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THINGS THAT MAKE YOU GO

A walk around the fringes of finance

By Grant Williams

To learn more about Grant's new investment newsletter, Bull's Eye Investor, Click here

15 APRIL 2013

Bit Happens
You cant win... Strike me down, and I will become more powerful than you could possibly imagine. Obi-Wan Kenobi, Star Wars The phoenix must burn to emerge. Janet Fitch The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law" which states that the number of potential connections in a network is proportional to the square of the number of participants becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's. Paul Krugman, 1998 I find your lack of faith disturbing. Darth Vader, Star Wars
Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page. Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.

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Contents
THINGS THAT MAKE YOU GO HMMM... ....................................................3
Cyprus Faces Economic Meltdown as EU-IMF Refuses Extra Aid ................................16 The Know-It-All Party .................................................................................17 Dont Make Us Fhrer: Anti-Euro 'Alternative for Germany' Launches ........................19 Fed, BoE Officials Don't See Signs of Emerging Equity Bubbles .................................20 Assault on Gold Update ..............................................................................21 Billions of Pounds of QE Unlikely to Cause Inflation - IMF .......................................23 France Plans Currency Swap Line with China .....................................................24 Former Portuguese Prime Minister Says "Portugal Cannot Pay Its Debts" .....................25 EU Set to Clash on Bank Deal as Germany Sees Treaty Limit ..................................25

CHARTS THAT MAKE YOU GO HMMM... ..................................................27 WORDS THAT MAKE YOU GO HMMM... ..................................................30 AND FINALLY ................................................................................31

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Things That Make You Go Hmmm...

Let's begin at the end. Why? Well, because all anybody wants to know these days, it seems, is where you stand on the Bitcoin phenomenon. The virtual currency has spawned a whole new label to bestow upon people who have bought in: 'bitbug'. And whether you are a believer or more prone to pooh-pooh the hottest topic in global finance right now, people are happy to stick a nice, tidy label on you and move on. Many think Bitcoin is a bubble the likes of which we haven't seen since US housing or NASDAQ stocks or even tulips, while others think it is the future. Certainly, the behaviour of Bitcoin this past week has given the advantage to the naysayers, but to dismiss the virtual currency out of hand is to miss the point entirely. Personally, I think Bitcoin is much more than a carnival sideshow, as it has frequently been portrayed. For what it's worth, I happen to think Bitcoin is one of the most important things to happen to the world of finance (and, indeed, to the numerous worlds that orbit it which is to say, pretty much all of them) in several decades. That being said, I think there are enormous problems with the virtual currency, which may well ultimately defeat it. However, now that the trend has started, if Bitcoin does crash and burn, something more robust will inevitably rise, phoenix-like, from the ashes. Now you know my conclusion: you know where I stand on Bitcoin, and so those amongst you who think the whole thing is some kind of joke have just had fifteen minutes of your lives handed back to you, because you can stop reading, put me in the file labeled'bitbug', and get on with your day. For those of you still with me either out of mere curiosity or a burning belief in Bitcoin, let's go back to the beginning and see if we can make some kind of sense of this virtual phenomenon. The history of Bitcoin has everything you could ever want from an underground cultural phenomenon, including a mysterious, shadowy figure at the heart of it, whose true identity remains a mystery. In November of 2008, a man (or men, or women nobody is quite sure) named Satoshi Nakamoto published a research paper outlining his ideas for a new digital currency.

