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Grant Williams

Grant Williams

Avatar of Grant Williams

Editor and Chief Investment Strategist Grant Williams is the chief investment strategist for Mauldin Economics’ premium publication, Bull’s Eye Investor, as well as the author of the popular free investment letter, Things That Make You Go Hmmm… Williams also acts as the portfolio and strategy advisor for Vulpes Investment Management in Singapore − a hedge fund running $250 million of largely partners’ capital across multiple strategies. Grant has 26 years of experience in finance in Asian, Australian, European, and US markets and has held senior positions at several international investment houses.

Homepage: http://www.mauldineconomics.com/go/bwvB6/NIT

Jabber/GTalk: jkeithjohnson@gmail.com


Posts by Grant Williams

Things That Make You Go Hmmm: Signing Off

 

On Christmas Eve 1979, 27 days before I became a teenager, in a surburban street in Moseley in Britain’s West Midlands, a group of musicians put the finishing touches on their debut album.

The musicians — Brian Travers, Astro, James Brown (no, not that one), Earl Falconer, Norman Hassan, Mickey Virtue, and twins Ali and Robin Campbell — had a unique approach to the music business.

Eighteen months prior to completing their first album, Ali Campbell and Travers had plastered the streets of Birmingham with leaflets promoting the band, which had taken its name from the document issued to people claiming unemployment benefits from the UK government’s Department of Health and Social Security (DHSS). The name of the form — and thus the band — was UB40.

Having advertised themselves and with dreams of making a big splash on Britain’s reinvigorated music scene running wild in their heads, the band had just one remaining item on their to-do list — learn to play their instruments.

The members of UB40 made an agreement to spend the next year doing nothing other than learning their instruments and practising their songs until they felt they were good enough.

(I know, I know! This IS analagous to many modern-day Central Bank policy efforts, but that’s not where I’m going with this, so stop jumping ahead.)

Anyway, after about a year, the band felt competent enough to play in public; and they made their debut on the 9th of February, 1979, in an upstairs room at the Hare & Hounds, a small pub in King’s Heath. They had been “booked” by a friend to celebrate his birthday.

Following on the success of their first gig (apparently, the birthday boy was delighted), the band secured a series of similar shows, all in local pubs, at which they planned to unleash their blend of reggae and dub onto an unsuspecting public who, though they didn’t realise it, had been waiting for UB40 for years.

Remarkably, at one of these pub gigs, Chrissie Hynde just happened to be in attendance, no doubt supping a couple of pints of Throgmorton’s Dubious Explanation (a real ale so thick it’s served by the slice); and she liked what she saw so much, she offered the band a supporting slot on The Pretenders’ upcoming tour of the UK.

Simple.

Fast-forward to Christmas 1979, and the story of the recording of the band’s debut album burnishes the legend yet further:

(Wikipedia): The band approached local musician Bob Lamb as he was the only person they knew with any recording experience. Lamb had been the drummer with the Steve Gibbons Band for much of the 1970s and was a well-known figure within the Birmingham music scene…. However, as the band were unable to afford a proper recording studio, the album was recorded in Lamb’s own home at the time, a ground-floor flat in a house on Cambridge Road in Birmingham’s Moseley district….

Brian Travers recalled just how basic the recording facilities of the original Cambridge Road “studio” really were:

Because we couldn’t afford a studio and he was the only guy we knew who knew how to record music, we did the album in his bedsit. I remember he had his bed on stilts. So underneath the bed was a sofa and mixing desk. And so we recorded the album there on an eight-track machine, with the same 50p coin going through the electric meter continually because we’d booted the lock off it. And, with it being a bedsit and us being eight in the band, we’d record the saxophone in the kitchen — because there was a bit of resonance off the walls, a bit of reverb — before putting the machine effects on it. While the percussion — the tambourines, the congas, the drums — we’d do in the back yard. Which is why you can hear birds singing on some of the tracks! You know, because it was in the daytime we’d be shouting across the fences “Keep it DOWN! We’re RECORDING!”

Lamb remembered the process fondly:

Nothing was hard work about that album, it was a bit of a dream that sort of fell out of the sky… It was almost effortless to make in that they were so good at the time, and so happy at the time with the success that they got, there was no effort in it.

The title of the album, “Signing Off,” was inspired by the process of the band members ending their claim on UK unemployment benefits — and becoming pop stars.

The LP (Google it, Gen Y-ers), released on August 29, 1980, spent 71 weeks on the UK albums chart, peaking at number 2 and turning platinum (when doing such a thing used to mean something). It was greeted with rapture by Britain’s music press:

(Sounds): Five stars out of five. It is an (almost) perfect album…. It’s rare to find a debut album so detailed, so excellently played and so packed with bite — I sometimes think it hasn’t really happened since The Clash.

The album would go on to make Q Magazine’s “100 Greatest British Albums Ever” (#83, if you’re interested) and is featured in a book somewhat somberly titled 1001 Albums to Hear Before You Die.

I think it’s fair to say I played my part in the success of the band by spending the pocket money I had saved up on a copy of “Signing Off” (though the band have so far not publicly acknowledged my involvement).

Anyway, as I am now signing off from Mauldin Economics, I felt it would be appropriate to take stock of a few of the issues I have covered ad nauseum repeatedly during my two-plus years working with John and his team; and I thought I’d also take those of you unfamiliar with UB40’s debut album through a few of the tracks (and remind those of you who know the band just how spectacular that album was).

Track 2. King — 4:35

The “King” referred to in the second track on “Signing Off” was, of course, Martin Luther King, Jr. The song was short on lyrics but big on impact; however, the undoubted “King” in markets today is once again King Dollar, and the world’s reserve currency is making some serious waves right now, which threaten to cause chaos in world markets.

At this point I’ll throw things over to my friend and partner in Real Vision Television and author of The Global Macro Investor, Raoul Pal, who has been warning of the likelihood of a major move in the dollar for longer than just about anybody. In his most recent report, he explained the ramifications of a dollar bull market in the clearest, most concise way possible:

(Raoul Pal): Debt dynamics, deflation, positioning and technicals all suggest that a dollar bull market of some considerable velocity and length is underway.

When dollar bull markets occur, emerging markets get hit.

When dollar bull markets occur, carry trades get unwound.

When dollar bull markets occur, they tend to usher in disinflationary forces as commodities and goods get re-priced.

The preceding three factors lead to a self-reinforcing of the dollar bull market, creating more of the same in a cycle of liquidation and bad debts, creating more demand for US dollars.

As I said, clear and concise.

I watched Raoul present at the iCIO Summit this past week, and his presentation was compelling, to say the least. As he pointed out in a panel discussion with Mark Yusko, Dennis Gartman, David Rosenberg, and myself, “When currencies begin to trend, they can do so for decades.”

A sobering thought.

A look at the long-term charts of the DXY Index shows just how massive the potential reversal of this trend is; and based on Raoul’s roadmap, the sheer size of the reversal gives us a strong hint of the degree of carnage that will be wrought upon a world in which the dollar carry trade has reached somewhere between $5 trillion and $9 trillion.

Incidentally, one of those estimates is Raoul’s, and one belongs to the BIS, and I bet your first guess as to which is which would have been wrong.

A closer look at a shorter-term chart demonstrates the recent break clearly:

The BIS report to which I refer was published last week, and it was astounding in terms of the sheer size of the dollar carry trade it depicted.

According to the BIS, US dollar loans to China’s banks and companies have jumped to $1.1 trillion — that’s TRILLION — from virtually zero just five short years ago. The annual rate of increase of those loans is a mind-boggling 47%.

However, the fun doesn’t stop there.

Consider Brazil, for example, where cross-border dollar credit now stands at $461 billion, or roughly 20% of GDP. For Mexico those numbers are even more eye-watering. A country with a GDP of just $1.1 trillion has outstanding cross-border dollar credit of $381 billion — or roughly 30% of GDP. Frightening.

Meanwhile, in Russia the same metric has reached $751 billion. Why does this matter? Well, the charts below, which show the appreciation of the US dollar against those three currencies in the last five years, highlight the danger to countries that have been able to borrow seemingly endless amounts of (relatively) stable dollars to finance business operations and expansion.

Lastly — and perhaps most importantly — witness the change in direction of the Chinese renminbi which, after trending higher against the dollar for many years (and, in the process, moving virtually everybody to the same side of the boat in the belief that a stronger Chinese currency was a given), has suddenly started to look as if it may also succumb to the renewed strength of the dollar. The only difference here being that the Chinese may actively be looking now to devalue their currency in light of the ongoing attempt by the Japanese to devaluetheir way back to competitiveness. Few thought this a likely scenario until very recently; consequently, few are positioned accordingly; and when things like that happen in the macro world, you can get some REALLY funky moves.

When currency wars break out, they can get very nasty very quickly.

 

Under no circumstances should you take your eyes off the US dollar, folks. The sheer number of places where you will witness the knock-on effects of a soaring dollar — chief amongst them emerging markets and the commodity space — will be breathtaking.

I will write at greater length on the likely effects of the dollar’s move on gold in a few weeks, as it warrants a piece all its own; so stay tuned for that one.

In a series of conversations I’ve been fortunate to have had with some of the best macro traders in the world in recent months through Real Vision Television, there has been one overarching takeaway from every one of them: macro is back, and 2015 is shaping up to be an epic year for the guys who trade these fundamental shifts. To a man, after several years of little action in the macro world, they are positively licking their lips at the potential opportunities that are headed their way next year.

One person’s opportunity is another person’s crisis. You have been warned.

3. 12 Bar — 4:24

Track 3 was an instrumental number called “12 Bar,” a reggae reimagining of the 12-bar blues that highlighted Brian Travers’ remarkably good saxophony skills (given his lack of attention to learning to play the instrument before forming the band).

Obviously, during my time with Mauldin Economics, the “bars” which have preoccupied me have been those of the gold variety — and for the most part, their constant movement in an easterly direction.

I have written article after article and given presentation after presentation about the dichotomy between paper and physical gold and have regularly highlighted the magnitude of the flow of gold out of the West and into strong Eastern hands. In the previous edition of this publication (“How Could It Happen?”), I imagined a future in which this stunning relocation of physical gold had finally mattered; and between publishing that piece and penning this one, a couple of interesting things have happened. Firstly, my friend Barry Ritholtz took a big, fat shot at me in a Bloomberg column entitled “The Gold Fairy Tale Fails Again.” Barry’s article (which was entirely consistent with his very public and oft-stated thinking and was, as is always the case with Barry, very well-written) took apart what he sees as the various failed narratives in the gold markets. He began with gold’s link to QE:

(Barry Ritholtz): [T]he most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time…

… moved on to the recent SGI:

Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77 percent to 23 percent, by the electorate….

… then hit upon the recent Indian import restrictions and reports of gold shortages, which Barry clearly feels are spurious, before eventually finding his way to yours truly:

Perhaps the most egregious narrative failure came from Grant Williams of Mauldin Economics. He imagined a conversation 30 years from now about China’s secret three-decade-long gold-buying spree, dating to November 2014. Well, we only need to wait 30 years to see if this prediction is correct.

Now, in response to the lighting up of my Twitter feed after Barry’s article was posted (and my thanks to all those who kindly pointed it out to me), I would say this: Barry is right on all counts.

For now.

I am delighted to be able to call Barry a friend and have absolutely no problem with his calling me out on what I said. Those of us who possess sufficient hubris to deem our thoughts worthy of distribution wider than the inside of our own heads are absolutely there to be taken to task should others disagree with us. We make ourselves fair game the second we hit the wires.

Sadly, none of us actually KNOW anything. How could we? We all take whatever inputs we find and then use them to reach our own conclusions based mostly on probability, and more often than not those conclusions are wrong.

