{"id":65518,"date":"2014-12-19T09:16:17","date_gmt":"2014-12-19T14:16:17","guid":{"rendered":"http:\/\/countingpips.com\/?p=65518"},"modified":"2014-12-19T07:18:19","modified_gmt":"2014-12-19T12:18:19","slug":"things-that-make-you-go-hmmm-signing-off","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/12\/things-that-make-you-go-hmmm-signing-off\/","title":{"rendered":"Things That Make You Go Hmmm…Signing Off"},"content":{"rendered":"
December 19, 2014<\/div>
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By Grant Williams<\/h4>\n
\"\"On Christmas Eve 1979, 27 days before I became a teenager, in a surburban street in Moseley in Britain\u2019s West Midlands, a group of musicians put the finishing touches on their debut album.<\/p>\n

The musicians \u2014 Brian Travers, Astro, James Brown (no, not that one), Earl Falconer, Norman Hassan, Mickey Virtue, and twins Ali and Robin Campbell \u2014 had a unique approach to the music business.<\/p>\n

Eighteen months prior to completing their first album, Ali Campbell and Travers had plastered the streets of Birmingham with leaflets promoting the band, which had taken its name from the document issued to people claiming unemployment benefits from the UK government\u2019s Department of Health and Social Security (DHSS). The name of the form \u2014 and thus the band \u2014 was UB40.<\/p>\n

Having advertised themselves and with dreams of making a big splash on Britain\u2019s reinvigorated music scene running wild in their heads, the band had just one remaining item on their to-do list \u2014 learn to play their instruments.<\/p>\n

\"\"<\/p>\n

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

(I know, I know! This\u00a0IS<\/em><\/strong>\u00a0analagous to many modern-day Central Bank policy efforts, but that\u2019s not where I\u2019m going with this, so stop jumping ahead.)<\/p>

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Anyway, after about a year, the band felt competent enough to play in public; and they made their debut on the 9th of February, 1979, in an upstairs room at the Hare & Hounds, a small pub in King\u2019s Heath. They had been \u201cbooked\u201d by a friend to celebrate his birthday.<\/p>\n

Following on the success of their first gig (apparently, the birthday boy was delighted), the band secured a series of similar shows, all in local pubs, at which they planned to unleash their blend of reggae and dub onto an unsuspecting public who, though they didn\u2019t realise it, had been waiting for UB40 for years.<\/p>\n

Remarkably, at one of these pub gigs, Chrissie Hynde just happened to be in attendance, no doubt supping a couple of pints of Throgmorton\u2019s Dubious Explanation (a real ale so thick it\u2019s served by the slice); and she liked what she saw so much, she offered the band a supporting slot on The Pretenders\u2019 upcoming tour of the UK.<\/p>\n

Simple.<\/p>\n

Fast-forward to Christmas 1979, and the story of the recording of the band\u2019s debut album burnishes the legend yet further:<\/p>\n

(Wikipedia): The band approached local musician Bob Lamb as he was the only person they knew with any recording experience. Lamb had been the drummer with the Steve Gibbons Band for much of the 1970s and was a well-known figure within the Birmingham music scene…. However, as the band were unable to afford a proper recording studio, the album was recorded in Lamb\u2019s own home at the time, a ground-floor flat in a house on Cambridge Road in Birmingham\u2019s Moseley district….<\/em><\/strong><\/p>\n

Brian Travers recalled just how basic the recording facilities of the original Cambridge Road \u201cstudio\u201d really were:<\/em><\/strong><\/p>\n

Because we couldn\u2019t afford a studio and he was the only guy we knew who knew how to record music, we did the album in his bedsit. I remember he had his bed on stilts. So underneath the bed was a sofa and mixing desk. And so we recorded the album there on an eight-track machine, with the same 50p coin going through the electric meter continually because we\u2019d booted the lock off it. And, with it being a bedsit and us being eight in the band, we\u2019d record the saxophone in the kitchen \u2014 because there was a bit of resonance off the walls, a bit of reverb \u2014 before putting the machine effects on it. While the percussion \u2014 the tambourines, the congas, the drums \u2014 we\u2019d do in the back yard. Which is why you can hear birds singing on some of the tracks! You know, because it was in the daytime we\u2019d be shouting across the fences \u201cKeep it DOWN! We\u2019re RECORDING!\u201d<\/em><\/strong><\/p>\n

Lamb remembered the process fondly:<\/em><\/strong><\/p>\n

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

The title of the album, \u201cSigning Off,\u201d was inspired by the process of the band members ending their claim on UK unemployment benefits \u2014 and becoming pop stars.<\/p>\n

