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Leather Apron Letter
Founded in 1727 by Benjamin Franklin, the Leather Apron Club was a club for mutual improvement whose purpose was
to debate questions of morals, politics, philosophy, and business affairs.
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Fact of the Week
“If, like me, you have a perfect record of never guessing correctly which side of your rental car the fuel door is on, this tip from
Fly Gracefully is for you...simply look at your fuel gauge and there should be an arrow pointing to either side. That's the side
your fuel door is on.”
http://boardingarea.com/blogs/flygracefully/2013/05/21/dont-pull-up-on-the-wrong-side-again-when-refueling-a-rental/
Articles of the Week
Our friend Bill Fleckenstein (who also writes a daily at FleckensteinCapital.com) shares his views on the recent debacle in
JGBs…
1) MSN Money—I want to talk about the crack in the Japanese bond market that occurred on May 23. I believe that was a very
important moment in recent and longer-term financial history. In the near-term, I believe it marked the end of the "sweet spot," a
term I have used to describe the environment we've been in where people believe that central banks could create an easy-money
nirvana at the push of a button.
In a recent column, I mused about which bond market -- Japan's, Britain's or
ours – would crack first. Now we know: Japan's. The reason I say the sweet
spot has ended is because on May 23, the very early stages of a funding crisis
hit Japan.
This is demonstrated by the fact that Japanese government bonds traded
through 1.00%, which is two-and-a-half times their rate when the Bank of
Japan's huge quantitative easing efforts began. One can imagine the carnage
that would occur here if our 10-year rates leaped higher in a similar fashion.
It was also a mini-demonstration of a point I made last week: Once you have
entered ZIRP (a zero-interest-rate policy) you can never leave, unless you have
a funding crisis and the market drives rates higher, despite central bank commands/demands.
In terms of a timeline, I believe the action in Japan is analogous to first-payment defaults during the mortgage meltdown,
which began in early 2007 and were a sign that the subprime market had cracked. However, it wasn't declared
"contained" until six to nine months later. During that period, fallout from the bursting of the housing bubble was not
only not contained, it was spreading.
Comments: The vicious Japanese volatility continues unabated… “Fleck” has nailed most of the long term trends in the past
couple decades, so our ears are perked...
June 7, 2013
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Confirming the great rotation out of bonds...GPIF finally made the announcement…
2) MoneyNews-Japan's public pension fund, the world's largest with a pool of $1.1 trillion, announced on Friday the most significant shift in its asset allocation since 2006 so it can take on greater risk by shifting into stocks and away from Japanese government bonds.
GPIF said it is increasing its Japanese stocks allocation to 12 percent of its portfolio from 11 percent, while lowering its
JGB weighting to 60 percent from 67 percent. GPIF said it would increase its weighting in foreign stocks to 12 percent
from 9 percent and lift its allocation of foreign bonds to 11 percent from 8 percent.
S. Korea is likely looking at this Japanese volatility and yen appreciation with a bit of joy...a bunch of schadenfreuden if you
ask me...
3) ZeroHedge—Over three months ago in "South Korea Starts Currency War Rumblings; Has Japan In Its Sights" we showed
that the one nation with the biggest sensitivity to Japan's currency-destructive and export-promoting Abenomics policy is its
close neighbor, South Korea. With nearly 60% of SK's entire GDP deriving from net exports, every percent drop in its trade balance result in a more than 0.5% hit to GDP: more than any nation in the world. And since South Korea and Japan compete for
the same export end markets, there would be no bigger loser in a zero trade sum world than Seoul.
Kospi
...now that Abenomics is in its sixth month, and South Korea's
max export pain threshold has been reached, the country no longer will stay silent. As the FT reports, "South Korea has warned
that G8 leaders need to do more to tackle the “unintended
consequences” of Japan’s monetary easing when they gather
for a summit later this month amid mounting concerns about
the knock-on effects of a weaker yen. In an interview, Hyun Oh
-seok, the South Korean finance minister and deputy prime minister, said that international co-ordinated action was needed to mitigate the impact of so-called “Abenomics” on currency markets."
The weaker yen had begun to hurt South Korean exports, Mr
Hyun said, and is having unforeseen spill over effects on the
global economy.
Comments: South Korea continues to be affected by Abenomics...a trend that should continue until they are forced to act on
their own behalf (or Japan cracks as Fleck and Bass predict)…
4) (Reuters) - Five years after the global financial crisis, South Korean construction workers are feeling the pinch more than ever
as they shoulder a mountain of debt from a real estate bust that has cast a long shadow on the country's growth prospects.
Facing the specter of bankruptcy, some construction firms persuaded their staff to take up loans to mop up unsold apartments.
"There was pressure. There's nowhere else in the world where there's a parallel to these practices," said a construction worker,
who declined to be identified due to the sensitivity of the matter.
"Loyalty and hierarchy is still strong in South Korea and especially in the construction companies which are run like the
armed forces," he said, adding that his employer Poonglim Industrial Co Ltd had asked him to buy two apartments, which meant
he had to borrow 800 million won ($712,800).
Such loans represent just a small part of a big problem in Asia's fourth-largest economy, as outstanding household debt
has climbed to almost $1 trillion.
South Korea's household debt has doubled over a decade to levels where debt-to-income ratios are in excess of
those in the United States before the sub-prime crash in 2008.
Hit by debt and the prolonged property market slump, January-March private consumption fell for the first time in
five quarters as Koreans kept a tight hold on their wallets.
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5) Jim Rogers chimes in on Japan and his usual agricultural pitch...
“ET Now: Agricultural commodities have not been able to sustain at higher levels. Coffee, corn, soyabean, rice all of them
have declined from the highs they made earlier this year. How should one approach agri commodity as a group now?
Jim Rogers: Well, I am more optimistic about agriculture than most other things. Inventories of agriculture products are near
historic lows, may be we will have great crops everywhere this year and they will stay down, but inventories are near historic
lows. We are running out of farmers, the average age of farmers is getting very old throughout the world. So I am still extremely
optimistic about agriculture on a secular picture.