HOWEVER… if your logic is sound and your thought processes rigorous, being wrong is often a temporary state — something that can also be said about being right, of course. In my humble opinion, the issue with gold today is not one of narrative, as Barry suggests, but rather that the extent of the current interference in markets by our friends at the various central banks around the world has meant that being wrong (no matter which part of the financial jigsaw puzzle you may be concerned with) has never been easier — even though being right has never, in my own mind at least, been more assured in the long term, certainly as far as gold is concerned.

As I slumped against the literary ropes, Barry threw one more punch when he suggested that the reader would “only need to wait 30 years to see if this prediction is correct,” but this is where I stop covering up and finally flick a jab or two of my own.

I think the chances of having to wait 30 years to see the gold conundrum resolve itself (in materially higher prices, I might add) lie close to those of Barry’s being invited to give the opening address at the next GATA conference. The evidence is crystal clear that significant quantities of physical gold have been pouring into Eastern vaults (due to both private- and public-sector activity); and gold is, after all, a finite resource. Not only that, but the “weakness” in gold (which remains roughly 500% above its turn-of-the-century low, despite the recent 30% correction) is confined to the paper market.

Whilst this distinction between paper and real gold hasn’t mattered up until now, there will come a day when it absolutely does — to everybody — and at that point, anyone not positioned correctly will be in a world of hurt.

(Charts above and below courtesy of Nick Laird at Sharelynx and Koos Jansen)

Tightness in the physical market has increased consistently as the likes of Russia continue to stockpile ever-increasing amounts of gold and as Chinese imports as well as withdrawals from the Shanghai Gold Exchange maintain a torrid pace. The only missing piece of the puzzle is the lack of any official acknowledgement that the Chinese have been doing the same thing to a far greater degree; and, as I wrote in “How Could It Happen?”, there is a curious demand for absolute proof from those who dispute official figures, whilst the principle of reasonable doubt continues to hold sway on the other side of the argument.

I suspect that imbalance will right itself — possibly very soon — and when it does there will be absolutely no putting the genie back into the bottle.

In the meantime, as Barry so confidently predicted, the Swiss Gold Initiative failed, but that was overshadowed (in my mind at least) by a couple of very interesting developments that were covered beautifully by two of my buddies, Willem Middelkoop (author of The Big Reset — a phenomenal read) and Koos Jansen.

Firstly, Koos reported on the increasing drive to allocate the gold held within the Eurosystem:

(Koos Jansen): [M]ost of the Eurosystem official gold reserves are allocated, and since January 2014 (which is as far as the more detailed data goes back) the unallocated gold reserves are declining, as we can see in the next chart.

Unfortunately we do not know what happened prior to 2014.

Note, allocated does not mean the gold is located on own soil, but it does mean the gold is assigned to specific gold holdings, including bar numbers, whether stored on own soil or stored abroad. Unallocated gold relates to gold held without a claim on specified bar numbers; often these unallocated accounts are used for easy trading… The fact the Eurosystem discloses the ratio between its allocated and unallocated gold and, more important, the fact that the portion of allocated gold is far greater and increasing, tells me the Eurosystem is allocating as much gold as they can.

Secondly, another repatriation request was unearthed — this time made by perhaps the least likely source imaginable:

(Koos Jansen): In Europe, so far, Germany has been repatriating gold since 2012 from the US and France, The Netherlands has repatriated 122.5 tonnes a few weeks ago from the US, soon after Marine Le Pen, leader of the Front National party of France, penned an open letter to Christian Noyer, governor of the Bank of France, requesting that the country’s gold holdings be repatriated back to France; and now Belgium is making a move. Who’s next? And why are all these countries seemingly so nervous to get their gold ASAP on own soil?

Funnily enough, the answer to Koos’ rhetorical question about who’s next was answered just a few days later:

(Bloomberg): The Austrian state audit court says central bank should address concentration risk of storing 80% of its gold reserves with the Bank of England, Standard reports, citing draft audit report. Court advises central bank to diversify storage locations, contract partners.

Austrian central bank reviewing gold storage concept, doesn’t rule out relocating some of its gold from London to Austria: Standard cites unidentified central bank officials. Austria has 280 tons gold reserves, according to 2013 annual report. Austrian Audit Court Will Review Nation’s Gold Reserves in U.K.

Say what you want about the gold price languishing below $1200 (or not, as the case may be, after this week), and say what you want about the technical picture or the “6,000-year bubble,” as Citi’s Willem Buiter recently termed it; but know this: gold is an insurance policy — not a trading vehicle — and the time to assess gold is when people have a sudden need for insurance. When that day comes — and believe me, it’s coming — the price will be the very last thing that matters. It will be purely and simply a matter of securing possession — bubble or not — and at any price.

That price will NOT be $1200.

A “run” on the gold “bank” (something I predicted would happen when I wrote about Hugo Chavez’s original repatriation request back in 2011) would undoubtedly lead to one of those Warren Buffett moments when a bunch of people are left standing naked on the shore.

It is also a phenomenon which will begin quietly before suddenly exploding into life.

If you listen very carefully, you can hear something happening…

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

The article Things That Make You Go Hmmm: Signing Off was originally published at mauldineconomics.com.

Things That Make You Go Hmmm: How Could It Happen?

 

“How could it happen, Grandad?”

The old man’s eyes misted over as he looked down at his grandson, who sat at his feet, his young eyes alive with questions as he turned the heavy gold bar over in his hands.

”I’ve told you the story too many times to count,” said the man, half-pleading, but knowing full-well he’d soon be deep into the umpteenth retelling of a story he’d lived through once in reality and a thousand times more through the eager questioning of the young man now tugging at his trouser leg. “Why don’t I tell you the story of how I met your Grandma instead?”

“Because that’s boring.” The reply was borne of the honesty only a ten-year-old could possibly still possess.

“OK, OK,” said the old man, a smile creeping into the corners of his mouth, “you win.”

“It began in early November of 2014, when a man called Alasdair Macleod published a report on how the Chinese had been secretly buying gold for 30 years.

“Most people believed what the Chinese Central Bank had been telling the world — that they owned just 1,054 tonnes. That number, first published in 2009, had remained unchanged for over five years; but there was a group of people who refused to accept that the People’s Bank of China were telling the truth, and those people set about diligently doing their own analysis to try to determine what the real number might be.

“In early November of 2014, Macleod’s report — which went largely unnoticed because most people were busy celebrating new highs in the stock market and the fact that a newly strengthening dollar was forcing down the price of gold — laid out the case for there having been an astounding amount of gold bought by the Chinese over the previous three decades.

“According to Macleod, China saw an opportunity at a crucial time and, with a view on the longer term, they took it.”

Grandad dipped his thumb and forefinger into his vPad, which hovered just above the table, and pinched and cast a paragraph into the air before them. At the same time, they heard the voice of Alasdair Macleod himself read the words aloud:

(Alasdair Macleod): China first delegated the management of gold policy to the People’s Bank by regulations in 1983. This development was central to China’s emergence as a free-market economy following the post-Mao reforms in 1979/82. At that time the west was doing its best to suppress gold to enhance confidence in paper currencies, releasing large quantities of bullion for others to buy. This is why the timing is important: it was an opportunity for China, a one-billion population country in the throes of rapid economic modernisation, to diversify growing trade surpluses from the dollar.

“Macleod explained why what he was about to explain to the world was going to come as something of a surprise to most people.” Grandad dipped his fingers and cast again:

To my knowledge this subject has not been properly addressed by any private-sector analysts, which might explain why it is commonly thought that China’s gold policy is a more recent development, and why even industry specialists show so little understanding of the true position. But in the thirty-one years since China’s gold regulations were enacted, global mine production has increased above-ground stocks from an estimated 92,000 tonnes to 163,000 tonnes today, or by 71,000 tonnes; and while the west was also reducing its stocks in a prolonged bear market all that gold was hoarded somewhere.

“But Grandad, why was the West selling its gold? That’s just stupid!” the young boy interjected, right on cue.

Again the old man smiled. Every time he told the story, his grandson would pepper him with the same questions, with a regularity that brought a familiar rhythm to this very private dance the two of them had performed so many times.

He paused, as he always did, to create just the right amount of dramatic tension before answering.

“I know it seems stupid NOW, but don’t forget, you know what you know. Back then, the people in charge in the West weren’t really all that smart; and, besides, when the Golden Domino finally fell, it became obvious that they had been…” — the old man paused, choosing his words carefully, almost theatrically; but when they came, they were the same carefully chosen words he used every time — “… a little less than honest about a few things.

“Now,” he continued with mock indignation, “if you’ll allow me to get back to the story…”

The boy smiled, and his grandfather pushed on.

“Macleod’s report concentrated on the period between 1983 and 2002, because in 2002 two important things happened: the Chinese people became free to own gold, and the Shanghai Gold Exchange was established. He wrote that the reason they allowed these two events to take place was that they’d already accumulated ‘enough gold’ for what he called ‘strategic and monetary purposes,’ and they were happy to keep adding to their stockpile from their domestic mine production and scrap, rather than buy more in the market…”

The old man held up a hand to head off the question he knew was coming — “I know, I know… you want to know how much the Chinese would have had to accumulate in order to be able to do this, don’t you? Well, Mr. Macleod told us, remember?” He reached once more into vPad space, waggled his fingers a bit, and cast the following:

(Alasdair Macleod) Between 1983 and 2002, mine production, scrap supplies, portfolio sales and central bank leasing absorbed by new Asian and Middle Eastern buyers probably exceeded 75,000 tonnes. It is easy to be blasé about such large amounts, but at today’s prices this is the equivalent of $3 trillion. The Arabs had surplus dollars and Asia was rapidly industrialising. Both camps were not much influenced by Western central bank propaganda aimed at side-lining gold in the new era of floating exchange rates, though Arab enthusiasm will have been diminished somewhat by the severe bear market as the 1980s progressed. The table and chart below summarise the likely distribution of this gold:

SIMPLIFIED GOLD SUPPLY 1983-2002 Tonnes
Official Sales by Central Banks 4,856
Estimated Leasing (Veneroso) 14,000
Mine Production 41,994
Net Western divestment (bullion, jewelry & scrap (est.) 15,000
TOTAL 75,850

 

 

The old man clipped his last sentence short to allow his young audience to make the (quite grown-up, the man thought) point that he always did at this juncture:

“But Grandad, you can’t just say things like ‘probable’ and make assumings like that. We always get told at school that you have to show your workings-out.”

His grandfather let the grammatical error slide — one more time.

“Ah yes, but THAT was the problem, wasn’t it? Everybody wanted proof that numbers like Macleod’s were accurate, but NOBODY wanted proof that the official figures were true, and THAT turned out to be the key lesson that the world learned from this whole sorry debacle.”

“But Grandad, YOU didn’t get hurt, did you?”

The old man looked through the window and out at the snowflakes settling on the tall pines that surrounded the ski field not 40 yards from where he sat, and smiled.

“That’s true,” he said, “but only because I was willing to think for myself and allow for possibilities that most people wouldn’t believe for a moment could actually happen. It wasn’t easy, and it wasn’t fun for many years, believe me. Now, where was I?”

“You were at the part where Mr. Macleod explained where all that gold had gone and…”

“Might have gone,” the man interrupted. “Remember, back then we didn’t know for sure.”

He smiled again and went on with the story.

“Macleod’s work suggested that, while a huge amount of gold had gone flooding into the Middle East during the oil boom of the 1970s (much of it ending up in Switzerland, which, back then at least, was famous around the world as being a safe haven for financial assets), in the mid-’90s, after the gold price had languished for many years, sentiment had changed.”

(Alasdair Macleod): In the 1990s, a new generation of Swiss portfolio managers less committed to gold was advising clients, including those in the Middle East, to sell. At the same time, discouraged by gold’s bear market, a Western-educated generation of Arabs started to diversify into equities, infrastructure spending and other investment media. Gold stocks owned by Arab investors remain a well-kept secret to this day, but probably still represent the largest quantity of vaulted gold, given the scale of petro-dollar surpluses in the 1980s. However, because of the change in the Arabs’ financial culture, from the 1990s onwards the pace of their acquisition waned.

