Nick Rost van Tonningen ~ Gleanings II ~ 509B Posted by John on April 26, 2013

At last February’s G-20 meeting in Moscow the Finance Ministers & Central Bank Governors were divided on the issue of the yen’s sharp drop against other currencies. But after last weekend’s meeting in Washington D.C., their statement said “Japan’s recent policy actions are intended to stop deflation and support domestic demand” – this seeks to “gild the lily’ of Prime Minister Abe’s determination to do whatever it may take to fluff up the Japanese economy & gives speculators license to drive the Yen down further with impunity, especially since BoJ Governor Kuroda has said he will keep the pedal to the metal for two years. But it raises the question why foreign investors are so hellbent on running the risk of “gaining on the swings & losing on the roundabouts”, i.e. make money in Yen terms but not necessarily so in terms of their own currency?

On April 18th the CBC aired a program on gold, more specifically on the behind-the-scenes, self-serving & highly profitable manipulation of the gold price by banks through the creation of “paper gold”. But most illuminating was its reference to a class action suit launched a decade ago by Maine resident Selwyn Silverblatt against Morgan Stanley, alleging the firm had sold him & others certificates purporting to give them title to precious metals the firm would buy, & store, for them but it had not only never bought the promised metal but had nevertheless charged them ‘storage fees’ for “their” metal for as long as 21 years. In June 2007 Morgan Stanley settled this suit out-of-court, saying it was only doing so to “avoid the cost and distraction of continued litigation”.

Both Goldman & Bank of America have officially a negative outlook on, & have for weeks have been advising their clients to sell, gold. And yet Goldman’s economic guru has also been telling their clients “the likely weakness of federal spending, slow consumption growth would make it difficult for real GDP to grow more than 2%, even if homebuilding and business investment were to grow at healthy rates” & his counterpart at Bank of America “the current slowdown in the economy is clearly worse than expected … on top of surprising domestic weakness we are faced with a number of important external risks.” But historically a weak US economy has been bullish for gold,& vice versa. In addition, Bank of America elsewhere also said “We expect a pickup in jewelry demand in the medium term … and believe that investors would need to buy merely 600 tons of gold to sustain prices of US$2,000/ounce by 2016 … (compared to ) 1,798 tons in 2012.”

Sprott’s Rick Rule is a gold bull. But he makes sense when he notes macroeconomic-, geopolitical- & global demographic conditions haven’t changed since the gold price slide started two years ago & when he says “I would ask every investor to ask themselves … Has the global financial crisis abated? Are the global banks solvent? Are real interest rates negative? Is physical bullion demand strong? Is global population and resource consumption rising? Is competitive devaluation looming? … the only thing has changed is the price (of gold)”. And this is a non-exclusive list. For one might also ask : What risks to the system are lurking in derivatives portfolios 10x the size of global GDP? Why are some central banks accumulating gold & others suddenly intent on ‘repatriating’ gold that they have long been happy to have stored in other jurisdictions?. How much of the world’s “official gold holdings” are encumbered to underpin the paper gold market? Has the Fed been playing fast and loose with gold it holds in safekeeping for others (there apparently have been problems matching the gold bar numbers of record with those on the gold bars in vaults)? Is it reasonable to expect the massive growth in global liquidity not to result in a burst of inflation at some point down the road and, if so, what might be the implications of such a drastic break with historical precedent? To what extent is the official inflation rate truly representative of living costs? How is the world going to cope with an impending water crisis &, for that matter, with growing environmental challenges? How long, in an era of social media, is it reasonable to expect growing income equalities not to foster social unrest? What is the potential for food- & water shortage-induced social unrest? When might the lid blow off the Middle East pressure cooker? How long before China’s expansionist mood triggers an incident that prompts a major international confrontation? What will be the effect on world peace of a diminished US Navy presence on the world’s oceans? What will happen when North Korea & Iran develop a nuclear arms capability cum deliverability? How long before the US will experience another truly serious terrorist attack? When will investors realize Japanese (& US?) debt management is the biggest Ponzi scheme ever? And this too is a non-exclusive listing!