ET Now: What about global equities then because they have been rather seeing a strong run up in the month of May before consolidating or even correcting a bit in the last few sessions? Would you rather favour this asset class versus commodities?
Jim Rogers: I do not really want to own equities right now. I owned a fair amount of Japanese equities. I sold most of them two
weeks ago (Ed. note, this was 1wk ago). I am not very optimistic about equities because you see what happened in Japan when
people started getting worried about the end of the artificiality. When everybody realises that all the central banks are going to
have to cut back, it is not going to be fun. The Japanese stock market has collapsed in three days. You just wait and the whole
world has to face its problem.
And of course we cant forget Roger’s typical Russia pitch as well…
6) YouTube—Jim: Vladimir Putin, isn't a model leader.
"He grew up in the KGB. He took control in a silent coup
with the KGB. And he has been running the place like a
KGB thug..."
Jim might not like Putin... But he believes he may be trying to turn his reputation around. And that's good for investors...
"Maybe [Putin] doesn't like being treated as a KGB thug."
Rogers says. "He understands there has not been great
prosperity in Russia in the past few years... I have the
view that international capital is welcome in Russia.
And if you go there and you invest, you will find opportunities. Everybody hates Russia for many good reasons... including me for a long time. That's usually a place that you
should look, when people hate a market. And so I am looking."
And an FYI for those interested in Russia…
7) Gulf Times—Russia’s central bank is likely to keep its main policy rates on hold when it meets next week but sees some
room to ease the cost of term lending to banks, its outgoing chairman said yesterday.
Capital outflows that have contributed to a weakening of the rouble remain “very heavy”, chairman Sergei Ignatyev said, complicating the central bank’s task of bringing down high inflation even as the $2tn Russian economy slows.
Ignatyev, who retires later this month after 11 years at the helm of the Bank of Russia, described the decision that policy makers
will have to take at their June 10 meeting as “very difficult”.
...a further rise in inflation to 7.4% in May, above the central bank’s 5-6% target range, will rule out a cut in key rates at Ignatyev’s last meeting as chairman.
That, say economists, should pave the way for Ignatyev’s more liberal successor, Elvira Nabiullina, to push for lower
rates to help lift economic growth that slowed to just 1.6% in the first quarter.
Comments: Will the new chairwoman, Elvira Nabiullina, create an inflection point in the slacking Russian economy???
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And speaking of the ags...
8) The United States is still racing to determine how unapproved genetically modified wheat was found growing in an Oregon
field, a discovery that continued to roil global wheat markets on Friday as South Korean buyers stepped aside
“A top official with the U.S. Department of Agriculture said investigators are "pursuing many avenues" to determine how the
wheat - which carries a gene making it resistant to herbicide applications - popped up in late April.
"At this point we have not ... eliminated any" potential causes, Bernadette Juarez, deputy director of the investigative unit with
USDA's Animal and Plant Health Inspection Service, told Reuters in a telephone interview.
South Korean millers suspended imports of U.S. wheat on Friday and some Asian countries increased inspections after the discovery of the unapproved wheat, but stopped short of imposing import bans.
U.S. officials are attempting to tamp down global alarm about the wheat, developed by biotech giant Monsanto Co (MON.N)
more than a decade ago but never put into commercial production. Field tests on GMO wheat were last conducted in 2005.
The discovery of the long-forgotten strain prompted major buyer Japan to shun wheat from the Pacific Northwest at its
weekly tender on Thursday, while the European Union said it would step up testing…
…The impact of the GMO wheat find has been felt mostly on cash prices in the Pacific Northwest, a key market for Asian buyers to purchase supplies of white wheat.
Still, South Korea - which last year sourced roughly half of its total wheat imports of 5 million tonnes from the U.S. - has
also raised quarantine measures on U.S. wheat bought to feed livestock, while Thailand put ports on alert…
…South Koreans say they will not import U.S. wheat until all tests are completed.”
Comments: Trying to separate the wheat from the chaff GMO...
Wheat
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Our (now weekly) look into S. Africa...
9) http://www.reuters.com/article/2013/06/03/us-safrica-strikes-lonmin-idUSBRE9520EZ20130603
(Reuters) - A shop steward from South Africa's National Union of Mineworkers (NUM) was shot dead on Monday at a Lonmin
mine, police and the union said, sparking fears of a renewed cycle of violence in the troubled platinum belt.
Lonmin said the shooting, in which another union official was also critically injured, took place at the NUM offices at Wonderkop community, which is near the town of Marikana, 120 kilometers (70 miles) northwest of Johannesburg, where police shot
dead 34 miners last August, the country's deadliest police action since the end of apartheid.
"Two people were shot," regional police spokesman Sabata Mokgwabone said. "One died on the scene and another one was taken to hospital."
Both men were Lonmin employees, the company said.
Platinum ETF vs. Gold ETF (a rising chart indicates PLAT outperformance)
Comments: Platinum continues to outperform the gold sector as violence and instability continues into this week…
Speaking of Africa…
10) http://qz.com/89903/by-2050-one-in-five-africans-will-live-in-nigeria/
Last year Nigerian president Goodluck Jonathan called on families to stop having more children than they can afford, but it appears no one listened. The Sub-Saharan nation is expected to become the world’s fourth most populous country by 2050, with
400 million people. That’s an addition of 11,000 people a day. The population of the African continent overall is expected to be
2 billion in 2050.
Nigeria’s economy, having grown an average of more than 7% over the past decade, is not only one of the largest in Africa but
also one of the world’s fastest growing. But its exploding population—an increase of about 2.4% a year— isn’t quite the demographic dividend that past and present emerging markets have enjoyed like the East Asian “tigers” (pdf) (Taiwan, South Korea,
Japan and Hong Kong), India, and parts of Latin America.