By elimination this leaves China as the only other significant buyer during that era. Given that Arab enthusiasm for gold diminished for over half the 1983-2002 period, the Chinese government being price-insensitive to a Western-generated bear market could have easily accumulated in excess of 20,000 tonnes by the end of 2002.

“Now, I know this is all back-of-the-envelope stuff — assumings, as you call them — but remember, back then, in 2014, none of the other stuff had been exposed.”

“But, Grandad, why were the Chinese buying all that gold? And why did the Westerns let them have it? I mean, it’s worth so much. Why didn’t they just keep it?”

This was always the old man’s favourite part, and he leaned forward in his seat as his enthusiasm for the story returned. With a twinkle in his eyes, he beckoned the boy closer.

“Strategy,” he said, then, after a pause (and with what even he felt was a little more relish than usual) “… and STUPIDITY!

“The Chinese had become very rich during those years, but most of that wealth had come in the form of dollars…”

“What, US dollars?” the boy asked, incredulously. “But why would they ever have wanted lots of those?”

“Because,” the old man chuckled, “there was a time — long before you were born — when everybody wanted US dollars. I know that’s hard to believe NOW, but it was true. If I may…?”

“So-rry Gran-dad,” the boy answered rhythmically and with mock apology.

“Anyway, the Chinese were great students of history and knew that, over thousands of years, what used to be called ‘fiat currency’ had always ended up worthless; and so they planned for the day when that fate would befall the dollar. They began accumulating euros instead of dollars — not because the euro was better but because they didn’t want to own too much of any one currency.”

“Whatever happened to the euro, Grandad?” inquired the boy.

“One story at a time, little fella!” replied the old man. “Now, where was I? Oh yes, then, in the mid-2010s, China began signing all sorts of agreements with other countries, like Iran, Turkey, Russia…”

“And Switzerland!” the boy eagerly interjected.

“… and Switzerland,” his grandfather agreed.

“Those agreements enabled them to swap goods and services for currencies other than the US dollar — all so they could eventually break their ties to what they saw as a doomed currency. And all the while, quietly, in the background, they were swapping as much of that paper money as they could for…?”

“GOLD!!!” Right on cue the boy blurted out the answer, raising both hands in triumph.

“Gold,” the old man said, softly. “Remember what Mr. Macleod wrote?” He cast it up:

(Alasdair Macleod): Following Russia’s recovery from its 1998 financial crisis, China set about developing an Asian trading bloc in partnership with Russia as an eventual replacement for Western export markets, and in 2001 the Shanghai Cooperation Organisation was born. In the following year, her gold policy also changed radically, when Chinese citizens were allowed for the first time to buy gold and the Shanghai Gold Exchange was set up to satisfy anticipated demand.

The fact that China permitted its citizens to buy physical gold suggests that it had already acquired a satisfactory holding.

Since 2002, it will have continued to add to gold through mine and scrap supplies, which is confirmed by the apparent absence of Chinese-refined 1 kilo bars in the global vaulting system. Furthermore China takes in gold doré from Asian and African mines, which it also refines and probably adds to government stockpiles.

Since 2002, the Chinese state has almost certainly acquired by these means a further 5,000 tonnes or more. Allowing the public to buy gold, as well as satisfying the public’s desire for owning it, also reduces the need for currency intervention to stop the renminbi rising. Therefore the Chinese state has probably accumulated between 20,000 and 30,000 tonnes since 1983, and has no need to acquire any more through market purchases, given her own refineries are supplying over 500 tonnes per annum.

“A man called Simon Hunt, who had extremely good connections in China and, more importantly perhaps, a willingness to entertain possibilities most people couldn’t, told a fascinating story once about a visit paid by a friend of his to an army base in China…”

(Simon Hunt, Nov 14, 2014): China is in the process of making the RMB acceptable as an international currency. It wants its trading partners and others to see the RMB as a stable currency that does not play the game of devaluation when difficulties arise. It is the long-game in which Beijing hopes that their currency not only becomes acceptable in financing trade but that central banks can feel secure in adding the RMB to their reserves, as some are now doing.

As we have discussed in earlier reports, China, not just the PBOC, holds far more gold than the market has been assuming, probably in the region of 30,000 tonnes, compared with the USA holding very little of its reported 8,300 tonnes.

Whilst in Japan we were told an interesting if not amusing story that supports this contention. A friend of ours has several factories in China and thus knows many senior people in different disciplines, one of which is a senior PLA officer. He was invited down to their HQ for drinks. After a few hours, his friend suggested they take a walk around the compound ending up at the entrance of a large warehouse. The door was opened and to my friend’s astonishment the warehouse was stacked from floor to ceiling with gold bars.

One day, when the timing suits Beijing best, the PBOC will link the RMB to gold. The West may dislike gold, or at least some of their central banks [do], preferring to operate with fiat currencies, but Eastern governments have a history of seeing gold as a store of value.

“NOW, of course, it seems that what Simon said should have been completely obvious; but all the way back in 2014, believe it or not, the idea that the Chinese would peg their currency to gold was something that most people here in the West just couldn’t even comprehend. I can’t even begin to tell you the number of times I talked to people about this stuff. For years it was obvious how things would end, but only a small group of people listened. Mostly, people just laughed and told me I was a fool. They said I should be buying shares and that a return to ANY kind of gold standard was a ridiculous idea. Do you know what I did?”

“Bought more gold?” The boy phrased it like a question even though he knew the answer. He just liked to let his grandfather have his moment.

“Bought more gold,” the old man said matter of factly. He threw up a chart they both knew well:

“But, but, you’ve jumped ahead, Grandad! The part where the Chinese link their currency to gold isn’t for ages yet. You skipped the bit about the Swiss gold! AND you left out the best part — the missing gold?”

“Sheesh!” the old man said in mock exasperation, “I’m coming to that part now! You are one impatient little fella, aren’t you?”

“But this is the best bit!” the boy replied excitedly.

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: Hato No Naka No Neko

 

Last week, appropriately enough on Halloween, the Bank of Japan did something truly scary.

As shocks go, this one — though it had been fairly well-telegraphed to the markets that something wicked this way might be coming — was in a league of its own.

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I’m sure that by now you’re well aware of what Kuroda-san (the Governor of the Bank of Japan) announced to the world; but in case you’re not, here’s a little recap:

(Japan Times): The bank will “enter a new phase of monetary easing in terms of quantity and quality,” Kuroda said…. “This is coming from a different level in both quality and quantity,” Kuroda told reporters after the two-day Policy Board meeting. “We have put forward everything there is to do at this point,” he said….

The former chief of the Asian Development Bank said the BOJ will aim to expand the amount of outstanding JGBs by hiking purchases to an annual pace of ¥50 trillion.

Increasing the amount outstanding of the bank’s JGBs at an annual pace of ¥50 trillion will bring the current balance of ¥89 trillion to about … ¥190 trillion by the end of 2014.

It also will target longer-term debt, including JGBs with maturities as long as 40 years, as well as ETFs and real estate investment trusts, it said….

Kuroda said he’d allow this monetary experiment to run until the inflation target is met.

He also said the main target of the BOJ’s operations would switch from the uncollateralized overnight call rate to the monetary base, which will be fattened via money market operations to the tune of about ¥60 trillion to ¥70 trillion a year.

Kuroda also pledged that the BoJ:

Will invest ¥1 trillion in exchange-traded funds and ¥30 billion in real-estate investment trusts annually.

Vows to continue quantitative and qualitative monetary easing until 2 percent inflation is achieved in a stable manner.

Will conduct monetary market operations so Japan’s monetary base expands at an annual pace of about ¥60 trillion to ¥70 trillion per year. The monetary base is cash in circulation and the balance of current-account deposits held by financial institutions at the BOJ.

Shocking? Unprecedented? Foolhardy?

All of the above… except…

That was the announcement Kuroda made in April of 2013 as the first of Abenomics’ Three Arrows was fired.

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Last week, barely 19 months after the world digested the news that Japan was going all-in, Kuroda pointed over the shoulders of all the other players at the table, said “Look! Behind you! An Austrian economist!” And in the ensuing panic, he slipped a bunch of freshly minted chips from a secret pocket in his jacket onto the table and, once calm had returned, went all-in again.

This time, apparently, he was serious.

The Bank of Japan, said Kuroda, would first be increasing its purchases of JGBs to ¥80 trillion a year from the previous range of ¥60-70 trillion.

What does this mean in real(ish) money? Well that’s about $720 billion. Sounds OK, right? After all, TARP was $787 billion, and that hasn’t done any damage whatsoever, has it?

However, there’s this age-old problem with comparing apples to oranges; and so, once we get our citrus fruits straight and convert the BOJ’s stimulus to a number proportionate to the larger economy of the USA, we find ourselves staring at the equivalent of the BoJ’s splashing out almost $3 trillion. Each year.

JP Morgan swiftly pointed out that this means the BoJ will be buying more than double the amount of new JGBs issued by the government.

Yes. You read that right. Double the total new government issuance. The Fed are lightweights compared to this mob.

We’ll get back to why they’re doing this a little later.

But this is just the beginning.

The BoJ will also triple its purchases of ETFs and J-REITs (yes, direct intervention by a Central Bank into the stock market is now not something to be afraid of, but rather embraced) which will make the BoJ the largest buyer of Japanese equities.

Do you smell anything wrong with this, Dear Reader?

Well, by way of a change, a few mainstream commentators are also beginning to question the logic of Kuroda-san’s latest incursion into monetary madness:

(Gavyn Davies, FT): [The BoJ’s] gigantic increase in QE activities… [is] …of first order global importance… ensuring that the total central bank injection of liquidity into the global economy in 2015 will be much larger than it has been in the last year….

The Japanese injection… relative to the size of the economy, is far larger than anything attempted by the other central banks.

[Japan is now conducting] a laboratory experiment… [and] Governor Kuroda’s monetary experiment has in effect morphed into a strategy of devaluation plus financial repression.

But Davies isn’t alone in highlighting the sheer madness of Kuroda’s latest move:

(Richard Katz, The Oriental Economist): In the face of growing loss of faith in the Bank of Japan’s ability to either achieve its 2% inflation target in the foreseeable future or to help boost real growth, Kuroda has doubled down his strategy of lots of confident talk and even more money-creation…. (I)t is well known that Prime Minister Shinzo Abe, who keeps a stock monitor in his offices, sees rising stock prices as critical to voter confidence in Abenomics and hence his own approval ratings…. Moves to lower the yen and raise stock prices are key to the BoJ’s own strategy and tactics; Kuroda is an Abe ally, not a puppet.

However, leave it to David Stockman — one of the shoutiest sane people you’ll ever come across — to dispense with journalistic niceties.

In a piece entitled The BOJ Jumps the Monetary Shark — Now the Machines, Madmen and Morons Are Raging, Stockman takes Kuroda and the BoJ to task as only he can:

This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters — Messrs. Morimoto, Ishida, Sato and Kiuchi — are only semi-mad.

Never mind that the BOJ … balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.

In fact, this was just the beginning of a Ponzi scheme so vast that in a matter of seconds it ignited the Japanese stock averages by 5%. And here’s the reason: Japan Inc. is fixing to inject a massive bid into the stock market based on a monumental emission of central bank credit created out of thin air. So doing, it has generated the greatest frontrunning frenzy ever recorded.

The scheme is so insane that the surge of markets around the world in response to the BOJ’s announcement is proof positive that the mother of all central bank bubbles now envelopes the entire globe.

The “surge of markets” to which Stockman refers illustrates the madness that has consumed both equity and bond markets in the wake of the 2008 ceding of custody of formerly free markets to the world’s central banks.

