving the EU debt restructuring process is false? Heavens above!

Kotok: A prospective default by Greece is much bigger than people believe for the following reasons. The ECB has lent money to the EU banks. The collateral for those loans are covered bonds issued by these same banks and sovereign debt. The sovereign debt that these banks hold is concentrated among the peripherals states. These banks are located in both the debtor states like Greece and in Germany and France.

CLICK TO ENLARGE SOURCE: DER SPIEGEL

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The IRA: The fiction coming out of the large German institutions is that they have sold most of their exposure to Greece and Ireland. There is no meaningful disclosure in Europe, so we’ll have to take their word for it.

Kotok: The EU banks have large exposures, but not large enough to trigger failures. The real issue is that you have a contagion risk hanging over the entire market and it is large. And it is serious, so serious that the can is being kicked down the road because there is no solution. The need for the haircut on Greek debt just grows larger the loner we wait. The Vito Racanelli argument in Barron’s for a 50 percent haircut on Greece is about right.

The IRA: Well at least it makes the issuer solvent again. Greece is hopeless without significant debt reduction.

Kotok: If you could take a 50 percent haicut now, it would be better in my view than getting 30 percent in a few years. It certainly looks as though Greece is not just illiquid but insolvent. The possible solutions are many, but selling the Acropolis does not solve the problem. You cannot restore solvency without massive political change. Greece has shown no willingness to do that.

The IRA: No, the typical European pattern would be a regional war. The question is who do the Greeks fight?

Kotok: The terminal risk is huge. In Greece the first takeaway is that we have govern-mental insolvency. Without restoration of solvency, access to the capital markets is problematic for several years. My view is that we must create the conditions for a debt swap or extension without kicking the credit default swap contracts.

O O O INSTITUTIONAL RISK ANALYST / LINK

Months after Bank of America wrongly foreclosed on a house Warren and Maureen Nyerges had already paid for, they were still fighting to get reimbursed for the court battle.

So on Friday, their attorney showed up at a branch office in Naples with a moving truck and sheriff’s deputies who had a judge’s permission to seize the furniture if necessary. An hour later, the bank had written a check for $5,772.88.

“The branch manager was visibly shaken,” attorney Todd Allen said Monday, recalling the visit to the bank last week. “At that point I was willing to take the desk and the chair he was sitting in.”

After the moving company and sheriff’s deputies get their share, the Nyerges should receive the rest of the money this week, ending a bizarre saga that started when they paid Bank of America $165,000 cash for a 2,700-square-foot foreclosed home in Naples in 2009.

About four months later, a process server knocked on their door and handed Warren Nyerges a notice of foreclosure.

“This is a big mistake,” he recalled saying. “You must have the wrong house. We bought a foreclosure and don’t have a mortgage.”

That started 18 months of frustrating phone calls, paperwork and court hearings. Whenever Nyerges

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called the bank, representatives told him to “come up to date” with his payments. When he called 25 different law firms, no attorney would take the case. When he went to court, the lawyers for the bank filed incorrect motions and were woefully unprepared for the hearings.

“It was mind boggling,” said Nyerges, a 46-year-old retired police officer. “To try to unscrew the screw up, it’s not as easy as it sounds.”

Eventually the Nyerges found Allen. They fought the foreclosure and won, proving that they owned the home outright.

O O O CBS NEWS / LINK

British banks’ lenience to struggling customers may be disguising the dangers the institutions face, the International Monetary Fund warned as it delivered its latest verdict on the UK economy.

Lender forbearance, where loans are extended or payments reduced, “may, in some cases, have masked the extent of risks, given the high indebtedness of the household and commercial real estate sectors,” said the Fund.

Just last week it emerged that the Financial Services Authority has accused banks of moving mortgage customers on to less strenuous terms to conceal bad debts.

The latest warning came as the IMF delivered a strong endorsement of the Government’s austerity plans on Monday, but laid out a clear Plan B of monetary easing and tax cuts in case of an emergency.

The “unexpected” weakness in growth and rise in inflation raises the ques-tion of whether it is time to adjust economic policies, said the global lend-

er, as it performed its annual health-check on the UK economy.