Elsewhere another senior Sprott executive, John Embry, seemed to make sense when, asked in an interview what advice he had for confused, scared and/or nervous people who had lost a bundle on gold, he responded “Ignore everything you read in the mainstream press. It’s there to confuse you and make you do the wrong thing.” (i.e. to panic & sell) – thus one Canadian newspaper on April 25th breathlessly reported The biggest losers in gold price plunge? Central banks, the kindest interpretation is that the person who wrote this doen’t understand how the system works.

The gold market right now is sort-of like the Chinese shell game : everyone is looking for the pea under the paper gold shell, while it is under the physical gold one. For the outlook in the real world of physical gold appears more bullish than the mainstream media would have one believe. Almost worldwide, incl. India & Dubai, there is a acute shortage of physical gold for immediate delivery. Sales at Australia’s Perth Mint in the First Quarter were up 49% YoY. The US Mint sold a record 63,500 ounces of gold (i.e. 2 tons) on April 17th alone – when the gold price was cratering -, bringing its sales for the month to 147,000 ounces, more twice the total for all of March in little more than half the number of days. In Japan gold purchases at Tokiruri Honti, the country’s second largest gold retailer have been twice their usual daily volume. On April 19th in Hongkong the Chinese Gold and Silver Exchange Society ran out of gold to sell. On April 16th & 17th gold sales in Mumbai were double the normal daily volume & gold for immediate delivery was so scarce buyers were willing to pay a premium over the going price for it. While all this flies in the face of a quote on Bloomberg from Donald Selkin, Chief Market Strategist at New York-based Nationa Securities Corp. that “The perception is that gold is not really needed as a safe haven, it’s worth remembering that in August 2009 he went on record as saying “Gold is unlikely to top $1,000”.

There is an estimated US$20TR in US private sector pension funds, 401(k)s & IRAs. According to Bloomberg the two year-old US Consumer Financial Protection Bureau, the validity of the appointment of Richard Cordray as its Head continues to be challenged, with some success, in the courts, is of the view that their beneficiaries need ‘protection’ (from whom?). While in many cases governments that displayed such concerns it has often been a euphemism for mandated investment in ‘safe’ government bonds (to bail out governments were no longer credit worth, in the case of the US case, doing so would be a way to exit QE.

A survey by Barron’s found that 74% of professional investors are (short-term) bullish on the stock market, a 20+-year high. This has historically been a “counter-indicator’ (i.e. when 70% were bullish, it was a harbinger of a market about to “head South”, just as the opposite is true when 70% is bearish – one must wonder how much corporate earnings’ growth potential remains at a time they account for 11% of US GDP, 50+% above the upper end of their long-term range, especially when GDP is growing only modestly & when much of recent years’ earnings growth has been due to drastic cost cutting, a process with a finite life that, when pushed to its extreme, has major ‘short-term gain, long-term pain’-type consequences. This is not to say one should shun the stocks, rather that this is a stock pickers’-, not a rising-tide-raises-all-ships-, ride-the-index sort of market.

John Mauldin (age 62) is President of Arlington, Texas-based investment advisory firm Millennium Wave Investments. He is also the author of a free weekly newsletter that supposedly is the world’s most widely-read of its kind & a best-selling author. As an out-of-the-box thinker he’s not afraid to call a spade a spade; thus the title of one of his best-selling books is “Endgame : End of the Debt Supercycle and How It is Changing Everything”, & that of a recent issue of his Thoughts from the Front Line weekly, “Austerity is a Consequence, not a Punishment”. He just wrote a short review of the First Quarter Review & Outlook of Austin, Texas-based Hoisington Investment Management that can be summed up as follows : while the Fed increased the monetary base by 350% in the past five years, money supply grew by by just 35% & US GDP growth has been lower than at any time in US history except the Depression. The reason, they say, is that the Fed cannot control the velocity of money, which in the past five years has declined to levels not seen since WWII, & their conclusion : “Bernanke has been firing blanks”’. And in another of his publications one of his acolytes this week started thusly : “I am a seller of gold … Just not yet – and certainly not at anywhere close to this price … One day long into the future , it will be time to sell gold … but it just ain’t time yet … no matter what you have been reading.” – isn’t it interesting how many successful & clear-visioned financial gurus, incl. the highest- profile of them all, Warren Buffett, rest their weary head every night on a pillow far away from Wall Street. If it isn’t something in the New York water, it must be something more incestuous & sinister that drives so many ‘experts’ there to ‘shortermism’ & an inability/unwillingness to see the forest for the trees.