These are the two charts that people care about when discussing the Bank of Japan’s moves.

Firstly, the Nikkei 225:

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As you can see, stocks have exploded in Japan since the beginning of Abenomics, rising 41.6% in just 19 months — but it wasn’t a straight line. Initially, after a 30% surge, the doubts set in and the Nikkei retraced most of its gains before beginning a long grind higher as investors reluctantly bought into the idea that Abenomics might just work raise the Nikkei 225.

Taking a step back, we get to see just how poorly stocks have behaved since the bursting of the twin Japanese bubbles in real estate and equities back in the late 1980s, as well as the clear breakout, retest, and break higher from the 25-year downward trendline:

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The second chart that folks care about in the wake of the BoJ’s moves is this one, the yen:

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Again, as you can clearly see, QE10 and now QE11 jumpstarted the yen. (Are you paying attention, Janet? Do you think for a second that when the BoJ announced QE1, it was as the first installment of a cunning 11-part plan to be implemented over a couple of decades?)

However, jumpstarted tends to imply a positive effect, as does a chart that travels from bottom-left to top-right. In the chart above, I have inverted the yen to better reflect the damage being done to it by the BoJ rather than the kinda-cool-looking chart where it explodes “higher.”

Of course, thanks to the wisdom of guys like Kyle Bass (whose Rational Investor Paradox warned of a plummeting yen and a skyrocketing Nikkei) and Dylan Grice (whose 63,000,000 call for the Nikkei by 2025 is occasioning fewer chuckles by the day), everybody is riding both these horses — hard. However, the fact that everybody got “long the Nikkei” and everybody got “short the yen” when Abenomics’ first arrow was fired is the wrong reason to be cheering Kuroda’s interference in the natural forces that used to drive markets.

Now, “long the Nikkei and short the yen” is undoubtedly a great trade and has much further to go — something my friend Jared Dillian pointed out in his excellent Daily Dirtnap recently. Pointedly, the piece was entitled “Unlimited Upside”:

(The Daily Dirtnap): I am starting to wonder if nobody understands why this trade works and why it will continue to work, and why, in November 2012, I called it “THE GREATEST TRADE EVER.” The reason it is the greatest trade ever is because you literally have unlimited upside. JPY can infinitely weaken. The stock market can go infinitely high….

So USDJPY is going to get to 120 in a hurry, then what? You’ve seen the chart. If it gets through that trendline, the sky is the limit. Where could the Nikkei go? Beats the heck out of me. But that is the great and interesting thing about this trade, is that if Japan really does find itself in trouble, they can’t default — well, I suppose they could, and that actually would be the smart thing to do, but no, they will print their way out.

No arguments from me there, Jared, BUT… the charts that people need to be looking at to try to understand the dire state Japan is in (as well as the ultimate futility of the Keynesian free lunch) are charts of things that can’t be directly influenced by the BoJ but which are instead supposed to be indirect beneficiaries of Abenomics and to generate the organic growth needed to revive Japan’s moribund economy.

Charts like… oh, I dunno, Japanese industrial production:

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Orrrr… perhaps that relatively unimportant macroeconomic datapoint, GDP:

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Then there are the places my friend Paul Mylchreest of ADM ISI looked at this week in an excellent piece that landed in my inbox — places like real Japanese household incomes:

(Paul Mylchreest): You only know with hindsight, but there’s a good chance that Japan’s economy has just moved into the terminal ward of mismanagement and decline.

Kuroda went nuclear just as Mr and Mrs Watonabe… never mind the rest of the world… had begun to realise that “Abenomics” wasn’t working.

Real household incomes in Japan are running 6.0% lower year-on-year, which is close to the worst they’ve been in a decade… and most of the bad data points have followed the implementation of Abenomics.

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And then of course there are the twin charts from my presentation at the Strategic Investment Conference back in May: Japan’s trade balance and current account (updated here to show the improvement in the data):

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In his most recent Global Macro Investor, my friend and colleague Raoul Pal pointed out a couple more problems with the Japanese economy that no amount of prestidigitation can hope to cure, beginning with the reaction to Abe’s recent sales tax hike and moving swiftly along to exports (ordinarily the natural beneficiary of a plummeting currency for an exporter like Japan):

(Global Macro Investor): Japan’s economy has reacted as it always has with regards to the tax hike — it got flushed down the toilet…. It puts to rest any stupid notions that you can falsely raise inflation and see it stick. It also shows that QE does not help the economy in any way.

We can also see that massive Japanese QE has not helped its industrial production base…. And exports are just not picking up with a cheaper currency…. And even after a massive currency move versus the RMB, it is still not able to export its way out of trouble… demand is just not there, regardless of price….

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Ahem!

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So the simple truth is this:

Japan’s only solution to its crippling debt burden and seemingly unbreakable deflationary spiral is to weaken its currency.

Period.

Yes, there is plenty of talk of reform, though given Japan’s corporate culture that is far harder to achieve and much farther in the distance than most outside observers could possibly imagine; but were the narrative presented to the world simply as “we are going to destroy our currency,” even the market monkeys who continue to see no evil would be forced to take drastic action.

By maintaining the pretense that weakening the yen is actually part of a broader strategy which will ultimately be successful, the Bank of Japan is engaged in simply that: pretense.

Now don’t get me wrong: I’m not saying the necessary reforms CAN’T be achieved in Japan — just that theywon’t. Not in time to save the country from disaster at the hands of Abe, Kuroda, and the rest of the Crazy Gang, anyway.

Those stagnant exports are a huge, flashing-red warning sign in the face of what can only be described as a resounding success in beginning the complete destruction of weakening the yen.

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: This Little Piggy Bent The Market

 

About 18 months ago, I had a very pleasant chat with a gentleman by the name of Luzi Stamm.

You may detect some measure of surprise in my words, and the reason for that is quite simple: Luzi Stamm is a politician; and, as regular readers will know, I am no fan of that particular class.

But Herr Stamm was different.

An MP representing the Swiss People’s Party, Stamm was spearheading a federal popular initiative which needed 100,000 signatures in order to comply with the Swiss parliamentary system’s rigid framework regarding referendums. (OK all you “referenda” people out there, I know, OK? But I’m going with “referendums,” so pipe down).

That initiative was one of three being pursued: firstly, a motion to limit immigration into Switzerland to 0.2% per year; secondly, a drive to abolish the flat tax system and for resident, nonworking foreigners to be taxed based instead on their income and their assets; and thirdly, Stamm’s initiative… Well, we’ll get to that shortly; but before we do, we need to understand a little about how Swiss democracy works.

(Wikipedia): Switzerland’s voting system is unique among modern democratic nations in that Switzerland practices direct democracy (also called semi-direct democracy), in which any citizen may challenge any law approved by the parliament or, at any time, propose a modification of the federal Constitution. In addition, in most cantons all votes are cast using paper ballots that are manually counted. At the federal level, voting can be organised for:

Elections (election of the Federal Assembly)

Mandatory referendums (votation on a modification of the constitution made by the Federal Assembly)

Optional referendums (referendum on a law accepted by the Federal Assembly and that collected 50,000 signatures of opponents)

Federal popular initiatives (votation on a modification of the constitution made by citizens and that collected 100,000 signatures of supporters)

Approximately four times a year, voting occurs over various issues; these include both referendums, where policies are directly voted on by people, and elections, where the populace votes for officials. Federal, cantonal and municipal issues are polled simultaneously, and the majority of people cast their votes by mail. Between January 1995 and June 2005, Swiss citizens voted 31 times, to answer 103 questions (during the same period, French citizens participated in only two referendums)

In Swiss law, any popular initiative which achieves the milestone of 100,000 signatures MUST be put to the citizens of the country as a referendum, and in a country of just 8,061,516 people (according to the July 2014 count — never let it be said that the Swiss aren’t precise), that’s a pretty big ask; but the Swiss do love their votes — so much so that, since 1798, there has been a seemingly never-ending procession of issues which the Swiss people have been entrusted by their leaders to decide: 

In 2014 alone there have already been three referendums concerning such diverse issues as the minimum wage, abortion, and the financing and development of railway infrastructure. (For those of you just dying to know the outcomes, the abortion referendum, which would have dropped abortion coverage from public health insurance, failed by a large margin, with about 70% of participating voters rejecting the proposal. The railway financing was approved by 62% of the voters, and the motion that would have given Switzerland the highest minimum wage in the world — 22 francs ($23.29) an hour — was soundly defeated, with 76% of the voters saying “nein.”)

One wonders what the outcome would be of a similar motion to hike the minimum wage to such lofty heights in the US. Or in Great Britain.

The bottom line? The Swiss just think (and, importantly, vote) differently.

But back to Luzi Stamm and the SPP initiative.

Immigration and taxes aren’t uppermost in Stamm’s mind. What he IS concerned about is gold.

When we spoke on the telephone last year, Stamm explained to me that he hadn’t really properly understood the part gold played in the Swiss monetary equation until he’d had it explained to him by a friend more versed in finance (Stamm is a lawyer by background but with an economics degree from the University of Zurich); but once he understood how it all worked, Stamm realized that the changes to Swiss monetary prudence which had occurred in just a few short years were (a) potentially disastrous for the country and (b) not remotely understood by his countrymen (and women).

So Stamm decided he ought to do something about it.

The Swiss had accumulated a significant gold reserve the old-fashioned way — through seemingly constant current account surpluses — over many decades, but in May 1992 they finally joined the IMF.

Once THAT little genie was unleashed, things began to change.

In November of 1996, the Swiss Federal Council issued a draft for a new Federal Constitution, and contained within that draft was an amended position on monetary policy (article 89, in case you’re wondering) which severed the Swiss franc’s link to gold and reaffirmed the SNB’s constitutional independence:

Money and currency are a federal matter. The Confederation shall have the exclusive right to coin money and issue banknotes.

As an independent central bank, the Swiss National Bank shall follow a monetary policy which serves the general interest of the country; it shall be administered with the cooperation and under the supervision of the Confederation.

The Swiss National Bank shall create sufficient monetary reserves from its profits.

At least two-thirds of the net profits of the Swiss National Bank shall be credited to the Cantons.

Spiffy.

In April 1999, the revision of the Federal Constitution was approved (how else than through a referendum?), and it came into effect on January 1, 2000.

Oh… sorry… I almost forgot to mention that in September 1999 — after the revision had been adopted but before it had been officially enacted — the SNB became one of the signatories to the Washington Agreement on Gold Sales, meaning that all that lovely Swiss gold which had been sitting there, steadily accumulating and making the Swiss franc one of the last remaining “hard” currencies on the planet, was eligible to be sold.

A single line in the Swiss National Bank’s own history of monetary policy identifies the beginning of the demise of one of the world’s great currencies:

On 2 May, the SNB begins selling gold holdings no longer required for monetary policy purposes.

And there you have it. “No longer required for monetary policy purposes.”

That’s what happens when you finally embrace the beauty of fiat. Not only do you get to sell gold, you get to call the proceeds of those sales “profits.”

The absurdity borders on breathtaking.

At the beginning of 2000, the Swiss National Bank (SNB) held roughly 2,600 tonnes of gold in its reserves. That equated to approximately 8% of total global central bank gold reserves. After the revised constitution became law, the Washington Agreement took over and… Bingo!:

Swiss gold reserves were plundered gently sold in line with the Washington Agreement, and the “profits” (the language used by the SNB themselves) were distributed amongst the Swiss cantons; so everybody in a position to raise questions ended up getting a nice, fat slug of “profit” to keep them quiet help their Canton pay the bills.

Now, does anyone notice anything particular about the period when the Swiss gold sales were at their highest? Yessss… that’s right (as with the UK’s sales), the bulk of Swiss sales were made at the lows in the gold price (between $300 and $500 per ounce — blue shaded area).