However, despite cutting its growth forecast and raising its inflation expectations to reflect recent disappointments in the data, the Fund concluded:

“The answer is no.” John Lipsky, the IMF’s acting head after Dominique Strauss-Kahn’s resignation, said: “We consider the current deviations from forecast represent temporary factors and that the cur-rent policy mix strikes us as appropriate.”

The Fund said spikes in commodity prices were a key factor behind its downwards revision of its growth forecast for the UK to around 1.5pc for 2011, from 1.7pc in April and 2pc in September, and its higher forecasts for inflation.

It now expects the pace of price rises to not return “near” to the official 2pc target until the end of next year, as opposed to its earlier prediction that inflation would be back to that level at the start of 2012.

Nonetheless, the IMF kept its forecast for 2.5pc growth in the medium term, seeing the recovery buoyed by business investment and the global bounce back helping exports.

The Fund encouraged the Government to plough on with raising the retirement age, cutting public sector pensions and relaxing planning rules to boost growth.

However, if a slowdown in the economy looks to be becoming entrenched, it said policymakers should look at more quantitative easing — pumping money into the economy — and temporary tax cuts.

... The “unexpected” weakness in growth and rise in inflation raises the question of whether it is time to adjust economic policies,

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“There are significant risks to inflation, growth and unemployment,” it said. “If they materialise, the policy response will depend on the nature of the shock.”

O O O UK DAILY TELEGRAPH / LINK

Sir, The Financial Services Authority claims that hedge fund gearing has decreased (report, May 2) and the Federal Reserve Bank of New York suggests that there is no close correlation between hedge fund returns making the current situation less alarming than in the past

(May 3). I believe it was Winston Churchill who said we must alert somnolent authority to novel dan-gers; but in this matter authority seems complacent, and the dangers are not novel.

The FSA produced numbers from a partial survey of hedge funds and discussed “average” leverage, thus highlighting the well known flaw of averages. If a swimming pool’s average depth is four feet,

but the deep end of the pool is eight feet, non-swimmers are presented with unacceptable risk. The average would suggest non-swimmers can safely use the pool, but a drowning man finds out the hard way that the average doesn’t contain information descriptive of the risk.

The NY Fed uses data to examine volatility and correlations, both of which are not of much use in a crisis when correlations deviate from historical measures and even approach one. Indeed even today, one should consider that hedge fund returns are anything but in-dependent. Hedge funds are often called “alternative” assets, but they have not created new asset classes. Hedge funds invest in the global markets along with other investors, albeit hedge funds may be more creative, more illiquid and may employ more leverage.

“Tavakoli’s law” states that if some hedge funds’ returns soar above market averages, then others must crash and burn. If one accepts that passive investors are indexed and reap average market re-turns, then active investors that reap extraordinary returns above the market average are offset by active investors who experience extraordinary losses in aggregate.

The current situation may indeed be different from that presented by Long Term Capital Manage-ment, but it may be even more alarming, not less alarming. Due to the use of structured products and derivatives, hedge funds can take on hidden leverage above and beyond that which can be explained by polling prime brokers. Furthermore, illiquid structured products will experience a classic collateral crash when hedge funds try to liquidate these assets to meet margin calls or collateral “cures”.

Since 2000, assets invested in hedge funds have more than tripled to around $1,500bn. While on average leverage may appear manageable, some hedge funds - Amaranth to cite a recent example - employ high degrees of leverage. A potential source of a “great unwind” arises from a trigger event affecting highly leveraged hedge funds, and another potential source is systemic risk that effects a larger cohort of hedge funds.

Many hedge funds are not highly leveraged, and they will weather the storm. But the explosion of hedge fund investments in illiquid assets combined with leverage currently pose a greater risk to the global financial markets than we experienced at the time of the LTCM debacle.

O O O JANET TAVAKOLI / LINK

The one thing that has helped to keep some of the population from becoming com-pletely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly

... The current situation may indeed be different from that presented by Long Term Capital Management, but it may be even more alarming, not less alarming

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going to economic hell, at least they were making a bit of money on their retirement accounts.

Take away this last refuge of happiness, and the mood of the public will grow foul and fester, not to mention that of Wall Street and the many brokerage houses which do not generally make money during bear markets in equities.