Since 1981 the Kansas Fed has hosted, each August at Jackson Hole, Wyo., a conference for the world’s central bankers, & assorted other economic & financial luminaries, & for the past 25 years the Fed Chairman has, not surprisingly, been its central figure & deliverer of a keynote address. But this year Bernanke won’t attend due to a “scheduling conflict”. Since it’s hard to imagine what, short of a death in the family, would justify his non-attendance, speculation is rife, with the most plausible explanation being this is intended as a signal he will relinquish his post when his term ends next January & wants Vice-Chairman Janet Yellen (an even greater “dove” than he), who in his absence will deliver the keynote address, to be his successor.

There have been discussions from time to time as to, & concerns about, the future US GDP ‘trend growth rate”. For a century it has been in the 3% range. But in only two of the past ten years has it reached that level , and in only six of the 29-, quarters ended March 31st has it even been 2½%, or better. So it would seem likely that 3% is yesterday’s number & that the only question is whether, going forward it will be 2%, or 2½%

In March US existing home sales slipped marginally to a 4.92MM annualized rate, from 4.95MM in February (while a similarly marginal increase to a 5.01MM rate, from the initial 4.8MM February rate had been expected), & the inventory of houses-for-sale went up slightly from 4.6 to 4.7 months. But there were three ‘green shoots’. The share of “distressed sales” was down to 21% (from 25% in February), the average price was up 5.6% to US$233,200, a post-August 2012 high, & the average stay for a house on the market before being sold was 62 days, down from 74 in February. Meanwhile, new home sales, after a 7.6% drop in February, were up 1½% in March to a 417,000 annualized rate (vs. the 420,000 rate expected) & their median price down 6.8% to US$247,000.
I fairly faithfully watch Fareed Zakaria’s Sunday morning program on CNN. Early in his April 21st program I found myself nodding appreciatively when he said that, since the objective of terrorism is to create panic & disorientation, the Boston Marathon bombers had failed miserably; for runners, bystanders, the people of Boston, & the authorities had instead responded with resolve & determination. And I did the same when he mentioned that, to put things in perspective, it was worth remembering that this very Sunday dozens of innocent bystanders whose only fault was to be in the wrong place at the wrong time, had been killed in terrorist events across the world. But I had reservations when, in commenting on recent events in the gold market, he parroted the mainstream media ‘party line’ that the central banks have proven they can expand the money supply at will without any adverse consequences & that inflation has been proven not to be the problem some had made it out to be, & that gold has been shown to be a false god (his sentiment, my choice of words). I hope he will be proven right but fear he will be proven disastrously wrong – media hype often is a ‘counter-indicator’, media darlings are routinely turned, often overnight, into media “dogs”, & being heralded by the media as the best thing since sliced bread is often the portent of a sudden fall from grace, and “CEOs of the Year”, like JPMorgan’s Jamie Dimon in 2011, who were once held to be able to walk on water, often are often found later to have been human Potemkin villages.

Some people have questioned the unprecedented decision to completely shut down the City of Boston as the security forces sought to locate the second Boston Marathon bomber on April 19th. They obviously aren’t familiar with the Mao Tse-tung quote that “The guerilla must move among the people as a fish swims in the sea.” For by doing what they did, the authorities could maximize the benefit of their technological superiority by having helicopters fly overhead with infra-red scanners to detect movement below, thereby depriving the culprit from the protective cover Mao referred to he needed to escape..