To look at it another way, the Swiss National Bank went from being one of the soundest central banking institutions on Earth to just another in the morass of apologist financial institutions that lost sight of their mandates while grasping for a Keynesian free lunch, egged on by a new breed of politicians who knew nothing of the principles of sound money or, if they did, were happy to put them to the back of their minds as they extended their hands.

Sadly, as went the soundness of the SNB, so went the soundness of the Swiss franc itself.

As you can see from the chart above, the SNB has, over the last two decades, oustripped its nearest rival in gold sales by a factor of three.

Adding to the fun and games was the decision in September 2011, at the height of the euro crisis, to peg the Swiss franc to the euro (something that obviously couldn’t have been done prior to breaking the gold peg) in order to stop it appreciating.

How? Why through literally unlimited printing of Swiss francs to stop the exchange rate breaking 1.20.

At the time, the SNB was unequivocal:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development. The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc.

All this talk of “massive overvaluation of the Swiss franc” is utter bollocks a little disingenuous. (“Surely not!” I hear you cry.)

Between 1970 and 2008, the strength of the Swiss franc was legendary. During that time, it appreciated by 330% against the US dollar and by 57% versus the Deutsche mark/euro. Consequently, a strong currency went hand-in-hand with a strong economy. How awful.

The problem was NOT in the OVERvaluation of the Swiss franc, as the SNB would have you believe, but rather in the UNDERvaluation of the competition; and the only thing the SNB could do was to join in the great devaluation race.

That move weakened the currency by about 9% in 15 minutes, and the immediate effect on the SNB’s balance sheet was obvious:

 

(Mitsui Global Precious Metals): As late as the end of 2009, the SNB held 38.1 billion CHF in gold out of total reserves of 207.3 billion CHF, with gold representing a touch over 18 per cent of all its reserves. At the end of July 2014, it owned 39.1 billion Swiss Francs in gold (or 1,040 tonnes) from total reserves of 517.3 billion CHF, meaning that roughly 7.6 per cent of its assets were in the form of the yellow metal.

 

Note that the rise in value of Swiss gold by CHF 1 billion wasn’t enough to counter the destructive nature of overt and unchecked money printing.

Like the Fed, the BoJ, and the BoE before them, the SNB became, at a stroke, another previously sound institution that unhesitatingly ripped its balance sheet to shreds:

Since 2009, the SNB has quintupled its balance sheet, making it (on a relative basis) the most prolific of the central bank printing machines. Not bad for the world’s 96th-largest nation.

Since the EUR peg was instituted just three years ago, the SNB’s balance sheet has more than doubled.

So, with the Swiss franc’s soundness under attack from within its own borders, Luzi Stamm decided to try to use the Swiss love for referendums and the rigidity of the Swiss political process to try to reinstate the Swiss franc as a sound currency.

To that end, Stamm proposed the Swiss Gold Initiative (“Save Our Swiss Gold”).

Funnily enough, the proposal was rejected by lawmakers, but Stamm gathered three like-minded MPs and, more importantly, enough signatures on his petition (100,000) to ensure that a referendum on the proposal would take place; and that vote will happen on November 30th — six weeks from now.

Stamm pulled off a masterstroke in securing the involvement in the Swiss Gold Initiative of Egon von Greyerz who, along with being one of the most highly respected figures in the gold industry, happens to be one of the world’s nicest human beings.

We’ll get to Egon’s involvement shortly, but first let’s take a look at the motions that make up the Swiss Gold Initiative, which are threefold:

1. The gold of the Swiss National Bank must be stored physically in Switzerland.
2. The Swiss National Bank does not have the right to sell its gold reserves.
3. The Swiss National Bank must hold at least 20% of its total assets in gold.

(NB. Before we get to the part of this story where the SNB tell us how big a nightmare it would be to force them to hold 20% of their reserves in gold (come on, you KNEW that was coming), I’d point you back to the chart on page 8. Remember? The one that showed the Swiss held 18% of their reserves in gold just five short years ago?)

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: The Consequences of the Economic Peace

 

This week’s TTMYGH is going to be a little different.

After several weeks on the road and staring down a couple more, I am going to make an attempt to turn the presentation I have been delivering into written form, after many requests for a version that people can look at in the comfort of their own homes (and, presumably, without my annoying voice clouding the issue).

I’m hoping I can turn a very visual and fluid presentation into a more static one; but I’m sure that if I fail miserably, you’ll let me know.

This will make for a chart-heavy and consequently much longer piece than usual (though lighter on additional articles in the interest of saving your time and space this week), but let’s see if we can’t make this work.

The presentation, entitled “The Consequences of the Economic Peace,” is a look at the ramifications of several decades of easy credit and an attempt to draw parallels with a time in history when the world looked remarkably similar to how it does now.

That last time didn’t end so well, I’m afraid.

So… without further ado, here we go.

The Consequences of the Economic Peace

                                                       Cover%20Slide.psd

The 19th century was a time of upheaval right across the world.

There were no fewer than 321 major conflicts in a century which encompassed, among others, the Napoleonic Wars, the Crimean War, the US Civil War, the Boxer Rebellion, the Opium Wars, and the Boer War.

That single century saw no fewer than 52 major conflicts in Europe alone.

Britain, as the world’s preeminent superpower, was involved in an astounding 73 conflicts in that single 100-year span. In addition, France fought 50 wars and Spain fought in 44.

How crazy was Europe in the 19th century?

Well, Britain and France fought on the same side in six major conflicts; the Spanish and the French sided together on nine occasions; and Britain and Spain found themselves in alliance in seven different wars.

HOWEVER…

Britain and France fought each other in no less than eight separate wars between 1803 and 1900; and in 1815 alone Spain and France fought each other on four occasions, while the British and Spaniards were on opposing sides six times during the century.

And people wonder why the EU is such a tricky proposition…

The serious point to be made, though, is that once it comes to war, former alliances count for nothing.

Anyway, as the 19th century made way for the 20th, Jan Bloch, a Polish banker, wrote a book entitled Is War Now Impossible?, in which he predicted that the lightning wars of the past — where cavalry ranks and infantrymen faced each other in hand-to-hand combat, deciding victory and defeat in short, brutal fashion — were to be replaced by drawn-out, grinding trench warfare.

“Everybody will be entrenched in the next war. It will be a great war of entrenchments. The spade will be as indispensable to a soldier as his rifle.”

— Jan Bloch, Is War Now Impossible?

Cheerful soul, was old Jan.

But, despite Bloch’s dire predictions, the first decade of the 20th century was blissfully peaceful, with no conflicts between European powers anywhere on the continent.

By the time 1910 rolled around, however, political tensions were rising across Europe.

The Franco-Prussian war that had so inspired Bloch had led to the creation of a German Empire and the ascension of Wilhelm II to the German throne in place of arch diplomat Otto von Bismarck. It had also made the country more bellicose.

Russia, meanwhile, had lost most of its Baltic and Pacific fleets in the Russo-Japanese War of 1905, and that defeat had led to revolution. Defeat in the Far East forced the country to turn its attentions westward towards the Balkans — a region it eyed lasciviously — as did its old rival Austria-Hungary.

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Meanwhile, in 1907, Britain and France had signed the Entente Cordiale, which finally put to bed a thousand years of almost continual conflict between the two countries (or at the very least reduced the “warfare” between the two to bouts of French impoliteness countered by silent indignance with some heavy tutting on the part of the British).

In 1908, Austria-Hungary had annexed Bosnia & Herzegovina; and in 1912 Serbia, Greece, Montenegro, and Bulgaria formed the Balkan League to challenge the Ottoman Empire.

After some classic in-fighting when Bulgaria turned on its allies (only to be defeated inside a month), the Balkan League emerged victorious — a victory that disturbed Austria-Hungary, who feared nothing more than a strong Serbia on her southern border.

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So here’s where Europe stood in 1914:

Great Britain, her power receding, was struggling to play the role of the world’s policeman; Germany, newly industrialised and ruled by a nationalistic leader, was puffing her chest out to the rest of the continent; and good old France was in steady decline and (no doubt painfully) reliant upon her old foe Britain for support.

And yet, despite such geopolitical turmoil everywhere, the man in the street was remarkably sanguine about the state of the world:

The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper.

— John Maynard Keynes, The Economic Consequences of the Peace

Those words were written by none other than everybody’s favourite economist, John Maynard Keynes, in his book The Economic Consequences of the Peace, a publication which made him a household name all around the world.

It’s a sad indictment of today’s society that the only way for a modern-day economist to achieve Keynes’ level of fame would be to become a serial killer or marry a Kardashian.

But I digress… let’s get back to Europe in 1914. Despite the numerous mounting problems, as Keynes had pointed out, everyday life went on as usual — and the men and women of Europe in general and the UK in particular assumed that nothing untoward would happen.

Europe’s leaders would make sure everything got sorted out.

Sound familiar?

Then, on the 28th of June, 1914, amidst all the known knowns, a young man called Gavrilo Princip stepped up to a passing car in Sarajevo and with a single shot became a Black Swan that changed the course of history when he assassinated Archduke Franz Ferdinand of Austria.

I won’t go into the details of WWI at this stage; but in case you don’t know about it, I’m told there have been several books written on the subject (Barbara Tuchman’s The Guns of Augustbeing my own personal favourite). Anyway, after four years of warfare that tore the world apart like never before, a peace was finally reached.

But it was a peace which one man in particular vociferously condemned — and that man was John Maynard Keynes.

Keynes had left Cambridge University to work at the Treasury in 1915, and he had been hand-picked to attend the Versailles Conference as an advisor to the British Government. He was staunchly against reparations of any kind and advocated the forgiveness of war debts (yeah, I know… go figure); but as it turned out, his advice to focus on economic recovery was disregarded; and Keynes resigned his position, returned to Cambridge, and set about scribbling furiously in his notebooks.

In just two months, Keynes wrote the book that would make him a household name around the world — The Economic Consequences of the Peace.

In the book, Keynes was highly critical of the deal struck at Versailles, which he felt sure would lead to further conflict in Europe — describing the agreement as a “Carthaginian peace” — and with the passing of a surprisingly short period of time, he would be proven correct.

 

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: Myanmar Shadow

 

Before we kick things off this week, I want to give you a quick update on Real Vision Television in response to a ton of emails I have received on the subject.

(If you missed my recent piece on Real Vision (Vision Quest, TTMYGH, July 7, 2014) you can read it by clicking on the link.)

Real Vision will launch on September 8th, and if you have already signed up and registered your interest, you will soon be receiving an invitation to become one of our Founder Members. The opening will be staggered to ensure that the site is robust, so don’t panic if you aren’t among the first to receive your invite. We will be rolling the red carpet out as fast as we can whilst ensuring that the heavy traffic doesn’t crash the website.

So far, we have been overwhelmed with the level of interest — not only that which we have received from potential subscribers but, equally importantly, the interest and support we have been shown from within the financial industry itself.

The sheer quality of the people who have come forward and are eager to contribute has been nothing short of phenomenal, and their contributions have already translated into some incredible content. Not only that, but we have a schedule of upcoming interviews and presentations that we feel will really demonstrate the power of our simple idea: giving smart people an unfiltered platform in order to bring truth back to finance.

If you haven’t signed up to register your interest in Real Vision, it’s not too late to do so, but the window is closing fast. Click HERE to express your interest (you’ll find a box at the bottom of the page, which you click to register).

(By registering, you are not undertaking any obligation whatsoever — merely giving yourself a free option on becoming one of our prestigious Founder Members.)

I hope that I see your name on the Real Vision list soon and that you’ll be joining our revolution in the way financial insight is presented, shared, and discussed.

Grant

And now, back to our regularly scheduled programming…

I have something different for you this week, folks.

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Some time ago I wrote a piece on Myanmar, in response to which I received a landslide of emails during the weeks after its publication. At the time, I promised to write further about this amazing country; but, as is so often the case, time has intervened and taken me in ever-different directions.