Look at the weekly chart of the S&P (note - I use the emini S&P for charting purposes) and you will see the rising 50 week moving average along with a critical horizontal sup-port level that comes in near the 1250 level. That is also the level near which the S&P began the new year of 2011. If it falls below that level, all gains from the year are gone and losses begin to then mount. That is when the general public will lose its last refuge of consolation.

I mentioned last week that if 1300 were to give way on the weekly chart, it would bode ill for the broad equity

markets going forward. That level is still a key level but as of now the S&P is trading below it and can-not seem to recapture its footing above it. The momentum is growing to the downside on the charts and if we continue to get economic data that disappoints and reinforces the growing perception that the economy is in serious danger of rolling over, a very strong possibility exists for a move lower in the S&P to the 1250 level.

If this level gives way allowing the market to fall down towards the 50 week moving average which currently comes in near the 1225 level, expect a chorus of voices clamoring, nay, demanding further stimulus from the Fed. Those voices will firstly come from the Democrats whose election fortunes next year are directly linked to the welfare (or lack thereof) of the US economy. It will also come from the doves on the FOMC. Lastly it will come from many in the financial community who are more will-ing to take their chances on a falling Dollar than a falling stock market.

If the Fed hearkens to those voices, and I have no reason to doubt at this time that they will not, ex-pect the US Dollar to not only take out critical chart support near 73 - 72.50, but to continue sinking lower. The result will be to push gold sharply higher and into new all time highs.

O O O DAN NORCINI / LINK

Yuan-denominated bank deposits in Hong Kong could rise to 1 trillion yuan by the end of the year, nearly double the 510 billion yuan peak reached in late April, according to market analysts.

This surge in Chinese currency deposits began in July 2010 when the central bank and Hong Kong Monetary Authority (HKMA) agreed to revise the previous agreement on yuan settlement and lift restrictions on interbank transfers.

The deal gave Hong Kong financial institutions permission to develop and offer yuan-dominated wealth management products. It also led to a series of improvements in supportive policies, HKMA Chief Executive Norman Chan told Caixin.

The bottom line is that Hong Kong remains far and away home to the largest yuan pool off the main-land. HKMA says Hong Kong now handles 80 percent of the mainland’s yuan-denominated trade set-tlements, while its banks and institutions offer customers yuan-denominated fixed interest accounts,

CLICK TO ENLARGE SOURCE: DAN NORCINI

14.THINGS THAT MAKE YOU GO Hmmm...

09 June 2011 14

fund investments and public listing services. Corporate accounts make up two-thirds of all yuan de-posits in Hong Kong, and personal accounts comprise the rest.

Chinese and Hong Kong monetary authorities say the yuan’s acceptance as an international currency will continue to grow. An HSBC report recently predicted that half of all of China’s international trade – up to US$ 2 trillion worth if business – will be settled in yuan by 2015.

The next question is whether the yuan can make the leap to international bond and equity markets, which so far have given the currency a mixed reception.

Another question mark hangs over Hong Kong’s status as an exclusive center for international yuan trade settlements. Singapore leaders, for example, have outlined a proposed yuan project that’s caught the eye of Beijing authorities, including some who complain that Hong Kong has moved too slowly toward yuan internationalization.

O O O CAIXIN / LINK

America clocked up a record last week. The latest drop in house prices meant that the cost of real estate has fallen by 33% since the peak – even bigger than the 31% slide seen when John Steinbeck was writing The Grapes of Wrath.

Unemployment has not returned to Great Depression levels but at 9.1% of the workforce it is still at levels that will have nerves jangling in the White House. The last president to be re-elected with un-employment above 7.2% was Franklin Delano Roosevelt.

The US is a country with serious problems. Getting on for one in six depend on government food stamps to ensure they have enough to eat. The budget, which was in surplus little more than a decade ago, now has a deficit of Greek-style proportions. There is policy paralysis in Washington.

The assumption is that the problems can be easily solved because the US is the biggest economy on the planet, the only country with global military reach, the lucky pos-sessor of the world’s reserve currency, and a nation with a proud record of re-inventing itself once in every generation or so.