Immigration is always a sensitive issue, especially when times are less than rosy & unemployment is high. So the United States has an annual quota of 65,000 “H-1B” visas for skilled immigrants. It was oversubscribed within one week of being opened up for this year on April 1st. Since the biggest demand for such immigrants comes from the hitech sector, this seems to confirm something that has long been of concern, namely that the US educational system doesn’t generate enough of the graduates with the STEM qualifications the sector needs. Another, lesser factor may also well be that many large & small hitech companies were founded, & are often still being run, by people who once were immigrants themselves ( according to The Economist 20+% overall, with twice that in states like New Jersey & Massachusetts), for whom family ties are still strong & who have networks in, & are familiar with the relative merits of, universities in their countries of origin.

Last month a survey by Toronto-based Forum Research found that 58% of those interviewed felt the oilsands operators are not doing enough to combat climate change but an almost identical percentage also that the oilsands can developed in a way that does not damage Canada’s environment – in the latter respect they are likely more than a little naive. For the word “footprint” says it all : wherever Man goes he leaves his mark & the challenge is to optimize it. And in that respect the industry, aided & abetted by the Alberta government, has done an abysmal job.

Fighting corruption among, & conspicuous consumption at public expense by, officials is becoming a big issue for China’s new leaders. In fighting back, they are pushing for “asset disclosure” by officials. According to the South China Post this is, not surprisingly, a highly sensitive issue, and at a meeting two months ago of the Communist Party’s Central Commission for Discipline fears were expressed that the disclosure of officials’ assets ‘might prompt social unrest’ – although it’s not clear if that would be among officials or the population at large.

In the past week Spain’s 10-year bond yield touched a post-2010 low of 4.50% & Italy’s a 2½-year low of 3.45%. But it may be a mistake to read too much into this. For much of it may be due to the “carry-trade” (when ‘investors’ borrow money cheaply in one currency to make a “spread” by investing the proceeds in government bonds denominated in another currency), and possibly, if not likely, to Japanese institutional investors searching for higher yields than they can get at home (with the added advantage they can do so “unhedged” since their government has all but guaranteed them that the Yen will continue to weaken during the foreseeable future.

The Globe & Mail on April 20th carried a half page luncheon interview cum profile of Greece’s central bank governor, George Provopoulos, which reads in part as follows :

“The handsome 1930’s Bank of Greece building … is surrounded by the gutted remains of buildings torched in the … riots of February, 2012. We had lunch in the sixth floor dining hall, where there was no hint of austerity or recessions … The table linen is white and crisp, the silver polished. The blue napkins, emblazoned with “TE,” for Trapeza Eallados (Bank of Greece), provided an elegant splash of colour … Around us were some of Greece’s finest paintings, all part of the bank’s vast art collection, which includes ancient Macedonian coins, medieval religious books, and a restoration laboratory to keep them all in top shape.”

They don’t get it, do they? I recently stumbled on the movie In the Shoes of the Fisherman, a 1968 movie in which Anthony Quinn plays a newly-elected Pope who at one point goes, incognito in a plain black hassock, out on the streets of Rome. Francis I (who recently admonished priests to be “merciful pastors, not functionaries”) seems of a similar mindset by spurning residence in the Papal Apartments (which, when he was first shown them, supposedly caused him to exclaim “300 people can live here!”) in favour of living in a Vatican guest house (even if mere symbolism, symbolism is important, more so now than ever because so much today’s symbolism is of the negative variety). In 1958, during China’s Cultural Revolution Mao Tse-tung ordered all government cadre to spend one month each year on a farm or factory floor to re-acquaint themselves with the lives of ordinary people whose everyday life their decisions affected, & interestingly enough Xi Jinping, in his capacity of Chairman of the Central Military Commission, just approved an order requiring officers in the military to spend time every few years in the ranks as common soldiers; while Mao’s idea, for obvious reasons, never gained much traction, & Xi’s order is likely to suffer the same fate, the idea itself has merit & the hoi polloi in Europe & North America would likely benefit, if such a rule were to apply to their public servants with their job security & rich pensions.