Nigeria’s available labor force has indeed expanded, but poverty reduction and job creation haven’t kept pace, the World Bank
warned in a report (pdf) this month. Absolute poverty grew 60% last year, according to the government. In Lagos, Nigeria’s largest city, two thirds of residents live in slums. Some fear that growing ranks of uneducated, unemployed youth will breed instability, contributing to kidnapping, gang crime, and possibly an Islamist insurgency taking place in the north.
For a country to prosper from a population boom, fertility rates usually have to drop slightly. Then, when the proportion of working-age adults outnumbers children or the elderly (dependents for families and the government), productivity increases and economic growth helps fund needed services and infrastructure building.
Comments: With a large oil sector and bullish demographics, Nigeria is an interesting place if they can tame the turmoil and
control the poverty levels...but they have a lot of work to do...
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A quick look at a trend we’ve been all over since the beginning of the unwind...
11) http://www.bloomberg.com/news/2013-06-03/canary-in-coal-mine-gasps-as-australia-resource-jobs-fall.html
After Mark McGrath lost his job in Sydney in November, he tried to follow the thousands of Australians who headed to
the nation’s mines, which have mopped up surplus workers and fueled growth for a decade. Not anymore.
Fired by Royal Dutch Shell Plc (RDSA) after 26 years when the oil company shut its Sydney refinery, McGrath put his
home in the suburb of Liverpool up for sale to seek a job in the coal mines of the Hunter Valley, 210 kilometers (130 miles) to
the north. He couldn’t find work because the boom in demand for coal, iron ore, gold and oil that supported the economy is waning, adding to unemployment swelled by an ailing manufacturing base.
“Companies won’t hire,” McGrath said by phone from the central coast, separated from his family who are packing up
the Liverpool home. “They’ve a lot of contractors working in the pits up here,” he said, who are being let go first.
A drop in hiring of support staff by resources companies is one of the first indicators of a broader downturn because each
mining position creates four to five contract jobs in related services, said Martin Whetton, an interest-rate strategist at Nomura
Holdings Inc. in Sydney.
“Mining service companies are the canary in the coal mine,” said Whetton. “We’re likely to see higher unemployment over the course of the year.”
The Reserve Bank of Australia predicts the labor market will “remain somewhat subdued” and the government, in its
May budget, projected unemployment would rise to 5.75 percent by June 30, 2014, from the current 5.5 percent. That compares
with a U.S. jobless rate of 7.5 percent and an average of 8.1 percent for the Organization for Economic Cooperation and Development.
12) RBA holds rates amid concerns over Aussie’s strength
The Reserve Bank of Australia left its benchmark interest rate on hold at a record low of 2.75 per cent on Tuesday but
repeated its concerns about the strength of the domestic currency and said there was scope for further easing in monetary policy.
In an attempt to rebalance the economy and stimulate growth in non-mining sectors, the RBA has lowered its cash rate by 2 percentage points since November 2011.
However, interest-rate sensitive sectors of the economy, such as consumer spending and housebuilding, have been slow
to respond to lower interest rates, while industries such as tourism and manufacturing have continued to struggle with the Australian dollar’s strength.
In the unusually short statement which accompanied Tuesday’s decision, Glenn Stevens, RBA governor, again signaled
his unease at the strength of Australia’s currency in spite of recent weakness that has seen it fall below parity against the US dollar
The RBA also retained its so-called “easing bias” with Mr Stevens saying the inflation outlook “may provide some scope
for further easing, should that be required to support demand”.
13) http://blogs.wsj.com/moneybeat/2013/06/05/aussie-dollar-faces-grave-danger/
After the halcyon days of 2011 and 2012 when the high-yielding currency appeared to shed its role as a global risk proxy
for one as a minor reserve asset, the Aussie is reverting to its status as a whipping boy for traders.
From London to Sydney analysts are rushing to tell clients that the Aussie, the world’s fourth-most traded currency, has only just
begun its downward spiral. Not content with a 6% sell off against the greenback since the start of May, bearish analysts argue
that a recovering U.S. economy, falling interest rates in Australia and a slowing China bode ill for the trades that fueled the Aussie’s ascent.
In the view of Stephen Jen, a partner at London-based SLJ Macro Partners, the Aussie dollar ranks alongside emerging
market currencies as being in “grave danger” of a big correction lower.
“If China decelerates, the ‘truth will be revealed,” he says in a note to clients.
Mr. Jen is far from alone. One of Sydney’s best known brokers, Bell Potter’s Charlie Aitken, also chimed in Wednesday.
He believes his year end target of US$0.9200 will be hit very quickly and give way to a level somewhere above US$0.8000.
But Mr. Aitken goes further. He is calling a rout and warned that pricking the Aussie dollar bubble won’t be pretty to watch.
“The Australian dollar has been one of the most obvious bubbles in the financial world,” he argues in a note. “I remain of the
view that this Australian dollar correction will get disorderly.”
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6 2013
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This past week and a half has seen Turkey erupt in protests…Turkish Spring or good entry point???
14) http://english.alarabiya.net/en/business/
economy/2013/06/03/Economists-still-bullish-on-Turkeybut-warn-of-prolonged-protests.html
Economists remain bullish on Turkey’s prospects after
three days of fierce protests, although some warn that a
prolonged period of unrest could hit business.
Turkey’s economy is the fastest-growing in Europe, with
the per-capita income having tripled to more than $10,000
during the ten-year rule of Prime Minister Recep Tayyip
Erdoğan.
That growth trend is set to continue, according to commentators, despite speculation that the widespread demonstrations and a
heavy-handed response from security forces could mark the start of a ‘Turkish Spring’.
“These demonstrations seem to be fairly natural in other contexts, such as Spain and Greece. I don’t think they will have any impact on the economy,” said John Sfakianakis, the chief investment strategist of Masic, a Saudi Arabian family investment company. “However, if these are long-lasting events, it could be different.”
Sfakianakis said the fundamentals of the market are solid, with a strong appetite for investment in Turkey.