All this is true and more. US universities are superb, attracting the best brains from around the world. It is a country that pushes the frontiers of

technology. So, it may be that the US is about to emerge stronger than ever from the long nightmare of the sub-prime mortgage crisis. The strong financial position of American companies could unleash a wave of new investment over the next couple of years.

Let me put an alternative hypothesis. America in 2011 is Rome in 200AD or Britain on the eve of the first world war: an empire at the zenith of its power but with cracks beginning to show.

The experience of both Rome and Britain suggests that it is hard to stop the rot once it has set in, so here are the a few of the warning signs of trouble ahead: military overstretch, a widening gulf between rich and poor, a hollowed-out economy, citizens using debt to live beyond their means, and once-effective policies no longer working. The high levels of violent crime, epidemic of obesity, addic-tion to pornography and excessive use of energy may be telling us something: the US is in an advanced state of cultural decadence.

Empires decline for many different reasons but certain factors recur. There is an initial reluctance to admit that there is much to fret about, and there is the arrival of a challenger (or several challengers) to the settled international order. In Spain’s case, the rival was Britain. In Britain’s case, it was America.

... The experience of both Rome and Britain suggests that it is hard to stop the rot once it has set in

15.THINGS THAT MAKE YOU GO Hmmm...

09 June 2011 15

In America’s case, the threat comes from China.

Britain’s decline was extremely rapid after 1914. By 1945, the UK was a bit player in the bipolar world dominated by the US and the Soviet Union, and sterling – the heart of the 19th-century gold standard – was rapidly losing its lustre as a reserve currency. There had been concerns, voiced as far back as the 1851 Great Exhibition, that the hungrier, more efficient producers in Germany and the US threat-ened Britain’s industrial hegemony. But no serious policy action was taken. In the second half of the 19th century there was a subtle shift in the economy, from the north of England to the south, from manufacturing to finance, from making things to living off investment income. By 1914, the writing was on the wall.

O O O THE GUARDIAN / LINK

Good news still sometimes emerges in Greece these days. Take Hellenic Petroleum (Helpe), which owns a number of refineries and some 1,200 gas stations in the country and made a net profit of €150 million last year. It earned €43 million in the first quarter of 2011 despite of the crisis. Helpe is “an example of efficiency and stable management,” company chairman Anastasios Gi-annitsis said. “We’re constantly trying to increase productivity.”

The model company, barricaded behind mirrored windows in its futuristic Athens headquarters, is among the few economic pearls of the crisis-ridden country. But para-doxically, Hellenic Petroleum is also a prominent example of the Greek disease -- excessive generosity to the few, at the expense of the many.

It is a worker’s paradise. The company’s 2,500 employees receive the equivalent of 17.8 monthly salary payments in a year, 3.4 of which count as “productivity bonuses.” The average yearly salary is between €65,000 and €70,000, according to official figures. Drivers and doormen make an impressive €90,000, a fact that left one of Helpe’s top managers “a bit surprised” when he took his own post at the company, he said. Meanwhile chairman Giannitsis said the high wages are justifiable because of “very specific business and the major dependency on international price and profit margins” in the oil industry. Besides, personnel costs account for “less than three percent” of turnover, he said.

Hope and madness are close together in Prime Minister Georgios Papandreou’s battle against his country’s crisis -- and his room to maneuver is dwindling. Despite drastic savings programs and struc-tural reforms in public services, and despite tough tax increases and pension cuts, public revenue is shrinking. In late March, Greece’s public debt increased to some €354 billion, and the budget deficit is currently at 9.5 percent of GDP, above the government’s target of 7.5 percent.

Now the government wants to stave off bankruptcy with an ambitious privatization program aimed at raising some €50 billion by 2015.

But public resistance to the measures has been tremendous, and isn’t just confined to the daily dem-onstrations. GENOP, the union of workers for energy provider DEI, is among the most radical oppo-nents of the sell-off plan, and is threatening to switch off the nation’s electricity supply. Some 51 per-cent of the company belongs to the state, which plans to sell 17 percent. With profits of €950 million for 2010, the company is viewed as a lucrative prospect for investors. But the union’s 20,000 members have much to lose. Their average yearly earnings of €40,000 are high when compared to other profes-sions -- a high school teacher makes just €20,000 per year, for example. DEI workers also get discounts of around 70 percent on their energy costs, with some even getting their electricity for free.