According to Chen Yuntai, Professor & Honorary Director of the Institute of Geophysics – China Earthquake Administration & twice President of China’s Seisnmological Society, following the 2008 Wenchuan earthquake his group had warned that the same geological fault would cause another quake in the foreseeable future & had even pinpointed its location as 80 miles Southwest of the 2008 quake, i.e. in Baoxing county (where the latest one was centred).

According to Reuters, the Phillippines, have since last year’s naval stand-off all but ceded souvereignty over the Scarborough Shoal to China (thereby depriving local fishermen of their livelihood), despite it being just 124 miles of its coast, i.e. well within the 300 miles “economic zone” recognized under international law – if so, it will be a signal for all countries in the region that the US has limited appetite/ability for backing up their enforcement of legitimate territorial claims.

GLEANINGS II – 509
Thursday April 25th, 2013

CENTRAL BANKS LOAD UP ON EQUITIESAS (BW, Sarah Jones)

• A survey of 60 central banks overseeing US$6.7TR in assets by Central Banking Publications & the Royal Bank of Scotland Group found 14 are all ready investing, or are planning to start investing within the next five years, in equities. The BoJ said it plans to more than double its holdings of equity ETFs, to US$3.5TR, by next year, the Swiss & Czech National Banks have boosted their equity holdings to over 10%of their reserves, and last year the Bank of Israel (run by a naturalized American citizen & former Chief Economist of the World Bank) bought stocks for the first time ever.

This is in part driven by a desire for more yield than the puny QE-driven ones available on US, UK, & Japanese government bonds, but far more importantly, & geopolitically significant, by a desire to diversify out of US Treasury securities.

CARBON BUBBLE WILL PLUNGE THE WORLD INTO ANOTHER FINANCIAL CRISIS
(The Guardian, Damian Carrington)

• Lord Nicholas Stern teaches at LSE & Carbon Tracker a London-based think tank. On April 19th the latter published a report by the former warning that, if the markets’ assumption of governments failing to meet legally-binding carbon emission targets were proven false, this would prompt another financial crisis as two-thirds of the world’s fossil fuel reserves would become worthless (a view with some resonance with, among others, HSBC, Citigroup, S&P, the IEA & the Bank of England. He says that, while the top 200 fossil fuel companies last year spent US$674BN, 1% of global GDP, finding & developing new sources of fossil fuels (that may become “stranded”), his 2007 study mandated by then Chancellor of the Exchequer Gordon Brown found that 1% of GDP would pay for an orderly transition to a clean global economy.
• HSBC says 40-60% of the oil & gas companies’ US$4TR market cap, & US$1.5TR of debt, would be at risk from the collapse of a carbon bubble &. S&P expects it would lead to lower ratings for fossil fuel companies within a few years. Moody’s SVP Steve Oman opined “It behooves us as investors and as a society to know the true cost of something so that intelligent policy and investment decisions can be made (isn’t “intelligent policy making” an oxymoron?). Too often the true costs are treated as unquantifiable, or even ignored”. Howard Pearce, Head of Pension Fund Management at UK’s US$3BN Environment Agency, says “Every pension fund manager needs to ask … ‘have we incorporated climate change and carbon risk into our investment strategy’. If the answer is no, they need to start to now.” James Leaton, a former PwC consultant now at Carbon Tracker, faults short-termism in financial markets; for “Analysts say you should ride the train until just before it goes off the cliff. Each think they are smart enough to get off in time, but not everyone can get out of the door at the same time.” And Jeremy Grantham, a legendary money manager who oversees US$160BN in assets at Grantham, Mayo, Van Otterloo, says it is on the verge of pulling out of all coal- & unconventional fossil fuel investments : “The probability of them running into trouble is too high for me to take that risk … if we … burn all the coal and any appreciable percentage of the tar sands, or other unconventional oil & gas, we’re cooked. There are] terrible consequences that we will lay at the door of our grandchildren.”
• Both Stern & Leaton point to China as evidence that carbon cuts will be delivered, & Leaton is surprised that the market hasn’t priced in China’s plans to have its coal use peak in five years; for “When it says it is going to do something, it usually does”.