However, this week a chance meeting with an old friend during a truly epic Singapore rainstorm brought Myanmar firmly back to the front of my mind; and so, after a long overdue catch-up with that friend, I find myself once again marveling at what is happening in the country that represents perhaps the last true frontier market in Asia.

In my original piece I laid out a little of the history of Myanmar; and so it may make sense to refresh old memories and enlighten the many new readers amongst you with an excerpt from the earlier piece, which will lay the foundation for some truly eye-popping statistics from a place which offers golden opportunities for investment over the medium to long term:

(Things That Make You Go Hmmm… August 2012): The names of such places as Rangoon, Mandalay, and Irrawaddy evoke memories of a bygone era when the once-mighty British Empire included many far-flung outposts that inspired not only adventure but poetry.

One such outpost was Burma, a country of tremendous strategic importance that was conquered by the British after a series of Anglo-Burmese Wars between 1824 and 1885.

With the fall of Mandalay in 1886, Burma’s last monarch, King Thibaw Min, abdicated, setting the stage for a little under 60 years of British rule, during which time the city of Rangoon was anointed the country’s capital and grew into an thriving port along the trade routes between Calcutta and Singapore.

Many of those years were fraught with unrest as cultures clashed and seemingly insignificant differences, such as the refusal of the British to break with their own tradition and remove their shoes when entering pagodas, were enough to cause severe rioting and the loss of many lives; but the quid pro quo was that Burma became the most-developed and wealthiest country in Southeast Asia under British colonial rule.

In April 1937, Burma became a separately administered colony of Great Britain and Ba Maw was installed as the country’s first prime minister. Amazingly enough, Ba was a very outspoken opponent of British rule in Burma (begging the question of how that little fact escaped those in Britain conducting the vetting process); and, after strongly opposing Burmese participation in WWII, he resigned from the legislative assembly in 1940 and was arrested for sedition.

It was at this time that an exiled Burmese activist with a family pedigree of resistance (his great uncle had fought against the British annexation of Burma in 1886) named Aung San formed the Burma Independence Army from his base (located, curiously enough, in Japan), and these displaced Burmese took up arms against the Allies.

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Burma would be decimated by WWII as it became a major battleground due to its geographical significance and the richness of its resources. Though many Burmese initially fought on the side of the invading Japanese army, the vast majority switched allegiance by 1945; and it was in the aftermath of the war that Aung San negotiated the Panglong Agreement, which guaranteed the country’s independence and firmly established him as the father of modern Burma.

Aung San was tragically assassinated by political rivals six months before his dream of an independent Burma was finally realised; but despite this setback, on January 4, 1948, Burma finally became an independent republic with Sao Shwe Thaik as its first president and U Nu as its first prime minister.

The next 14 years were relatively stable and reasonably peaceful after the turmoil that had gone before. It was during this time that Burma’s U Thant became Secretary General of the United Nations (a position he would hold for ten years), taking with him to New York a young woman named Aung San Suu Kyi, daughter of Aung San, as an administrative assistant. This young woman was later to win the Nobel Peace Prize in 1991 and play an enormous role in shaping the country — but that is a story half-written, to which we shall return shortly.

In March of 1962, however, darkness descended upon Burma when a military coup d’état, led by General Ne Win, overthrew the government, plunging the country into decades of violent misrule by an oppressive junta. In 1974, a new constitution of the Socialist Republic of the Union of Burma was adopted, which instituted a one-party socialist system. The good news? It led to the resignation of the military rulers. The bad news? They continued to rule anyway, through the Burma Socialist Programme Party (BSPP), and virtually destroyed the country, turning it into one of the most impoverished nations in the world through their rule based on the toxic combination of Soviet-style central planning and superstitious beliefs. I know, I know… how could a system that combined two such brilliant ideas possibly go wrong?

Periodic protests during this period were swiftly and brutally suppressed; but on the 8th of August, 1988 (in perhaps something of a harbinger for those currently attempting to “fix” Europe — pay attention mesdames et messieurs), a bizarre piece of economic mismanagement was undertaken by Ne Win that would finally lead to his downfall and the installation of a new military regime. He abruptly and foolishly decided to demonetize large-denomination kyat bills — a move that instantly affected Burma’s middle class, turning many of them into paupers overnight and sparking what became known as the “8888 Uprising” (8th of the 8th ‘88). The bloody protests that sprang up across the country were eventually quelled after yet another military coup in September by the State Law and Order Restoration Council (SLORC), which imposed even more draconian conditions upon the poor citizens of Burma than those they had endured under Ne Win.

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But amidst the turmoil it was the formation, in September 1988, of the National League for Democracy (NLD) under the leadership of that young lady who had left her home for New York a decade earlier, Aung San Suu Kyi, that was to mark this period of upheaval as a crucial turning point for Burma, as it turned away from socialism and inched towards a more democratic structure. Inched being very much the operative word.

The following year, the SLORC officially changed the country’s English name to The Union of Myanmar; and, in a move that would make them the laughing stock of repressive regimes everywhere, they promised that in 1990 they would hold free elections for the first time in 30 years.

Now, call me old-fashioned, but if I’m handicapping a free election between a brutal military junta and a democratic party of the people, I am concerned with only one variable: is the election truly “free”? If it is (and I think it’s safe to say that such regimes have a fairly spotty record when it comes to such things), then I’ll happily take the points and back the democrats. Of course, such elections are never truly free (no, Mr. Putin, they are NOT. We’ve discussed this before. I’m busy; leave me alone), and so the smart money always goes on the ruling party.

But a funny thing happened on the way to the ballot boxes as each of the ruling generals assumed that one of the others was going to fix the result; and, amazingly, the NLD won an astonishing 80% of the seats.

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Normally that might be a problem for a regime, but not in Myanmar.

The military junta simply refused to step down, then quietly set about repressing the populist NLD, imprisoning many of its leaders and placing Aung San Suu Kyi under house arrest, where she remained for 16 of the next 21 years.

The SLORC changed their name to the State Peace and Development Council (SPDC) in 1997, but the old switcheroo failed to fool anybody. Nevertheless, the junta remained in power until 2007 under the leadership of General Than Shwe, whose claims to fame include being ranked No. 4 on Parade magazine’s 2009 “World’s Worst Dictators” list and placing an impressive No. 2 on Listverse’s Top Ten Worst Living Dictators list (seriously). Shwe was described thus by the Democratic Voice of Burma:

(Democratic Voice of Burma): He tends to be seen as being sullen, humorless and rather withdrawn, a hardliner, skilled manipulator and an opponent of the democratization of Burma.

According to his eHarmony profile he also liked long walks, 1940s film noir, and labradoodles.

But I digress.

There must be something about the heat of August in Myanmar, because nineteen years after the 8888 Uprising, the situation boiled over once again in August of 2007; and, amazingly enough, it was not just the repressive brutality of the regime, it was once again economic missteps that finally brought about an angry revolt amongst the people of Myanmar (pay attention, Brussels… pay attention).

In the wake of what became known as the “Saffron Revolution,” a constitutional referendum was held in May 2008, which promised a “discipline-flourishing democracy” and bestowed yet another name change upon the Union of Myanmar, which would henceforth be known as the Republic of the Union of Myanmar (evoking Monty Python’s Judean Popular People’s Front). But perhaps most importantly, the referendum set the stage for a full and free general election in 2010 (the first to be held in Myanmar in 20 years), which, despite being decried as fraudulent by many Western nations in the wake of a resounding win for the military ruling party, looks to have potentially been the beginning of real reform after so many false dawns.

After the 2010 election, Myanmar’s aging military rulers began a series of reforms towards a more liberal democracy and a mixed economy. Their motives were likely selfish as, after years in absolute power, they were wealthy beyond imagination, with offspring who wanted to travel the world (which was prohibited by EU, US and Swiss sanctions), and they had most likely decided that an orderly, self-determined transition into quiet retirement was infinitely preferable to the alternative.

Whatever the reasons, the generals matter little, since, if you talk to citizens of Myanmar now, the feeling is very much that the reforms are both real and irreversible; and the success of the NLD in by-elections held on 1st April of this year [2012 — I know, right?] was a graphic illustration of this profound change, as Aung San Suu Kyi’s party swept 43 of the 45 constituency seats available, and she herself took a seat in the Pyithu Hluttaw (lower house) of the Burmese parliament, representing the constituency of Kawhmu.

Such events had been inconceivable only months earlier, but with the visit of Hillary Clinton to Myanmar in December 2011 (the first visit by a US Secretary of State in 50 years), the imminent lifting of sanctions and Myanmar’s election to the chair of ASEAN in 2014, progress is proving swift and sweeping. Myanmar’s prospects haven’t looked this good in a generation.

So… there you had it, back in late autumn, 2012. Since then, things have been moving at an incredibly rapid pace, as the friend I bumped into in the deluge this week explained to me over a beer.

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Billy Selig has done his time in finance. Over the last twenty-plus years, he has worked at the NY Fed and for a bunch of brokerage houses in the US and across Asia; and during that time he has always shown a willingness to go places others feared to tread. It was that pioneering spirit which led to his announcing to a group of friends in Singapore back in late 2011 that he was going to Yangon. Not for a visit — no. That’s not Billy’s style at all. He was moving there lock, stock, and barrel to try to chase down the opportunities that had captivated him after he had ventured to Myanmar to see what was going on.

Billy set up New Crossroads Asia, a boutique research and financial advisory house that quickly became an invaluable source of intelligence for foreigners looking to gain access to and knowledge of a country that had been off the world’s investment radar for 50+ years.

(In the interests of full and fair disclosure, Vulpes Investment Management was so impressed with the work Billy and his team were doing in Myanmar that the company bought a 25% stake in NCRA. This article is most definitely NOT, however, an infomercial!!)

As Billy and I chatted, I asked him about the progress being made in Myanmar:

There has been a significant amount of change both politically and economically since I arrived; however, in some instances things have now hit a speed-bump as we await some crucial by-elections which will take place in November or December and are the precursor to a general election scheduled for December 2015.

(It was here that I interrupted in order to make the point that, in the Myanmar of old, a general election was just that — a day when a whole bunch of generals got “elected” — but Billy just soldiered on…)

Those elections offer the chance to prove once and for all that there is no going back on the proposed reforms, so foreign direct investment is waiting on the sidelines in order to ascertain whether or not the new administration will carry the democratic reforms of late forward and more importantly support a pro-business environment.

I asked Billy about the major changes he’d seen over the last few years and whether there was any specific development that stood out above the rest:

When I first arrived in Myanmar, it quickly became apparent to me that the main hurdle to overcome if Myanmar was to move forward from an economic perspective was the severe lack of capital and the need for multilateral oversight and lending. Since the country had been in isolation for over 50 years, it not only lacked the capital needed to pay for reconstruction, but the infrastructure and the soft resources to manage it were also nonexistent.

My point was that, until the market developed a solid mechanism through which investment could find much-needed credit and the necessary distribution and collection channels, there wouldn’t be much change. Until the World Bank and IMF and other multilaterals entered the market, we would not see much economic development.

Now, in August 2014, we in the business community in Myanmar are very excited to see the IMF, IFC, World Bank, and other multilaterals engaging in project development and financing.

This is an absolutely crucial step.

Billy is right. You only have to look at some of the numbers to get a sense of the true scale of the investment opportunity in Myanmar.

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: Thinker, Trader, Holder, Why?

 

By: Grant Williams

Sometimes, just sometimes, you need to stop for a second, take a step back, and reconsider the simplest pieces of any puzzle.

David John Moore Cornwall was a real-life spy. A spook. An agent. He worked for Britain’s MI5 and, later, MI6 intelligence services.

Whilst there, Cornwall began a little hobby that, in today’s world, would be unthinkable for a serving intelligence officer: writing novels about the secret world in which he lived and worked.