O O O DER SPIEGEL / LINK

... Hope and madness are close together in Prime Minister Georgios Papandreou’s battle against his country’s crisis

16.THINGS THAT MAKE YOU GO Hmmm...

09 June 2011 16

“Quantitive easing is the only tool that the Fed has had available to them. The Fed has pumped in trillions of dollars and the result of that pump-priming in the monetary sense has been only at best a modest recovery, and certainly making trillionaires out of some bankers, billion-aires out of many of them.

We’ve come to a point now where if QE were to be stopped, you would see an implosion in the gen-eral equity markets...And yes gold would go down, the market would go down hard. The dollar would go up slightly to begin, but then fall back down again as the management of the economy was seen

to have been ineffective and inefficient.

Gold would then start moving back up again and I think if QE was to cease, the recovery on gold from a modest reaction would be multiples upon multiples of that reaction and would lead the way to Harry’s $2,400, to Alf’s $3,000 to $6,000.

You can’t stop quantitive easing. If you stop quantitive easing the stock market will return to its recent low or lower. That alone by its impact on decision making will cause an economic implosion. We’re tied into this monetary stimulation, there is no way out of monetary stimulation. If there was any at-tempt to get out of monetary stimulation it would cause an economic accident which would require central banks to go right back where they were. That would be again, loss of control...

So because loss of control could be this summer’s event, the potential is gold could have a very seri-ous run to the upside this summer.

If QE is continued then the basic uptrend in gold now so solidly intact, will continue in its power up-trend, and you could expect a stronger gold market this summer. I’d be very careful about seasonality in gold...There’s every possibility that gold could put on a summer rally of distinction.

...A cessation of quantitive easing could open up the black hole of Calcutta for the general equities markets in a way that very few really understand. You could see thousands of points taken off that market in a very short period of time.

The only way to overcome that would be by whatever name you called it to start the QE again. That would be indicative of a total loss of control. So the question is what would the price of gold be if it became publicly undeniable that control of the economic functions for the believers no longer re-sided in Federal Reserves and central banks?

The answer is gold would do what it historically attempts to do and that is to balance the balance sheet of the United States of America’s external foreign debt...and when we do the calculations we come up with a figure that is in excess of $12,500.”

O O O JIM SINCLAIR / LINK

Greek efforts to stabilise public finances and push through reforms have ground to a halt in the last quarter, according to officials from the IMF, the ECB and the European Commission.

The latest so-called “Troika” report, seen by The Irish Times yesterday, made a grim impression when presented to German MPs in Berlin yesterday evening.

At a crunch parliamentary party meeting, members of the ruling Christian Democrats (CDU) and Free Democrats (FDP) heard that Greece will require fresh aid from euro zone members because of the “prohibitive” cost of the alternative: returning to financial markets.

... because loss of control could be this summer’s event, the potential is gold could have a very serious run to the upside

17.THINGS THAT MAKE YOU GO Hmmm...

09 June 2011 17

“The financing strategy needs to be revised,” said the report’s authors.

“Given the remoteness of Greece returning to the funding markets in 2012, the adjustment pro-gramme is now underfinanced. The next disbursement cannot take place before this underfunding is resolved.”

Greece’s debt situation will peak in 2012/13, the troika said, while the financial sector “remains very tense”.

Worse, the report warned that “uncertainty on the functioning of the EU and euro area financing facilities have aggravated the tension in financial markets”.

O O O IRISH TIMES / LINK

One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can’t be fixed. By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past. At least they are for the debt-encrusted developed nations over the short haul -- and, over the long haul, across the entire soon-to-be energy-starved globe.

The sooner we can accept that idea and make other plans the better. To paraphrase a famous saying, Anything that can’t be fixed, won’t.

The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natu-

ral limits, such systems are prone to increasingly chaotic behavior, until the money that under-girds them collapses into utter worthlessness, al-lowing the cycle to begin anew.