This follows up on Carbon Tracker’s award winning report last year, entitled Unburnable Carbon, that postulated only 20% of the world’s fossil reserves can safely be burned without unacceptable global warming consequences. Be that as it may, any carbon bubble-driven financial crisis will have to take a number; for there are numerous other causes likely to prompt a ‘Mother of All Financial Crises’ long before the carbon bubble goes POOF!

MONETARY FUND CHIEF WARNS AGAINST ‘3-SPEED’ RECOVERY (NYT, Annie Lowrey)

• On April 18th, at the onset of the IMF/IBRD Annual Meeting, IMF Managing Director Christine Lagarde called for moving the world into a “full speed recovery”. Echoing an earlier warning, she expressed concern about the emergence of a “three speed” global economy, with the developing nations growing rapidly, the US healing faster than other industrialized countries & Europe continuing to suffer from insufficient demand & incomplete government policies, saying “It’s not the healthiest recovery … (although) we believe … we have avoided the worst and the economic world no longer looks quite as dangerous as it did … (even as) The pickup in financial conditions, financial markets, is clearly not translating into a sustained pickup in growth and jobs.” Asked about being ordered by a French court to appear before it to explain her handling of a financial scandal during her days as Sarkozy’s Finance Minister, she answered (rather flippantly?) “There is nothing new under the sun … I will be very happy to travel for a couple of days to Paris. I look forward to it.”

There is nothing wrong in principle with different parts of the world growing at different rates (unless, of course, one is a denizen of the slower growth part of the world). As to the need for her to give evidence on events on her watch as France’s Finance Minister, twenty-two centuries ago Julius Caesar divorced his possibly innocent wife Pompeia when her conduct was questioned on the grounds ”my wife ought not even to be under suspicion”, these days a quaint, old-fashioned notion.

GOOD BYE TO ALL THAT (NYT, Thomas L. Friedman)

• The mainstream media have all but ignored the April 13th resignation of PA Prime Minister Salam Fayyad, a former IMF economist. More’s the pity. For, as a secular, decent Arab leader intent on improving the lot of his people, rather than a modern day robber baron intent on enriching his family, tribe, sect or party, he was the “Arab Spring” before there was such a thing. He focused on building infrastructure, incl. a security service that even the Israelis begrudgingly came to respect, & was successful to the point that economic growth on the West Bank averaged 9% in the 2008-2011 period. The US should have supported him but instead cut his legs out from under him when it cut off aid for the PA after Abbas’ ill-advised, but successful, effort to gain statehood recognition at the UN (that Fayyad had vehemently opposed). His resignation was good news for Hamas & the settlers who prefer endless struggle so they can claim there is no one on the other side to talk to, bad news for the US & Israel because he was the best hope for peace in the Palestinian camp, and another nail in the coffin of a two-state solution.

As I have noted before, prior to the election that brought Netanyahu into power, a prominent Israeli political analyst opined that “A vote for Netanyahu is a vote for a one-state solution” – with the passage of time, these words seem to be proven more & more prophetic.

SPEED ISN’T EVERYTHING (Economist)

• Today China’s critics complain it’s not growing fast enough after complaining for years that it prized speed over balance, that its breakneck speed economic growth was heedless, relentless & headlong, & that investment crowded out consumption, & heavy industry services. But the China economy’s loss of momentum came at a bad time & was puzzling because of its credit expansion during the First Quarter, & disconcerting since it coincided with a lull in US growth & the IMF’s more gloomy outlook for most major economies.
• But this slowdown has two good longer-term aspects. Consumption is gaining traction, and services have exceeded industry for three-, & almost so for four-, quarters for the first time since the 60’s. And this was not coincidental but due to the 2008 change in labour laws that strengthened workers’ bargaining power, income & ability to consume, to a higher exchange rate that caused the energies of the nation to be internalized, & to a change in the tax regime that eased the fiscal burden on the services sector.