The LP (Google it, Gen Y-ers), released on August 29, 1980, spent 71 weeks on the UK albums chart, peaking at number 2 and turning platinum (when doing such a thing used to mean something). It was greeted with rapture by Britain\u2019s music press:<\/p>\n

(Sounds): Five stars out of five. It is an (almost) perfect album…. It\u2019s rare to find a debut album so detailed, so excellently played and so packed with bite \u2014 I sometimes think it hasn\u2019t really happened since The Clash.<\/em><\/strong><\/p>\n

The album would go on to make\u00a0Q Magazine\u2019s<\/em>\u00a0\u201c100 Greatest British Albums Ever\u201d (#83, if you\u2019re interested) and is featured in a book somewhat somberly titled\u00a01001 Albums to Hear Before You Die.<\/em><\/p>\n

I think it\u2019s fair to say I played my part in the success of the band by spending the pocket money I had saved up on a copy of \u201cSigning Off\u201d (though the band have so far not publicly acknowledged my involvement).<\/p>\n

Anyway, as I am now signing off from Mauldin Economics, I felt it would be appropriate to take stock of a few of the issues I have covered\u00a0ad nauseum<\/span>\u00a0repeatedly during my two-plus years working with John and his team; and I thought I\u2019d also take those of you unfamiliar with UB40\u2019s debut album through a few of the tracks (and remind those of you who know the band just how spectacular that album was).<\/p>\n

Track 2. King<\/span>\u00a0\u2014\u00a0<\/a>4:35<\/span><\/p>\n

The \u201cKing\u201d referred to in the second track on \u201cSigning Off\u201d was, of course, Martin Luther King, Jr. The song was short on lyrics but big on impact; however, the undoubted \u201cKing\u201d in markets today is once again King Dollar, and the world\u2019s reserve currency is making some serious waves right now, which threaten to cause chaos in world markets.<\/p>\n

At this point I\u2019ll throw things over to my friend and partner in Real Vision Television and author of\u00a0The Global Macro Investor,\u00a0<\/em>Raoul Pal, who has been warning of the likelihood of a major move in the dollar for longer than just about anybody. In his most recent report, he explained the ramifications of a dollar bull market in the clearest, most concise way possible:<\/p>\n

(Raoul Pal): Debt dynamics, deflation, positioning and technicals all suggest that a dollar bull market of some considerable velocity and length is underway.<\/em><\/strong><\/p>\n

When dollar bull markets occur, emerging markets get hit.<\/em><\/strong><\/p>\n

When dollar bull markets occur, carry trades get unwound.<\/em><\/strong><\/p>\n

When dollar bull markets occur, they tend to usher in disinflationary forces as commodities and goods get re-priced.<\/em><\/strong><\/p>\n

The preceding three factors lead to a self-reinforcing of the dollar bull market, creating more of the same in a cycle of liquidation and bad debts, creating more demand for US dollars.<\/em><\/strong><\/p>\n

As I said, clear and concise.<\/p>\n

I watched Raoul present at the iCIO Summit this past week, and his presentation was compelling, to say the least. As he pointed out in a panel discussion with Mark Yusko, Dennis Gartman, David Rosenberg, and myself, \u201cWhen currencies begin to trend, they can do so for decades.\u201d<\/p>\n

A sobering thought.<\/p>\n

A look at the long-term charts of the DXY Index shows just how massive the potential reversal of this trend is; and based on Raoul\u2019s roadmap, the sheer size of the reversal gives us a strong hint of the degree of carnage that will be wrought upon a world in which the dollar carry trade has reached somewhere between $5 trillion and $9 trillion.<\/p>\n

\"\"<\/p>\n

Incidentally, one of those estimates is Raoul\u2019s, and one belongs to the BIS, and I bet your first guess as to which is which would have been wrong.<\/p>\n

A closer look at a shorter-term chart demonstrates the recent break clearly:<\/p>\n

\"\"<\/p>\n

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

According to the BIS, US dollar loans to China\u2019s banks and companies have jumped to $1.1 trillion \u2014 that\u2019s TRILLION \u2014 from virtually zero just five short years ago. The annual rate of increase of those loans is a mind-boggling 47%.<\/p>\n

However, the fun doesn\u2019t stop there.<\/p>\n

Consider Brazil, for example, where cross-border dollar credit now stands at $461 billion, or roughly 20% of GDP. For Mexico those numbers are even more eye-watering. A country with a GDP of just $1.1 trillion has outstanding cross-border dollar credit of $381 billion \u2014 or roughly 30% of GDP. Frightening.<\/p>\n