All economic depressions share the same root cause. Too much credit that does not lead to en-hanced future cash flows is extended. In other words, this means lending without regard for the ability of the loan to repay both the principal and interest from enhanced production; money is loaned for consumption, and poor investment decisions are made. Eventually gravity takes over, debts are defaulted upon, no more borrowers can be found, and the system is rather painfully scrubbed clean. It’s a very normal and usual pro-cess.

When we bring in natural limits, however, (such as is the case for petroleum right now), what emerges is a forcing function that pushes a debt-based, exponential money system over the brink all that much faster and harder.

But for the moment, let’s ignore the imminent energy crisis. On a pure debt, deficit, and liability basis, the US, much of Europe, and Japan are all well past the point of no return. No matter what policy tweaks, tax and benefit adjustments, or spending cuts are made -- individually or in combina-tion -- nothing really pencils out to anything that remotely resembles a solution that would allow us to return to business as usual.

O O O CHRIS MARTENSON / LINK

SOURCE: CHRIS MARTENSON

18.CHARTS THAT MAKE YOU GO Hmmm...

09 June 2011 18

Courtesy of Richard Russell come these two charts showing the rapid deteriora-tion in the number of stocks on the NYSE trading below their 50-Day moving averages (above) and 200-Day moving averages (below).

Cause for concern...

SOURCE: RICHARD RUSSELL

SOURCE: RICHARD RUSSELL

19.CHARTS THAT MAKE YOU GO Hmmm...

09 June 2011 19

The energy limit model to economic growth is working beautifully, having come into play pri-or to the 2008 crisis and now once again forcing another global slowdown. Above is the most recently updated chart showing energy expenditures as a percentage of US GDP. As usual, I have not merely taken EIA.Gov’s calcula-tions here, but cross checked various data from EIA.gov on total energy spending with BEA.gov data on historical GDP. In addition, I am working on a chained (real) dollar version of the above chart but here I have presented the nominal version of both expenditure and GDP. | see: US Energy Expenditure as a Percentage of GDP 1999-2010 (All Nominal Dollars).

As we can see, the relief from the 2007-2008 energy spike was short-lived. Whatever economic “recovery” the US was able to cobble together was built on the base of lower energy price levels in 2009. But by 2010, the energy expenditure percentage was right back up above 8.00%. More urgently, preliminary data shows

that 2011’s level is back above 9.00%. Given the recovery in coal and oil pric-es, that’s no surprise. This Spring’s run of terrible economic data, showing the US economy turning back down again, now has an obvious cause.

But it’s not like Americans haven’t tried to reduce their use of the primary energy source–oil. In the chart [right], we can see that US consumption of oil, expressed in BTU, has fallen dramati-cally from the highs of mid-decade. While the US consumption of coal and natural gas—and also wind and solar power—has rebounded more strongly since the 2009 lows, US consumption of oil is still down nearly 11.00% from peak. This aspect of the story contains both good news and bad news, which I will explain below.

O O O GREGOR / LINK

CLICK TO ENLARGE

CLICK TO ENLARGE

SOURCE: GREGOR

SOURCE: GREGOR

20.CHARTS THAT MAKE YOU GO Hmmm...

09 June 2011 20

At this point QE2 is in its final weeks.

The behavior of Treasur-ies is an area of special interest in light of the Fed’s second round of quantitative easing, which was formally an-nounced on Novem-ber 3rd. The first chart shows the percent change for a basket of eight Treasuries since November 4th.

The next chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed’s website for the FFR.

O O O DSHORT / LINK

21.

09 June 2011 21

WORDS THAT MAKE YOU GO Hmmm...

Bill Fleckenstein talking to Eric King.

Enough said.

Heres’s the video story of the BoA foreclosure in Florida which proves that truth is sometimes stranger than fiction...

“OK... we’re going to need some-one to ask a real softball question - one that essen-tially lays out how utterly fantastic the job we’ve done is .....and we need it to be somebody cred-ible.....”

...

.....

“Mr. Dimon..... Paging Mr. Jamie Dimon.... Would Mr. Dimon please pick up the white courtesy tele-phone in the hotel lobby please”

CLICK TO WATCH

CLICK TO WATCH

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and finally…

09 June 2011 22

So..... there’s drunk..... and there’s ‘drunk’

Then there’s this guy.....

Hmmm…

CLICK TO WATCH

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