“I’m very bullish about Turkey in general. The numbers are very optimistic, in the property sector in particular,” he said. “The
foreign-direct investment appetite is there. Turkey has managed to grow at phenomenal rates.”
15) http://www.bbc.co.uk/news/business22778768
While the impact of the demonstrations on the
economy appears to be limited to a part of the
tourism industry for now, even a small bump
can be magnified in a country where much of
the economy hinges on the services sector.
It makes up 63% of the country's GDP. Turkey is the sixth most popular destination in
the world, having attracted 31 million tourists
in 2011 and valuing the industry at $30bn.
"It doesn't help that there are photos [in the
media] showing the smoke-filled lobby of the InterContinental," said Ms Ozden, adding that the tourism industry was trying to
assuage fears by promoting the protests as a healthy symptom of a working democracy.
Comments: Turkey has seen and relied on a lot of “hot money” flows...this unrest will likely shake some of this fast moving
money from the system and allow Turkey to continue to trend towards being one of the dominant countries in the region...
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Last week we profiled China's attempt at their largest US acquisition to date…we continue into this week...
16) http://www.testosteronepit.com/home/2013/6/4/the-chinese-dream-come-true-gobbling-up-assets-overseas.html
The “Chinese dream” is the dream of the whole nation and also of every individual Chinese, explained Fu Ying, chairwoman of
the Foreign Affairs Committee of the National People’s Congress. The slogan had been coined by President Xi Jinping after he’d
ascended to the throne of the Communist Party. It would benefit the world, she said. But for the richest Chinese, it has already
come true.
So Chinese real estate mogul Zhang Xin bought a big stake in the iconic 50-story white-marble General Motors Building in Manhattan. A few days ago, Shuanghui International Holdings, China’s largest meat processor, offered to acquire Smithfield Foods,
the largest pork producer in the US, a couple of months after 16,000 dead pigs floated down the Huangpu River into Shanghai.
Maybe, Shuanghui wants to obtain Smithfield’s expertise in food safety; or maybe it just wants to find a place outside China to
park a few billions.
Other industries have seen similar purchases, particularly the automotive component sector. Or what’s left of it in the US, as
many component makers have already moved their production and in some cases even their design centers to China in search of
cheap labor. It shows: for the first four months of 2013, imports of Chinese auto components have swollen to over $5 billion and
will soon be in second place, behind Mexico but ahead of Japan and Canada. Delphi, GM’s former component division, and Visteon, Ford’s former component division, have but skeleton crews left in the US [for these dark aspects of deindustrialization,
read my article.... The Currency Wars: Now US Automakers Are Squealing].
The Chinese have also gone on a shopping spree in Germany, where they’re interested in the Mittelstand – family-owned companies with innovative technologies and high-quality manufacturing in worldwide niche markets. The most prominent was the acquisition of Putzmeister, long the world leader in concrete pumps (here is my take). The Chinese have been buying in each country according to their perception of what that country is famous for, and what is available to Chinese buyers without too many
political hassles.
So in France, the Chinese have a different shopping list – in late May, for example, Fosun International, one of the biggest privately owned Chinese conglomerates, partnered with Axa Private Equity to make a tender offer for vacation-resort operator Club
Med, of which both are already the largest stockholders. There were other deals for what France is known for in China: châteaux
and their vineyards.
17) http://business.time.com/2013/06/03/europes-new-wave-chinese-acquisitions/
Another day in Europe, another Chinese acquisition: over the first June weekend it was the turn of three prestigious Bordeaux
wine châteaus, Bon Pasteur, Rolland-Mallet and Bertineau St.-Vincent, to be acquired by the Hong Kong–based Goldin Group
for an undisclosed amount.
A new wave of Chinese investment is rolling across the world, and Europe is where much of it’s washing up. Over the past couple of years, Chinese groups have been snapping up an assortment of manufacturing companies and consumer brands, from forklift makers to wineries, in Germany, France, the U.K., Scandinavia and elsewhere at a steadily increasing pace. Last year Chinese
investments into Europe totaled $12.6 billion, up 21% over 2011, according to A Capital, a private-equity fund based in Beijing,
Brussels and Shanghai that was involved in the biggest recent European deal, a friendly $700 million buyout of France’s Club
Med by shareholders including China’s Fosun International. Chinese investment into Europe tripled between 2006 and 2009, and
then tripled again from 2009 to 2011.
At a time when Europe and especially the 17 nations in the core euro zone are struggling with no growth, rising unemployment
and an increasingly restless populace, this Chinese investment is a vote of confidence, just as some U.S. companies have become
increasingly downbeat about the Continent’s prospects.
Comments: As the yuan strengthens against all major currencies, China continues to go on a global buying spree to secure
resources and assets for the long term… this is a strong trend that should continue for some time…
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Speaking of China...
18) China’s debt servicing cost and dat Minsky moment
“A little update on China’s growing debt-to-GDP ratio, which has caused much alarm and puzzlement this year.
We’ve mentioned before a very interesting 2012 BIS paper on national debt servicing ratios, which found the following:
…the DSRs’ peak levels are surprisingly similar across countries and time despite different levels of financial development. As a
broad rule of thumb, the graph panels suggest that a DSR above 20–25% reliably signals the risk of a banking crisis.
There are certainly exceptions to this — the authors of the BIS paper, Mathias Drehman and Mikael Juselius, point out that
South Korea well exceeded this range before experiencing a financial crisis; while German and Greek crises occurred before 20
per cent was reached.
What about China?
Societe Generale’s Wei Yao has used the methodology from the BIS paper for calculating debt servicing ratios (DSRs) and applied it to China’s recent credit and growth data, including a broad measure of credit (ie, shadow banking). This is what she
found (our emphasis):
First, taking bond, formal and shadow banking credit together, we see the debt burden of non-financial corporates and
LGFVs at 145-150% of GDP as of end-2012. We consider LGFVs with other corporates because they are in pursuit of the
same financing sources and increasingly face similar borrowing costs.