He chose a nom de plume with a certain je ne sais quoi: John le Carré. The hero of le Carré’s first two novels, Call for the Dead andA Murder of Quality, was George Smiley, a somewhat ordinary spy who grew up in a middle class family and attended an “antiquated Oxford college of no real distinction” but who, apparently, had“the cunning of Satan and the conscience of a virgin.”

Smiley was everything other spies of the time — fictional ones, at least — weren’t:

(Wikipedia): The spy novel writing of John le Carré stands in contrast to the physical action and moral certainty of the James Bond thriller established by Ian Fleming in the mid 1950s; the le Carré Cold War features unheroic political functionaries aware of the moral ambiguity of their work, and engaged in psychological more than physical drama. They experience little of the violence typically encountered in action thrillers, and have very little recourse to gadgets. Much of the conflict is internal, rather than external and visible.

Unlike the moral certainty of Fleming’s British Secret Service adventures, le Carré’s Circus spy stories are morally complex. They emphasise the fallibility of Western democracy and of the secret services protecting it, often implying the possibility of East-West moral equivalence…

In 1979, the BBC adapted what is perhaps le Carré’s most famous novel for television, casting the great Alec Guinness as Smiley in a seven-part miniseries that changed the face of television.

The series, Tinker, Tailor, Soldier, Spy, was a smash hit in a time before box sets and gratuitous action scenes; and despite its measured, almost glacial pace, millions tuned in each week to watch le Carré’s masterpiece of cross and double-cross unfold before their eyes.

The fictional Smiley operated during the very real Cold War between NATO and signatories to the Warsaw Treaty Organization of Friendship, Cooperation, and Mutual Assistance. (Those communist countries LOVED a good, long title. We in the West called it the Warsaw Pact, and it essentially included the Soviet Union, Bulgaria, Czechoslovakia, Yugoslavia, East Germany, Hungary, and Poland. You know, all the powerhouses.)

Looking back on it now, the Cold War was more Ali vs. Cooperman than Batman vs. Superman; but at the time, the world lived in fear of a cataclysmic resolution to the conflict. It seems like a lifetime ago; but those years between 1946 and 1991, when communism finally gave up the ghost, were fraught with fears over a rogue USSR.

Throughout the entire episode, the price of gold — the ultimate barometer of fear — performed as one would have expected it to — once Richard Nixon removed the shackles on August 15, 1971, of course.

Fear of conflagrations along the borders of the Soviet Union led to consistent buying of gold year after year and decade after decade. Yes, there were flare-ups, during which gold saw large spikes; but as “immediate” dangers eased, so did the price — exactly as one would expect.

To be fair, it wasn’t all about “those darn Russkies.” No. The gold price was certainly helped higher by an irritating inflation problem (as you can clearly see from the chart on the previous page). Once Nixon closed that damn window, gold wasted no time in playing catch-up and responding to inflationary pressure as well as to perceived Cold War threats; but either way, once the downward pressure of a fixed price was removed, gold exploded higher — rising 82% in the first 12 months and 419% in the space of 4 years.

There are a couple of interesting points to make about the action of the gold price during those darkest of postwar days (points I’ve made before, but will expand upon this week).

Let’s begin with Asia.

During the 1980s and 1990s, Asian central bank reserves (particularly gold reserves) were nothing to write home about. Thanks to the IMF and the World Bank, we can see exactly what they were:

As you can see, the huge run-up in the gold price during the 1970s occurred against a highly inflationary backdrop and the ongoing Cold War; but, crucially, WITHOUT THE PARTICIPATION OF ASIAN CENTRAL BANKS. (The IFC — part of the World Bank — classifies “East Asia & The Pacific” as China, Indonesia, Japan, Laos, Mongolia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, as well as the Pacific Islands).

If we switch our focus to those same countries’ total reserves, however, a completely different story emerges. From the mid-1990s onwards, total currency reserves soared from $300 billion in 1994 to $5.8 trillion by the end of 2013.

That relentless climb has given Asian nations two things they didn’t have the last time we saw gold being chased higher by the terror of surging inflation and the spectre of a large-scale conflict between opposing blocs: extraordinary purchasing power and the need to diversify their massive holdings of US dollars.

If we throw India into the picture (India is classified as part of South Asia by the IFC/World Bank, along with Bangladesh, Bhutan, the Maldives, Nepal, and Sri Lanka — countries we will leave out of this discussion for now), we can see a microcosm of that build-up in purchasing power laid out very clearly indeed:

Indian reserves doubled between 2008 and 2009, and by 2012 they had tripled to almost $300 billion.

Why is India so important on its own? Well, for one very good reason:

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: Ann Elk’s Theory On Brontosauruses

 

Though they reunited this past month for a series of concerts at London’s O2 Arena, the cast of Monty Python last assembled onstage together at London’s Drury Lane Theatre a staggering 40 years ago.

As they took to the stage at the O2 in early July, the surviving members of perhaps the most famous comedy troupe in history (sadly, Graham Chapman died in 1989) boasted a combined age of 357.

As expected, neither of these facts deterred people from flocking to see the Pythons; nor, it has to be said, did the occasional “senior moment” on stage prevent rapturous critics from garlanding them with rave reviews.

The centrepiece of the show was, of course, the famous “Parrot Sketch” in which John Cleese returns a dead Norwegian Blue parrot to “the very boutique” from whence it came “not ’alf an hour ago.”

The sketch, written by Cleese and Chapman in 1969, took aim at the British fondness for euphemism (particularly as pertains to death) and (somewhat ironically, given the subject) became one of the most mimicked pieces of comedy ever conceived.

The YouTube video I linked to above (just in case there is still anybody out there who HASN’T seen the “Parrot Sketch”) has 4.5 million views alone.

However, buried in the Python’s canon of work lies another sketch which proved far less popular amongst the viewing public but which found favour amongst (of all groups) the scientific community.

The sketch, “Anne Elk’s Theory on Brontosauruses,” appeared in the 31st episode of Monty Python’s Flying Circus, which was entitled “The All-England Summarize Proust Competition”; and it featured Chapman as a television interviewer and Cleese (in drag) as Miss Anne Elk, a paleontologist, who was in the studio to discuss her new, ground-breaking theory on the afore-mentioned dinosaurs.

What followed when Elk was questioned about her theory is classic Python:

Presenter: You have a new theory about the brontosaurus.

Anne Elk: Can I just say here, Chris, for one moment, that I have a new theory about the brontosaurus?

Presenter: Uh… Exactly…

Very long pause

(prompting) What is it?

Anne Elk: Where?

Presenter: Your new theory

Anne Elk: Oh! What is my theory?

Presenter: Yes!

Anne Elk: What is my theory that it is? Well, Chris, you may well ask me what is my theory.

Presenter: I am asking.

Anne Elk: Good for you. My word yes. Well Chris, what is it, that it is, this theory of mine. Well, this is what it is. My theory, that I have, that is to say, which is mine… is mine.

Presenter: Yes, I know it’s yours! What is it?

Anne Elk: … Where? … Oh! This is it.

Starts prolonged throat clearing

Anne Elk: (clears throat) This theory, which belongs to me, is as follows… (more throat clearing) This is how it goes… (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

Inevitably, after such a prolonged build-up, the payoff is predictable in that Elk is clearly stalling in order to avoid explaining her theory for as long as possible; but, eventually, she is forced into laying it out for the whole world to see:

Anne Elk: My Theory, by A. Elk (Miss). This theory goes as follows and begins now:

All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end. That is my theory that is mine and belongs to me and I own it and what it is, too.

… and in that instant, she is exposed for what she is: a fraud.

The scientific community adopted Anne Elk’s theory on brontosauruses to describe any scientific observation which is not actually a theory but rather a minimal account; and that sobriquet — it seems to me — merits far broader application and acceptance.

Lately I seem to be constantly reminded of Anne Elk everywhere I turn, as the world descends into chaos and those charged with running it (at least officially) stumble from pillar to post, relying on the public’s buying into whatever they spin in order to press their agenda.

We see it in the rush to demonize Vladimir Putin for the MH17 tragedy, along with everything else that remotely touches Russia; we see it in the one-sided reporting of events in the Middle East; and we see it in the broad-brush strokes painted across the China canvas when assumptions are made about what is happening inside the political hierarchy that runs the Middle Kingdom.

However, the one place it is glaringly obvious (and has been for a number of years) is in the talk emitting from the mouths of the world’s central bank governors.

Now, I am no great fan of Putin; nor do I feel able to confidently choose sides between various factions in the Middle East — mainly because I find it impossible to take what I read in the mainstream media at face value and therefore come to what I would consider a well-informed opinion — but the beauty of central bankers is that they hold press conferences and release detailed minutes of their meetings which, if anything, throw perhaps too much light onto their deliberations, operations, and machinations for anybody’s good — least of all their own.

July 26th, 2012: Anne Elk’s Mario Draghi’s Theory on Preserving the Euro:

 

This theory, which belongs to me, is as follows… (more throat clearing) This is how it goes… (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

We think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made, to make it irreversible.

But there is another message I want to tell you.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

Now, unlike Anne Elk’s (brackets, “Miss,” close brackets), Draghi’s theory — though in effect every bit as toothless should his bluff ever have been called — was taken at face value by a gullible public; and disaster was averted (though, along with the gullibility, there was also an implicit explicit bribe put carefully in place — buy bonds of bankrupt countries, and we’ll make sure you don’t lose money).

Many of you will probably not remember what the edge of the abyss looked like, so here are a couple of reminders — just for old times’ sake:

 

The chart above shows the yields on 10-year government bonds for Greece’s $242 billion economy; Spain’s $1.35 trillion economy; and the behemoth, Italy’s $2.17 trillion economy through 2011, going into the unveiling of Draghi’s Elk Theory plan and beyond.

Due to scaling issues, the plot for Greece is on a separate scale on the right-hand side of the chart; but, if you look carefully, you’ll see that yields on its 10-year bonds peaked at 37% in early 2012 and, despite some serious jawboning on the part of EU politicians, were still at 28% in July when Draghi cleared his throat.

Remember those days? Europe was teetering on the edge of oblivion, and each day saw the chances of a disorderly unwind of the euro increase to the point where even some of the more staunch pro-Europe voices began to waver in their certainty about its future.

Writing somewhat presciently a few short weeks before Draghi unveiled his Elk Theory, plan, The Economistlaid out the bind perfectly:

(Economist): Even the single currency’s die-hard backers now acknowledge that it was put together badly and run worse.

Greece should never have been let in. France and Germany rode a coach and horses through the rules designed to prevent government borrowing getting out of hand. The high priests of euro-orthodoxy failed to grasp that, though Ireland and Spain kept to the euro’s fiscal rules, they were vulnerable to a property bust or that Portugal and Italy were trapped by slow growth and declining competitiveness.

A break-up, many argue, would allow individual countries to restore control over monetary policy. A cheaper currency would help match wages with workers’ productivity, for a while at least. Advocates of a break-up imagine an amicable split. Each government would decree that all domestic contracts—deposits and loans, prices and pay—should switch into a new currency. To prevent runs, banks, especially in weak economies, would shut over a weekend or limit withdrawals. To stop capital flight, governments would impose controls.

All good, except that the people who believe that countries would be better off without the euro gloss over the huge cost of getting there. Even if this break-up were somehow executed flawlessly, banks and firms across the continent would topple because their domestic and foreign assets and liabilities would no longer match. A cascade of defaults and lawsuits would follow. Governments that run deficits would be forced to cut spending brutally or print cash.

Has anything changed in Greece since July 26th, 2012? Well, let’s see:

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: Anne Elk’s Theory On Brontosauruses

 

Though they reunited this past month for a series of concerts at London’s O2 Arena, the cast of Monty Python last assembled onstage together at London’s Drury Lane Theatre a staggering 40 years ago.