Geopolitically this likely means it will start importing more consumer goods from lower cost countries in the region. And this will give it potentially more political clout, which it won’t hesitate to use, with those countries, & further its plans to create a yuan-based trading bloc.

CHINESE TROOPS SET UP CAMP IN INDIAN TERRITORY (Economic Times)

• Dozens of Chinese soldiers have set up camp 10 kms (6 miles) inside Indian territory (or rather territory claimed by India) on the high-altitude (14,000+foot/4,200 metre) Himalayan Ladakh desert, raising the spectre of growing border tension. But an Indian Foreign Ministry spokesman says the two countries ‘are in touch with each other to resolve the issue’.

Reports of this in the Indian media have been strenuously denied by Beijing. Be that as it may, Ladakh, in the Northeast portion of the Indian part of Jammu Kashmir was the scene of a month-long ‘mini-war’ in 1962 that was started in similar fashion by the PLA in the Chou Enlai era & ended with its withdrawal (even though militarily it had bested the Indian forces). The region’s sparse population is equally divided between Muslims & Buddhist Tibetans, and this border has been imprecisely defined since colonial times. But the question remains, “why now?”

DOES JAPAN FACE A DEBT APOCALYPSE? (Barron’s, Andrew Bary)

• Massive Quantitative Easing (QE) could ultimately prove dangerous to the country’s bond market & lead to the Japanese debt apocalypse long predicted by Kyle Bass, founder of Houston-based money manager Hayment Advisers (who made a bundle a few years back shorting the subprime mortgage market). Since it became obvious last November Shinzo Abe would win the election & aggressively move to propel the economy onto a growth path, the Japanese stock market has gained 50% as foreign investors poured US$67.3BN into it, some, or much, of its through “unhedged” ETFs, the potentially equally poisonous twin of ‘paper gold’ (thereby working at cross purposes with Abe avowed policy of weakening the Yen, & masquerading its underlying weakness) at the very time Japanese investors in search of better profit opportunities started shifting loads of money into foreign securities.

So far the foreign speculators’ bet has worked; for the Japanese stock market is up 50+% to a five year high (albeit to a level one-third of its peak a quarter of a century ago) while the Yen has declined just 25%. But longer term the upside potential in the Japanese stock market may be much less than the downside risk in the Yen. As to Kyle Bass, he has been bearish on the JGB market since 2010 (which is not to say that at some point he won’t be proven right), & as a trustee of the University of Texas Investment Fund he had a hand in it first acquiring US$1+BN in physical gold & then deciding last month to have it removed from the vaults of the New York Fed.

WHEN NOT IN ROME (The Economist, Lexington)

• Some Republicans pretend America is halfway to Mediterranean dysfunction & Democrats that their opponents are promoting the kind of crony capitalism that has the hoi polloi up in arms from Oporto to Piraeus (the former is on Portugal’s Atlantic coast & the latter has long been Athens’ port). But, while America is not about to suffer Europe’s fate, because most Americans appreciate the need to stay globally competitive & fix the public finances, it increasingly shares one problem with the Eurozone : division.
• A Pew Research Center poll last year asked Europeans if success was due to hard work or good luck. While most Germans, British & Czechs said the former & most Southern Europeans the latter, Britain, with 57% was the European country with most faith in hard work, while 77% of Americans did so in a way that cut across party-, & personal wealth-, lines. And the crude poison paralysing Europe, mutual dislikes, is also growing among Americans. Republicans bear much of the blame for this by having divided Americans into taxpaying “makers” & welfare-dependent “takers”. And while slow to approve Hurricane Sandy disaster funding for the (mostly Democratic) Northeastern states, Raul Labrador (R.-Idaho) complained his party’s proposed tax cuts would be “painless” if only the President would quit making Republican districts suffer. But the Democrats too have stoked division, with the President accusing the Republicans of slashing school spending in lieu of loopholes for “big oil companies” & “corporate jet owners”; while he may think he’s more reasonable, he’s not above stirring up division himself.