Second, the average interest rate and maturity are estimated at 7.8% and 6.3 years. Bear in mind that this is a fairly rough
estimate, as detailed loan-level data are not easy to obtain, especially for shadow banking credit. As a general rule, we choose to
adopt more lenient assumptions when information is scarcer. Therefore, maturities used in the calculation for each segment are
probably longer than in reality and actual prevailing interest rates in the shadow banking system may be higher.
Third, assuming the repayment schedule of an installment loan (i.e., a regular mortgage, for example), we then arrive at a
shockingly high debt service ratio of 29.9% of GDP, of which 11.1% goes to interest payment (=7.8%×145 % of GDP) and
the rest principal. At such a level, no wonder that credit growth is accelerating without contributing much to real growth!
The mechanism that still holds the situation together is the state-backed formal banking system and its unspoken commitment to
supporting local governments. We think this precarious equilibrium could last a bit longer but not much longer, particularly
if the central government does nothing.
However she’s not forecasting chaos either — like other China pundits (Capital Economics for example) she’s been reassured
that the central government hasn’t turned to big stimulus efforts this year and appears comfortable with slowing growth.
Comments: Another interesting bearish anecdote concerning China...Bull or bear, China has seen a much smoother couple
of years then some of its sovereign competitors… calm before the storm or an attractive entry point???
FXI-China ETF
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More on the BRICS...
19) Economist.com—The trouble is that in Lula’s second term (2007-10) and especially under his chosen successor, Dilma
Rousseff, the formula behind Brazil’s success has been slowly abandoned. The policy secret was simple: inflation targeting by a
Central Bank operating with de facto independence; transparent public accounts; a rigorous fiscal target, which brought down the
public debt; and a much more open attitude to foreign trade and private investment.
But the global recession of 2008-09 prompted Lula and Ms Rousseff to shrug at decadent liberal economics and ape Chinese
state capitalism. The finance ministry wrote vast cheques to boost lending by state banks. The government gave up on market reform, and spent remorselessly. When overheating turned to stagnation (the economy grew by a paltry 0.9% last year),
Ms Rousseff publicly chivvied the Central Bank to slash interest rates. When inflation neared the top of its target range
(6.5%), she said she cared more about growth. She unleashed a bewildering and ever-shifting barrage of tax breaks (and tariff rises) for favoured industries but failed to balance these with spending cuts. And instead of a clear fiscal target, there are
some worryingly Argentine accounting fudges (see article).
The upshot is that investors have become confused about Brazil’s economic policies. This uncertainty has contributed to a mediocre performance: since 2011 growth has been lower and inflation higher than in most Latin American countries.
20) http://www.bloomberg.com/news/2013-06-04/brazil-scraps-foreign-investment-tax-as-real-hits-four-year-low.html
Brazil will eliminate its foreign investment tax on fixed income after the real had the worst performance in Latin America in the
past three months, Finance Minister Guido Mantega said today.
“We were worried about excess liquidity and we have always criticized that,” he said after meeting with President Dilma
Rousseff. “Now the market is more regular, more normal, which allows us to remove this obstacle we had placed.”
The government starting tomorrow will scrap a 6 percent tax rate on foreign investors who buy Brazilian bonds in the domestic
market, he said. The government is keeping the tax on derivative operations.
Signs the U.S. may tighten monetary policy threaten to exacerbate a drain in global liquidity that has caused the dollar to gain in
value against global currencies, Mantega said. Still, Brazil isn’t facing a liquidity shortage and companies are able to secure international financing, he said.
Mantega’s tax measure comes as the government reduces a series of capital controls it put in place over the years after
low interest rates in developed economies
put pressure on the real. President
Rousseff in April eliminated a tax on
loans for the purchase, production and
leasing of capital goods.
Comments: As noted last week, the
BRICS continue to have issues...keep an
eye on these...
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21) Speaking of South America...Goldman Sachs by way of ZeroHedge…
Venezuela: Rising Risks that the Economy Could Shift From Stagflation Toward Hyperinflation
Consumer prices rose by a very high 6.1% in May (the highest monthly print on record), driving the yoy measure to
35.2% from 20.1% in December. Food prices rose by 10.0%
in May (following the 6.4% increase in April) and are now up
48.1%. Food inflation is a particularly regressive social tax as
it disproportionately affects low-income households for whom
the weight of food in the overall consumption basket is higher
than for the representative consumer.
Eleven of the 13 CPI groups have now inflation running
above 20% yoy, which shows Venezuela is now trapped in
stagflation (real GDP collapsed to a minor 0.7% yoy during
1Q2013 while annual inflation accelerated by 15pts) and entering the dangerous and slippery road of hyperinflation.
Caracas stock exchange
Comments: Take a look at the chart..BoJ, BoE, FED, ECB take note….gotta love that “wealth effect”...
And finally, while on the emerging market topic…
22) FinancialTimes- “In this new environment, it will no longer suffice to treat EM as an asset class that largely goes up together.
In the short run, we are witnessing what can be seen as a “winner’s curse”: countries that have received the most capital inflows
due to stronger perceived fundamentals suffer the most as the inflow of money dries up. Measuring the sensitivity of flows to
global “push” factors (as opposed to local “pull” factors) is key to seeing which countries may suffer more. Looking at five major EM countries (Brazil, Turkey, Mexico, South Africa and Indonesia) our work shows Mexico, followed by Brazil, has the
greatest potential sensitivity to a “sudden stop” of flows into EM.
A “sudden stop” is dangerous, as the literature shows that exogenous drops in capital flows can have very bad effects on growth
through a series of transmission channels, such as lower asset prices and higher lending spreads. By looking at a measure of how
much growth could be impacted by the need to rapidly close current account deficits, we find that South Africa, followed by Turkey, would be impacted most. Of course the eventual impact on growth would also depend on possible second round balance
sheet “accelerator” effects, such as excess corporate leverage, that may exert further downward pressure on growth.