As they took to the stage at the O2 in early July, the surviving members of perhaps the most famous comedy troupe in history (sadly, Graham Chapman died in 1989) boasted a combined age of 357.

As expected, neither of these facts deterred people from flocking to see the Pythons; nor, it has to be said, did the occasional “senior moment” on stage prevent rapturous critics from garlanding them with rave reviews.

The centrepiece of the show was, of course, the famous “Parrot Sketch” in which John Cleese returns a dead Norwegian Blue parrot to “the very boutique” from whence it came “not ’alf an hour ago.”

The sketch, written by Cleese and Chapman in 1969, took aim at the British fondness for euphemism (particularly as pertains to death) and (somewhat ironically, given the subject) became one of the most mimicked pieces of comedy ever conceived.

The YouTube video I linked to above (just in case there is still anybody out there who HASN’T seen the “Parrot Sketch”) has 4.5 million views alone.

However, buried in the Python’s canon of work lies another sketch which proved far less popular amongst the viewing public but which found favour amongst (of all groups) the scientific community.

The sketch, “Anne Elk’s Theory on Brontosauruses,” appeared in the 31st episode of Monty Python’s Flying Circus, which was entitled “The All-England Summarize Proust Competition”; and it featured Chapman as a television interviewer and Cleese (in drag) as Miss Anne Elk, a paleontologist, who was in the studio to discuss her new, ground-breaking theory on the afore-mentioned dinosaurs.

What followed when Elk was questioned about her theory is classic Python:

Presenter: You have a new theory about the brontosaurus.

Anne Elk: Can I just say here, Chris, for one moment, that I have a new theory about the brontosaurus?

Presenter: Uh… Exactly…

Very long pause

(prompting) What is it?

Anne Elk: Where?

Presenter: Your new theory

Anne Elk: Oh! What is my theory?

Presenter: Yes!

Anne Elk: What is my theory that it is? Well, Chris, you may well ask me what is my theory.

Presenter: I am asking.

Anne Elk: Good for you. My word yes. Well Chris, what is it, that it is, this theory of mine. Well, this is what it is. My theory, that I have, that is to say, which is mine… is mine.

Presenter: Yes, I know it’s yours! What is it?

Anne Elk: … Where? … Oh! This is it.

Starts prolonged throat clearing

Anne Elk: (clears throat) This theory, which belongs to me, is as follows… (more throat clearing) This is how it goes… (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

Inevitably, after such a prolonged build-up, the payoff is predictable in that Elk is clearly stalling in order to avoid explaining her theory for as long as possible; but, eventually, she is forced into laying it out for the whole world to see:

Anne Elk: My Theory, by A. Elk (Miss). This theory goes as follows and begins now:

All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end. That is my theory that is mine and belongs to me and I own it and what it is, too.

… and in that instant, she is exposed for what she is: a fraud.

The scientific community adopted Anne Elk’s theory on brontosauruses to describe any scientific observation which is not actually a theory but rather a minimal account; and that sobriquet — it seems to me — merits far broader application and acceptance.

Lately I seem to be constantly reminded of Anne Elk everywhere I turn, as the world descends into chaos and those charged with running it (at least officially) stumble from pillar to post, relying on the public’s buying into whatever they spin in order to press their agenda.

We see it in the rush to demonize Vladimir Putin for the MH17 tragedy, along with everything else that remotely touches Russia; we see it in the one-sided reporting of events in the Middle East; and we see it in the broad-brush strokes painted across the China canvas when assumptions are made about what is happening inside the political hierarchy that runs the Middle Kingdom.

However, the one place it is glaringly obvious (and has been for a number of years) is in the talk emitting from the mouths of the world’s central bank governors.

Now, I am no great fan of Putin; nor do I feel able to confidently choose sides between various factions in the Middle East — mainly because I find it impossible to take what I read in the mainstream media at face value and therefore come to what I would consider a well-informed opinion — but the beauty of central bankers is that they hold press conferences and release detailed minutes of their meetings which, if anything, throw perhaps too much light onto their deliberations, operations, and machinations for anybody’s good — least of all their own.

July 26th, 2012: Anne Elk’s Mario Draghi’s Theory on Preserving the Euro:

 

This theory, which belongs to me, is as follows… (more throat clearing) This is how it goes… (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

We think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made, to make it irreversible.

But there is another message I want to tell you.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

Now, unlike Anne Elk’s (brackets, “Miss,” close brackets), Draghi’s theory — though in effect every bit as toothless should his bluff ever have been called — was taken at face value by a gullible public; and disaster was averted (though, along with the gullibility, there was also an implicit explicit bribe put carefully in place — buy bonds of bankrupt countries, and we’ll make sure you don’t lose money).

Many of you will probably not remember what the edge of the abyss looked like, so here are a couple of reminders — just for old times’ sake:

 

The chart above shows the yields on 10-year government bonds for Greece’s $242 billion economy; Spain’s $1.35 trillion economy; and the behemoth, Italy’s $2.17 trillion economy through 2011, going into the unveiling of Draghi’s Elk Theory plan and beyond.

Due to scaling issues, the plot for Greece is on a separate scale on the right-hand side of the chart; but, if you look carefully, you’ll see that yields on its 10-year bonds peaked at 37% in early 2012 and, despite some serious jawboning on the part of EU politicians, were still at 28% in July when Draghi cleared his throat.

Remember those days? Europe was teetering on the edge of oblivion, and each day saw the chances of a disorderly unwind of the euro increase to the point where even some of the more staunch pro-Europe voices began to waver in their certainty about its future.

Writing somewhat presciently a few short weeks before Draghi unveiled his Elk Theory, plan, The Economistlaid out the bind perfectly:

(Economist): Even the single currency’s die-hard backers now acknowledge that it was put together badly and run worse.

Greece should never have been let in. France and Germany rode a coach and horses through the rules designed to prevent government borrowing getting out of hand. The high priests of euro-orthodoxy failed to grasp that, though Ireland and Spain kept to the euro’s fiscal rules, they were vulnerable to a property bust or that Portugal and Italy were trapped by slow growth and declining competitiveness.

A break-up, many argue, would allow individual countries to restore control over monetary policy. A cheaper currency would help match wages with workers’ productivity, for a while at least. Advocates of a break-up imagine an amicable split. Each government would decree that all domestic contracts—deposits and loans, prices and pay—should switch into a new currency. To prevent runs, banks, especially in weak economies, would shut over a weekend or limit withdrawals. To stop capital flight, governments would impose controls.

All good, except that the people who believe that countries would be better off without the euro gloss over the huge cost of getting there. Even if this break-up were somehow executed flawlessly, banks and firms across the continent would topple because their domestic and foreign assets and liabilities would no longer match. A cascade of defaults and lawsuits would follow. Governments that run deficits would be forced to cut spending brutally or print cash.

Has anything changed in Greece since July 26th, 2012? Well, let’s see:

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Things That Make You Go Hmmm: The Slip ‘n’ Fail Mutts

 

Now the news has arrived
From the Valley of Vail
That a Chippendale Mupp has just bitten his tail
Which he does every night before shutting his eyes
Such nipping sounds silly. But, really, it’s wise.

He has no alarm clock. So this is the way
He makes sure that he’ll wake at the right time of day.
His tail is so long, he won’t feel any pain
‘Til the nip makes the trip and gets up to his brain.
In exactly eight hours, the Chippendale Mupp
Will, at last, feel the bite and yell “Ouch!” and wake up.
-Dr. Seuss

Theodore Seuss Geisel was a master of anapestic meter.

An anapest is a metrical foot used in poetry which comprises two short syllables, followed by a long one. More familiarly (particularly in the world created by Seuss), it consisted of two unstressed syllables followed by a stressed one:

“Twas the night before Christmas and all through the house…”

Description: euss%20Stamp.psd

Or, in keeping with this week’s theme:

“The sun did not shine.
It was too wet to play.
So we sat in the house
All that cold, cold, wet day.”

Simple, but at the same time extremely difficult to pull off effectively.

Geisel was an English major at Dartmouth who eventually became the editor-in-chief of the college humor magazine, the Dartmouth Jack O’ Lantern; but after being forced by the dean to resign his post after being caught drinking gin in his dorm room, he rather cunningly adopted the nom de plume “Seuss” in order to continue to be able to write for the magazine.

Apparently, nobody at the Ivy League college figured out the identity of the mysterious “Seuss.”

When banned from his post for a gin-drinking crime
The scribe picked a name and then bided his time.
In a different guise he remained on the loose
By pretending to be the mysterious “Seuss.”

Geisel graduated from Dartmouth and left the USA to pursue a PhD in English literature at Lincoln College, Oxford; but, whilst there, he met a lady named Helen Palmer who persuaded him that he should give up his dream of becoming an English teacher and pursue a career as a cartoonist.

Returning home without a degree but with a fiancée (named Helen Palmer), Geisel found that his drawing ability allowed him to earn a rather handsome living as a cartoonist after he succeeded in getting his first cartoon published in theSaturday Evening Post on July 16, 1927.

Geisel took a job as a writer and illustrator at the humourous magazine Judge in October of 1927, married Palmer a month later, and five months after that, his first work was published and credited simply to “Dr. Seuss.”

A successful career as an illustrator allowed Geisel and his wife to travel extensively. According to Geisel himself it was on the journey home from an ocean voyage to Europe that the rhythmic noise of the ship’s engines inspired him to write his first book, the anapestically titled And to Think That I Saw It on Mulberry Street.

While at Oxford (in England) a lady supposed
To suggest he choose drawing instead of his prose.
When the young man relented his future unfurled
And he ended up famous all over the world.

And that, Dear Reader, is how Theodore Geisel became Dr. Seuss.

Thirty-five years after the publication of And to Think That I Saw It on Mulberry Street, Seuss wrote The Sleep Book, the brilliant story of a contagious yawn, started by a small bug called Van Vleck, that would lull even the most spirited toddler successfully off to sleep.

On page 32 of The Sleep Book, we are introduced to the Chippendale Mupp, a curious creature with an extraordinarily long tail. The Mupp bites the end of that tail when he goes to sleep every night, and its length ensures that the sensation of pain only reaches him eight hours later, causing him to wake up. It’s a brilliant and flawless alarm clock.

Description: upp%20Cropped.psd

Of course, once the Mupp has bitten his tail, the end result — in this case, a rather nasty, sharp pain — though delayed for quite some time, is assured; and there is nothing he can do about it.

I was discussing the Chippendale Mupp with Steve Diggle recently as we pondered the actions of central banks in recent years and, more specifically, the great inflation/deflation debate that has raged constantly ever since the dawn of QE. As the ECB battles to stave off what looks like deflationary pressures, Japan continues to struggle to generate the promised 2% inflation, and the US continues to pretend to the world that the cost of living from sea to shining sea is rising at just 1.46% per annum, it’s abundantly clear to me that the day QE was unleashed into the world was the very same day that the world’s central bankers — the Slip ‘n’ Fail Mutts — bit their own tails.

The pain from that bite is now working its way towards the brain and will, at some point, manifest itself in an almighty “OUCH!” that will wake the entire world; BUT there is one X-factor at this point: none of us knows exactly how long the Slip ‘n’ Fail Mutts’ tail actually is.

We will find out.

Description: 303.png

Back in 2012 — July 26th to be precise — Mario Draghi, in a speech at the Global Investment Conference in London, uttered those famous words which put an end to the seismic volatility roiling European debt markets once and for all for the time being:

(Mario Draghi): …the third point I want to make is in a sense more political.

When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area member states or leaders underestimate the amount of political capital that is being invested in the euro.

And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible.

But there is another message I want to tell you.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

Almost instantaneously, the clouds seemed to part, the oceans calmed, and the storm abated — all based on an ephemeral promise from a man under immense pressure who, let’s face it, if he was prepared to DO whatever it took, would most certainly SAY whatever it took.

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.