The consensus he refers to among Americans on the need to stay globally competitive & fix the public finances goes only skin deep; for once it gets to the short strokes, i.e. who should pay for it, “Apres Vous, Alphonse” is the order of the day.

EUROZONE WOES ENTER NEW PHASE (G&M, Eric Reguly)

• The Eurozone’s existential crisis may be over, but its second phase political crisis is just beginning. And it still faces a third (social upheaval) phase before a new generation of political leaders can work out a way to keep it (sort of) intact. The political crisis started with a pan-European “throw the bastards out” series of elections in Britain, France, Spain, & Italy. But the newcomers have proven no more popular than the last lot as economic & social problems deepened. Italy is furthest down the political crisis road, with Beppo Grillo, head of the anti-establishment-, anti-austerity, anti-Euro 5 Star movement, emerging as its most powerful political figure & the likelihood another election could decimate the centre-left & centre-right parties. And in Greece the anti-austerity, radical-left Syriza Party is once again in the ascendancy (as is, at a distance, the neo-fascist Golden Dawn Party).
• Austerity was to have reversed the economic malaise & ensured the sustainability of government finances. But it hasn’t. Job destruction continues. Economic reform to free up markets & boost competition has stalled. The rich stay rich while everyone else gets poorer. And the big risk is that the political phase will turn socially ugly, as is already happening in Greece, is about to happen in Spain (& Portugal?), & may happen before long in Italy & France. With more austerity now a non-starter, the question is what might be done to create jobs, so as to shrink the size of the debt relative to GDP. One idea that has resurfaced is that of a two-tier Euro, with the one for the South lower-priced than its Northern twin.

The fact that the idea of a two-tier Euro makes it past even first base shows that the Eurozone as the world once knew is as dead as the proverbial dodo bird (which in turn means its existential crisis is not over). As to Italy, the resignation of Pier Luigi Bersani as head of the centre-left Democratic Party throws all recent political prognostications about Italy’s political prospects into a cocked hat. For, he will likely be succeeded by Matteao Renzi, the mayor of Florence, who, when referring to the traditional political class, is wont to use the word “Rottamazione”, a slangy term for a ‘beaterwagon’ automoble headed for the junk yard. Like Bill Clinton or Tony Blair he is ‘pragmatically’ left-of-centre, unlike Bersani who had a background in the Communist Party, he is photogenic, & he is likely to attract more support than Bersani from disenchanted voters (who voted overwhelmingly for Beppo Grillo) & from centrist to moderate right Northern Italy voters who held their noses in the last election as they voted for the thoroughly discredited Sylvio Berlusconi.

STATE TELLS IRISH DEBTORS HOW THEY MUST SPEND (Bloomberg, Joe Brennan)

• Last year, with household debt, incl. home loans at 200+% of disposable income, 2+ times the Euro-area average (on December 31st 12% of owner-occupied home loans, & 19% of buy-to-let mortgages, were three months, or more, in arrears, levels the central bank called “unprecedented”), Irish lawmakers passed a Personal Insolvency Act to pave the way for writing-down unsustainable debt, & for bankrupts to emerge debt-free after only three-, instead of 12-, years. The Insolvency Service of Ireland, set up by the government to administer the Act & supervise its implementation, on April 18th, only seven weeks after its launch, issued monthly per capita living expense guidelines for eligibility, targeting a standard of living for people deeply in debt that would be “based on needs, not wants, but … is more than survival and allows for meaningful participation in society.” They included 247 Euros/month for food, 36 Euros for clothing & 33 Euros for personal hygiene products, roughly 10%, & 1½% each, of per capita after-tax disposable income. This was endorsed by the Dublin-based consumer advocacy group Free Legal Advice Centres since it accepted that “a reasonable standard of living does not mean … subsistence level.”

Meanwhile, the article breathlessly reported that people “may be banned from taking vacations.”