We believe that “what will growth be?” is the most important question to ask. This is because, as we learned during the European
crisis, fiscal and financial positions that looked healthy can quickly become unsustainable if there is a large, unexpected fall in
economic growth. In effect, an exogenous shift in capital, credit and financing flows may shock an economy from a “good” into
a “bad” equilibrium of low growth which is re-enforced by a higher risk premium due to a general re-pricing of risk.
For this reason it is important to measure a country’s “policy space”, or its ability to use economic policies to counter cyclical
reactions to a drop in capital inflows, to hopefully avoid falling into a low-growth, bad equilibrium. Looking at where policy
rates and fiscal positions are relative to their five-year averages, we find Indonesia and Turkey have the most policy space,
while Brazil has the least””
Page 11
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Pimco Chief Bill Gross released his monthly...in case you haven't read, it is excerpted below...
23) http://www.pimco.com/EN/Insights/Pages/Wounded-Heart.aspx
...just as profits are critical to the longevity of our capitalistic real economy so too is return or “carry” critical to our
financial markets. Without the assumption of “carry,” or return over and above the fixed, if mercurial, yield on
an economy’s policy rate (fed funds), then investors would be unwilling to risk financial capital and a capitalistic economy would die for lack of oxygen. The carry or return I speak to is most commonly assumed to be a credit
or an equity risk “premium” involving some potential amount of gain or loss to an investor’s principal. Corporate and
high yield bonds, stocks, private equity and emerging market investments are financial assets that immediately come
to mind. If the “carry” or potential return on these asset classes were no more than the 25 basis points offered by today’s fed funds rate, then who would take the chance? Additionally, however, “carry” on an investor’s bond portfolio
can be earned by extending duration and holding longer maturities. It can be collected by selling volatility via an asset’s optionality, or it can be earned by sacrificing liquidity and earning what is known as a liquidity premium. There
are numerous ways then to earn “carry,” the combination of which for an entire market of investable assets constitutes
a good portion of its “beta” or return relative to the “risk free” rate, all of which may be at risk due to artificial pricing.
This “carry” constitutes the beating heart of our financial markets and ultimately our real economy as well,
since profits on paper assets are inextricably linked to profits in the real economy, which are inextricably
linked to investment and employment. Without these, the wounded heart dies and shortly thereafter the body.
But there comes a point when no matter how much blood is being pumped through the system as it is now, with
zero-based policy rates and global quantitative easing programs, that the blood itself may become anemic, oxygen-starved, or even leukemic, with white blood cells destroying more productive red cell counterparts. Our
global financial system at the zero-bound is beginning to resemble a leukemia patient with New Age chemotherapy,
desperately attempting to cure an economy that requires structural as opposed to monetary solutions.
24) Pimco Flagship Has First Withdrawals Since ’11 as Bonds Drop
“Bill Gross’s Pimco Total Return Fund (PTTRX), the world’s largest mutual fund, suffered the first client withdrawals since 2011 last month as global bond markets tumbled the most in nine years.
Investors pulled $1.32 billion from the $285 billion fund, according to estimates from Chicago-based research firm
Morningstar Inc. (MORN) An exchange-traded version of the Total Return (BOND) fund saw clients pull an estimated $64.4 million, the first ever withdrawals since the ETF’s inception in 2012.
A bet on U.S. government debt hurt Gross last month as Treasuries tumbled 2 percent amid speculation a strengthening U.S. economy will allow the Federal Reserve to reduce its monetary stimulus. Gross’s fund declined 1.9 percent
last month through May 30, its biggest monthly loss since September 2008, to trail 94 percent of peers, according to
data compiled by Bloomberg. Gross raised the holdings of Treasuries in his fund to 39 percent as of April 30, the
highest level since July 2010, and has increased the proportion of U.S. government securities every month this year
since February.
Comments: The two kings of fixed income are long the long bond still...
Page 12
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Civic v. Model S
25) Yahoo—The beautiful Tesla Model S electric sports sedan has been an object of desire, rapture and ignominy to driving enthusiasts, eco-champions and eco-skeptics, respectively. It's also outselling some Mercedes, BMW and Audis. But does Tesla
merit this much attention for being green? Short answer: no, or at least, not yet. For one thing, its sales are miniscule in the grand
scheme of things and, as for reducing vehicular carbon impact, you'd do just as well buying a Civic.
26) http://www.zerohedge.com/news/2013-06-03/tesla-model-s-sales-may-1425-autodata-estimates
Curious why (formerly) government-subsidized, ultra-luxury battery operated car maker Tesla has a market cap of $10.6 billion
(a little over 25% of GM's market cap). Here's a hint:

AUTODATA ESTIMATES TESLA MAY U.S. MODEL S SALES
WERE 1,425
And that's with the surge in daily publicity, the headline news articles resulting from the epic short
squeeze, and the nearly daily CNBC infomercials.
But don't worry: it's a fixed cost model. In other
words the company's market cap right now translates
into $7.5 million per car sold per month. But just
wait until TSLA is selling 142,500 $100,000 electric
cars per month to the world's infinite (for it's own
sake) billionaires. Then you will see scale like no one
has seen ever before...
Comments: 23m shares short..caveat emptor
Page 13
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27) Where social mood meets marketing
“Gatorade’s transition from beverage giant to sports nutrition company is taking shape on several fronts, not the least of which is
social media. In a midsize conference room in Chicago known as “mission control,” four to six employees with laptops watch a
bank of six screens like NASA rocket engineers. On the screens, they track the Internet’s “mood” toward Gatorade, thanks to
software that collects, categorizes, and interprets a cross section of online conversations. Then, on their laptops, they follow up
on individual comments and complaints. For example, Gatorade investigated one about caps on some drinks being hard to open
and discovered that the bottles in question had overheated during shipping. “It’s the world’s largest unaided focus group,” says
31-year-old Randall Brown, global director of digital strategy for Gatorade.”