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

Lastly \u2014 and perhaps most importantly \u2014 witness the change in direction of the Chinese renminbi which, after trending higher against the dollar for many years (and, in the process, moving virtually everybody to the same side of the boat in the belief that a stronger Chinese currency was a given), has suddenly started to look as if it may also succumb to the renewed strength of the dollar. The only difference here being that the Chinese may actively be looking now to devalue their currency in light of the ongoing attempt by the Japanese to devaluetheir<\/em><\/strong>\u00a0way back to competitiveness. Few thought this a likely scenario until very recently; consequently, few are positioned accordingly; and when things like that happen in the macro world, you can get some REALLY funky moves.<\/p>\n

When currency wars break out, they can get very nasty very quickly.<\/p>\n

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Under no circumstances should you take your eyes off the US dollar, folks. The sheer number of places where you will witness the knock-on effects of a soaring dollar \u2014 chief amongst them emerging markets and the commodity space \u2014 will be breathtaking.<\/p>\n

I will write at greater length on the likely effects of the dollar\u2019s move on gold in a few weeks, as it warrants a piece all its own; so stay tuned for that one.<\/p>\n

In a series of conversations I\u2019ve been fortunate to have had with some of the best macro traders in the world in recent months through Real Vision Television, there has been one overarching takeaway from every one of them: macro is back, and 2015 is shaping up to be an epic year for the guys who trade these fundamental shifts. To a man, after several years of little action in the macro world, they are positively licking their lips at the potential opportunities that are headed their way next year.<\/p>\n

One person\u2019s opportunity is another person\u2019s crisis. You have been warned.<\/p>\n

3<\/span>. 12 Bar \u2014 4:<\/a>24<\/span><\/p>\n

Track 3 was an instrumental number called \u201c12 Bar,\u201d a reggae reimagining of the 12-bar blues that highlighted Brian Travers\u2019 remarkably good saxophony skills (given his lack of attention to learning to play the instrument before forming the band).<\/p>\n

Obviously, during my time with Mauldin Economics, the \u201cbars\u201d which have preoccupied me have been those of the gold variety \u2014 and for the most part, their constant movement in an easterly direction.<\/p>\n

I have written article after article and given presentation after presentation about the dichotomy between paper and physical gold and have regularly highlighted the magnitude of the flow of gold out of the West and into strong Eastern hands. In the previous edition of this publication (\u201cHow Could It Happen?\u201d), I imagined a future in which this stunning relocation of physical gold had finally mattered; and between publishing that piece and penning this one, a couple of interesting things have happened. Firstly, my friend Barry Ritholtz took a big, fat shot at me in a Bloomberg column entitled \u201cThe Gold Fairy Tale Fails Again<\/a>.\u201d Barry\u2019s article (which was entirely consistent with his very public and oft-stated thinking and was, as is always the case with Barry, very well-written) took apart what he sees as the various failed narratives in the gold markets. He began with gold\u2019s link to QE:<\/p>\n

(Barry Ritholtz): [T]he most popular gold narrative was that the Federal Reserve\u2019s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. \u201cThe problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,\u201d I wrote at the time…<\/em><\/strong><\/p>\n

… moved on to the recent SGI:<\/p>\n

Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the \u201cSave Our Swiss Gold\u201d proposal was voted down, 77 percent to 23 percent, by the electorate….<\/em><\/strong><\/p>\n

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

Perhaps the most egregious narrative failure came from Grant Williams of Mauldin Economics. He imagined a conversation 30 years from now about China\u2019s secret three-decade-long gold-buying spree, dating to November 2014. Well, we only need to wait 30 years to see if this prediction is correct.<\/em><\/strong><\/p>\n

Now, in response to the lighting up of my Twitter feed after Barry\u2019s article was posted (and my thanks to all those who kindly pointed it out to me), I would say this: Barry is right on all counts.<\/p>\n

For now.<\/p>\n

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

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

HOWEVER… if your logic is sound and your thought processes rigorous, being wrong is often a temporary state \u2014 something that can also be said about being right, of course. In my humble opinion, the issue with gold today is not one of narrative, as Barry suggests, but rather that the extent of the current interference in markets by our friends at the various central banks around the world has meant that being wrong (no matter which part of the financial jigsaw puzzle you may be concerned with) has never been easier \u2014 even though being right has never, in my own mind at least, been more assured in the long term, certainly as far as gold is concerned.<\/p>\n

As I slumped against the literary ropes, Barry threw one more punch when he suggested that the reader would \u201conly need to wait 30 years to see if this prediction is correct,\u201d but this is where I stop covering up and finally flick a jab or two of my own.<\/p>\n

I think the chances of having to wait 30 years to see the gold conundrum resolve itself (in materially higher prices, I might add) lie close to those of Barry\u2019s being invited to give the opening address at the next GATA conference. The evidence is crystal clear that significant quantities of physical gold have been pouring into Eastern vaults (due to both private- and public-sector activity); and gold is, after all, a finite resource. Not only that, but the \u201cweakness\u201d in gold (which remains roughly 500% above its turn-of-the-century low, despite the recent 30% correction) is confined to the paper market.<\/p>\n