28) http://www.bloomberg.com/news/2013-06-06/carriers-sell-users-tracking-data-in-5-5-billion-market.html
Transportation consultant Fehr & Peers, studying the commuting habits of California residents last year, got 300 responses from
5,300 postcard surveys sent by mail. Using cellular signals over the same period, Fehr was able to track travel patterns for 76,500
handset users.
Fehr was testing a new service from Atlanta-based startup AirSage Inc. that tracked wireless signals from consumer phones in
near-real time. The test was so successful that Fehr has expanded use of AirSage data to five projects this year from just one in
2012.
“Now we have a thousand times more data,” Mike Wallace, a senior associate at Fehr, said in an interview. “The prices
are generally comparable. In the future, we’ll do less of the traditional method.”
As demand from transportation planners, retailers and marketers grows, scores of companies, including AirSage, ComScore Inc.
(SCOR) and SAP AG (SAP) -- which entered the market on May 21 -- are taking mobile-user data from carriers like Verizon
Wireless, analyzing it and packaging it into reports they can sell. AirSage’s revenues are rising by 25 percent a quarter, according to the company.
While privacy advocates question the practice and the government is considering tighter regulations, carriers view it as welcome
extra revenue as voice calls continue to decline and contract subscriber growth slows.
SCOM—ComScore
Phone companies already collect data on user location,
as well as Web surfing and application use, to adjust
their networks to handle traffic better. Two carriers, Verizon Wireless and Sprint Nextel Corp. (S), are just starting to make the data available to third-party companies
in hopes of booking millions in sales. Worldwide, revenue from selling mobile-user behavior data may reach
$9.6 billion in 2016, up from $5.5 billion last year,
Walldorf, Germany-based SAP (SAP) estimated.
“The value of mobile subscribers is flattening out, and
wireless operators are all interested in new ways to generate revenue,” Cy Smith, chief executive officer of AirSage, said in an interview. “The value of this data is
still in the early stages of being recognized.”
Comments: As individuals put more and more info on the internet, personal data collection and analysis is becoming a huge
business and a trend to watch for the long term...
Page 14
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29) Mickey Mouse Inflation...
TorontoSun—Walt Disney Co raised single-day admission prices as much as 6.7% over the weekend at its theme parks in Florida and California, hikes that are more than five times the rate of inflation.
Higher prices for Disney’s theme parks have become an annual tradition. The theme parks and resorts unit provided 20% of the
company’s overall profits in the financial year that ended in September 2012, second only to the company’s media unit that includes the behemoth sports channel ESPN.
As of Sunday, one-day entry to Disney’s Magic Kingdom at the Walt Disney World resort in Orlando, Florida, costs $95 for a
person age 10 or older, a 6.7% increase.
A single-day pass to one of two parks at Disneyland in Anaheim, California, rose 5.7% to $92. A park hopper ticket for entry to
both California parks on the same day increased 9.6% to $137.
30) http://www.bloomberg.com/news/2013-06-04/coca-cola-ceo-opens-myanmar-bottling-plant-to-stave-off-pepsico.html
Coca-Cola Says Myanmar’s Opening Is Like Fall of Berlin Wall
Coca-Cola Co (KO). Chief Executive Officer Muhtar Kent marked the return of the world’s largest soda maker to Myanmar after
60 years by opening a bottling plant and pledging more investment in the newly opened economy.
The company will invest $200 million in the next five years and a second plant will open in a month’s time, Kent said in an interview with Haslinda Amin on Bloomberg Television.
“It’s a great moment in history, just like it used to be when we opened up our business in east and central Europe in the former
Soviet Union right after the fall of the Berlin wall,” Kent said. “We can retain and grow our leadership that we already have in
this market today.”
Coca-Cola’s new plant begins in earnest a race with PepsiCo Inc. (PEP) to control beverage markets in the Southeast Asia nation, which reopened its borders last year to foreign investment. Myanmar President Thein Sein has allowed more political freedom and loosened economic controls since coming to power two years ago, attracting companies such as Ford Motor Co., MasterCard Inc. (MA) and Unilever NV. (UNA)
The country is boosting economic, military and political ties with Western nations after years of isolation that left its 64 million
people among Asia’s poorest. Its transition to democracy last year after about five decades of military rule prompted the U.S. to
ease sanctions last May.
31) http://www.bloomberg.com/news/2013-06-06/myanmar-as-economic-miracle-hinges-on-natural-gas-bounty-energy.html
Myanmar’s opening to foreign investment has been compared to the fall of the Berlin Wall and the start of an economic growth
story to emulate Vietnam. How those views pan out will be largely decided by natural gas.
Exxon Mobil Corp. (XOM), Woodside Petroleum Ltd. (WPL) and Oil India Ltd. (OINL) are among 59 global energy companies
lining up for a share of Myanmar’s estimated $75 billion bounty of the fuel, according to the country’s energy ministry. While
oil and gas have been pumped for decades, investment largely dried up during almost five decades of military rule that ended in
2012.
Wedged between energy-hungry China and India, Myanmar needs more investment to explore its gas potential. Energy and industries such as agriculture need a combined $320 billion through 2030 to help the economy achieve 8 percent annual growth, a
report last week by McKinsey Global Institute forecast.
“People see Myanmar as a frontier market,” Melinda Tun, a senior associate at law firm Baker & McKenzie, said in a June 4
phone interview in Sydney. “If you can get a first-mover advantage you could be well set for years to come. It sits between the
two most populous economies in the world.”
“A lot of low-hanging fruit hasn’t been caught,” Olivia Boyd, a Beijing-based energy analyst at IHS Global Insight, said by
phone. “A lot of prospective areas are unexplored.”
Comments: A lot of low hanging fruit but without a functioning stock market, investing is tough...
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31) http://www.nytimes.com/2013/06/03/health/experts-debate-plan-to-speed-antibiotic-development.html?_r=2&
Pressure Grows to Create Drugs for ‘Superbugs’
Government officials, drug companies and medical experts, faced with outbreaks of antibiotic-resistant “superbugs,” are pushing
to speed up the approval of new antibiotics, a move that is raising safety concerns among some critics.