Whilst this distinction between paper and real gold hasn\u2019t mattered up until now, there will come a day when it absolutely does \u2014 to everybody \u2014 and at that point, anyone not positioned correctly will be in a world of hurt.<\/p>\n

\"\"<\/p>\n

(Charts above and below courtesy of Nick Laird at Sharelynx and Koos Jansen)<\/em><\/strong><\/p>\n

\"\"<\/p>\n

Tightness in the physical market has increased consistently as the likes of Russia continue to stockpile ever-increasing amounts of gold and as Chinese imports as well as withdrawals from the Shanghai Gold Exchange maintain a torrid pace. The only missing piece of the puzzle is the lack of any official acknowledgement that the Chinese have been doing the same thing to a far greater degree; and, as I wrote in \u201cHow Could It Happen?<\/a>\u201d, there is a curious demand for absolute proof from those who dispute official figures, whilst the principle of reasonable doubt continues to hold sway on the other side of the argument.<\/p>\n

I suspect that imbalance will right itself \u2014 possibly very soon \u2014 and when it does there will be absolutely no putting the genie back into the bottle.<\/p>\n

In the meantime, as Barry so confidently predicted, the Swiss Gold Initiative failed, but that was overshadowed (in my mind at least) by a couple of very interesting developments that were covered beautifully by two of my buddies, Willem Middelkoop (author of\u00a0The Big Reset<\/a>\u00a0\u2014 a phenomenal read) and Koos Jansen.<\/p>\n

Firstly, Koos reported on the increasing drive to allocate the gold held within the Eurosystem:<\/p>\n

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

Unfortunately we do not know what happened prior to 2014.<\/em><\/strong><\/p>\n

\"\"<\/p>\n

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

Secondly, another repatriation request was unearthed \u2014 this time made by perhaps the least likely source imaginable:<\/p>\n

(Koos Jansen): In Europe, so far, Germany has been repatriating gold since 2012 from the US and France, The Netherlands has repatriated 122.5 tonnes a few weeks ago from the US, soon after Marine Le Pen, leader of the Front National party of France, penned an open letter to Christian Noyer, governor of the Bank of France, requesting that the country\u2019s gold holdings be repatriated back to France; and now Belgium is making a move. Who\u2019s next? And why are all these countries seemingly so nervous to get their gold ASAP on own soil?<\/em><\/strong><\/p>\n

Funnily enough, the answer to Koos\u2019 rhetorical question about who\u2019s next was answered just a few days later:<\/p>\n

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

Austrian central bank reviewing gold storage concept, doesn\u2019t rule out relocating some of its gold from London to Austria: Standard cites unidentified central bank officials. Austria has 280 tons gold reserves, according to 2013 annual report. Austrian Audit Court Will Review Nation\u2019s Gold Reserves in U.K.<\/em><\/strong><\/p>\n

Say what you want about the gold price languishing below $1200 (or not, as the case may be, after this week), and say what you want about the technical picture or the \u201c6,000-year bubble,\u201d as Citi\u2019s Willem Buiter recently termed it; but know this: gold is an insurance policy \u2014 not a trading vehicle \u2014 and the time to assess gold is when people have a sudden need for insurance. When that day comes \u2014 and believe me, it\u2019s coming \u2014 the price will be the very last thing that matters. It will be purely and simply a matter of securing possession \u2014 bubble or not \u2014 and at any price.<\/p>\n

That price will NOT be $1200.<\/p>\n

A \u201crun\u201d on the gold \u201cbank\u201d (something I predicted would happen when I wrote about Hugo Chavez\u2019s original repatriation request back in 2011) would undoubtedly lead to one of those Warren Buffett moments when a bunch of people are left standing naked on the shore.<\/p>\n

It is also a phenomenon which will begin quietly before suddenly exploding into life.<\/p>\n

If you listen very carefully, you can hear something happening…<\/p>\n

Click here to continue reading this article from Things That Make You Go Hmmm\u2026<\/a> \u2013 a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.<\/em><\/p>\n

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The article Things That Make You Go Hmmm: Signing Off<\/a> was originally published at mauldineconomics.com<\/a>.<\/div>\n
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By Grant Williams On Christmas Eve 1979, 27 days before I became a teenager, in a surburban street in Moseley in Britain\u2019s West Midlands, a group of musicians put the finishing touches on their debut album. The musicians \u2014 Brian Travers, Astro, James Brown (no, not that one), Earl Falconer, Norman Hassan, Mickey Virtue, and […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-65518","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/65518","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=65518"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/65518\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=65518"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=65518"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=65518"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}