The need for new antibiotics is so urgent, supporters of an overhaul say, that lengthy studies involving hundreds or thousands of
patients should be waived in favor of directly testing such drugs in very sick patients. Influential lawmakers have said they are
prepared to support legislation that allows for faster testing.
The Health and Human Services Department last month announced an agreement under which it will pay $40 million to a major
drug maker, GlaxoSmithKline, to help it develop medications to combat antibiotic resistance and biological agents that terrorists
might use. Under the plan, the federal government could give the drug company as much as $200 million over the next five
years.
“We are facing a huge crisis worldwide not having an antibiotics pipeline,” said Dr. Janet Woodcock, director of the Center for
Drug Evaluation and Research at the Food and Drug Administration. “It is bad now, and the infectious disease docs are frantic.
But what is worse is the thought of where we will be five to 10 years from now.”
Annually, tens of thousands of Americans die from infections, largely acquired in hospitals, that are resistant to antibiotics, experts say.
Comments: The surge in “Superbugs” is creating a scramble for solutions...there will be big winners in this long term
trend...
32) http://kottke.org/13/06/alternative-energy-costs-are-dropping
Solar power is expensive, right? Actually, the high cost of alternative energy is a good example of a mesofact. As this graph
shows, the cost of producing photovoltaic cells has dropped two orders of magnitude over the past 35 years, bringing costs within range of fossil fuel energy production.
The underlying cause of this disruption is a phenomenon that solar's supporters call Swanson's law, in imitation of Moore's law
of transistor cost. Moore's law suggests that the size of transistors (and also their cost) halves every 18 months or so. Swanson's
law, named after Richard Swanson, the founder of SunPower, a big American solar-cell manufacturer, suggests that the cost of
the photovoltaic cells needed to generate solar power falls by 20% with each doubling of global manufacturing capacity. The
upshot (see chart) is that the modules used to make solar-power plants now cost less than a dollar per watt of capacity. Powerstation construction costs can add $4 to that, but these, too, are falling as builders work out how to do the job better. And running
a solar power station is cheap because the fuel is free.
Comments: We’ve touched on this in the past...solar is great but isn't scalable with current technology...hopefully Swanson’s
Law can remedy this...
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33) Legalizing marijuana will hurt drug lords, help cash-strapped states, and ease burdens on police and prisons.
Yet D.C. dithers. Should Pot Be Legal?
“America's 40-year crawl toward legalization of marijuana is picking up speed. Twenty-six states have taken steps
toward legalization, some quite bold. Just last week, Colorado Gov. John Hickenlooper made one of the biggest
moves yet, signing a package of bills addressing how marijuana will be grown, sold, taxed, and used. The measures,
which follow Colorado voters' approval of legalization last fall, form the cornerstone of the nation's first fully legal
market for pot. Come Jan. 1, Colorado residents over 21 will be allowed to buy marijuana at retail stores and smoke it
for their pleasure. The state of Washington, where voters also passed a referendum to legalize marijuana, will be next.
If all goes well with those pioneering efforts, it may be only a matter of time before more states follow…
…It's not just about the right to light up. With the nation's retail marijuana market estimated at about $30 billion, legalization also would bring some important economic benefits. It could lead to sharply lower prices, striking a
blow to the Mexican drug cartels and American street gangs. Pot could be produced in the U.S. for much less than
Mexican pot produced illegally. By some estimates, illegality adds 50% to marijuana's prices. If both countries legalized the drug, Mexicans might grow a lot of it and sell it to American consumers, but the inexpensive legal product
would not draw the attention of the ultraviolent Mexican drug traffickers any more than Mexican tomatoes do…
…Legalization also could bring some relief to cash-strapped states. Marijuana taxes would join levies on liquor, tobacco, gambling, and other pursuits that once were banned. A report prepared for the libertarian Cato Institute suggests states could raise a total of about $3 billion from marijuana taxes, and other estimates are even higher. California alone could pull in $1.4 billion a year, a state tax authority has projected. That may seem minor compared
with a state budget approaching $100 billion, but it would top the $1.3 billion that California now gets from alcohol
and tobacco taxes combined…
…Unquestionably, a loosening of marijuana laws would ease burdens on law enforcement. Some 663,000 people
were arrested for marijuana possession in 2011, up 32% since 1995. In New York, according to the prolegalization Drug Policy Alliance, a pot bust typically requires 2.5 hours of a policeman's time. Until Mayor Michael
Bloomberg changed the policy in February, the arrested automatically spent a night in the police lockup. Nationwide,
some 128,000 people are in state or federal prisons for marijuana offenses. That's 8% of all U.S. prisoners.”
Comments: According to an FBI report, a marijuana arrest occurs every 42 seconds in the US...enough is
enough...with state budgets bloated and the realization that the war on weed is a misnomer, the eventual legalization of pot is a strong trend that will continue to gain ground...
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7, 2013
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Happy Endings of the Week
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Contributors
Harris Kupperman
Harris Kupperman is the president and founder of Praetorian Capital, a macro themed hedge fund based in
Florida. Since its launch in 2003, the fund has consistently sought to be early in identifying longer term macro
trends and finding companies that will benefit from those trends.
Mr. Kupperman is the Chairman and CEO of Mongolia Growth Group, Ltd (YAK: Canada and MNGGF: USA) a
publicly traded company focused on investing in the rapidly growing economy of Mongolia. For more information on Mongolia Growth Group, please visit http://www.mongoliagrowthgroup.com.
Mr. Kupperman is also the chief adventurer of AdventuresInCapitalism.com, a site dedicated to uncovering
unique opportunities around the world.
Man In Black
”M.i.B” is an independent trader and consultant to hedge funds.
Yoda
“Yoda” is an analyst at Praetorian Capital focusing on value opportunities.
June 7, 2013
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June 7, 2013