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All that was known about him was that he supposedly hailed from Japan and had an email address that originated in Germany. However, though Nakamoto was (and remains) a mystery, his creation managed to solve a problem that had been causing cryptographers sleepless nights for years: the issue of doublespending. (The Wire): If a digital dollar is just information, free from the corporeal strictures of paper and metal, whats to prevent people from copying and pasting it as easily as a chunk of text, spending it as many times as they want? The conventional answer involved using a central clearinghouse to keep a real-time ledger of all transactions ensuring that, if someone spends his last digital dollar, he cant then spend it again. The ledger prevents fraud, but it also requires a trusted third party to administer it. Bitcoin did away with the third party by publicly distributing the ledger, what Nakamoto called the block chain. What does that mean to you and me? Well, The Economist takes up the story: (Economist): For a new block to be deemed valid, some computer on the network must create a transaction log for it that dovetails with the previous blocks. To prevent acceptance of bogus logs, giving it a seal of approval has to be prohibitively costly to any individual user, but relatively cheap for the network as a whole. This is done by making it into a forced-work task, which involves using the valid blocks and the new transactions to generate a digest consisting of 256 bits (ie, any number between 0 and 2256). The task is complete when the system's algorithm spits out a hash value below a preset target. The target is set so that the puzzle is solved by someone on the network, and a new block approved, every 10 minutes. To keep this rate constant as the network's ranks swell and its combined computing power grows, the target is lowered in order to make generating a value below it harder. (Conversely, if the network were to shrink, it would get easier again.) Part of the genius of this system lies in how difficult its complex structure makes it for anybody to cheat. Creating bogus 'blocks' requires the would-be counterfeiter to have control of over half the computing power of the entire Bitcoin system in order to outflank it and get his knockoff blocks validated in time. Yes, it's possible, but only theoretically rather than practically. So there is the indisputable beauty of Bitcoin: it is the anti-fiat currency, completely decentralized and unable to be created at whim by thirsty central banks. It is also, of course, inherently deflationary anathema to central bankers around the globe. As it grew quietly amongst a small, tech-savvy internet fringe group, Bitcoin began to be used in real-world transactions (the first of which was a pizza, delivered in Florida but paid for in bitcoins through an English volunteer who accepted the coins and then called in the order from the other side of the pond). Prophetically, when Wikileaks suggested they might adopt the viral currency in 2010, the mysterious Nakamoto emerged from the shadows with these words:

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The project needs to grow gradually so the software can be strengthened along the way. I make this appeal to Wikileaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy. You would not stand to get more than pocket change, and the heat you would bring would likely destroy us at this stage. We will revisit Nakamoto's prophecy in a moment. Shortly after he conveyed this message, Nakamoto sank back into the shadows once again, saying he had 'moved on to other things'; and he has not been heard from directly since. In October of 2011, Bitcoin entered the mainstream when a lengthy article appeared in The New Yorker, entitled 'The Crypto-Currency: Bitcoin and its mysterious inventor', in which the mechanics of the new frontier in monetary transactions was explained: (New Yorker): The Bitcoin software encrypts each transaction the sender and the receiver are identified only by a string of numbers but a public record of every coin's movement is published across the entire network. Buyers and sellers remain anonymous, but everyone can see a coin has moved from A to B, and Nakamoto's code can prevent A from spending the coin a second time. Nakamoto's software would allow people to send money directly to each other, without an intermediary, and no outside party could create more Bitcoins. Central banks and governments played no role.... "Everything is based on crypto-proof instead of trust," Nakamoto wrote in his 2009 paper. But, though Bitcoin grew rapidly, spawning multiple exchanges around the world where owners of 'wallets' could transact in the virtual currency, it did so on the fringes of society and failed to garner the attention of either the media or the public as the world strained to make sense of a financial system turned upside down after 2008 never mind something called a 'cryptocurrency' that was being 'mined' in the basements of computer nerds around the world.

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Naturally, there were teething issues exchanges were hacked and wallets full of Bitcoins stolen after being left unprotected on users' computers, and much bad press was generated by Bitcoin's association with the underground website Silk Road, on which the anonymous currency could be used to pay for everything from drugs to pornography. But slowly and steadily the marketplace weathered its growing pains and, as more and more merchants began accepting payment in Bitcoins, the community broadened into something more than just a weird underground movement. The list of places willing to accept Bitcoins as payment will be surprising to many (you can check it out HERE), but it wasn't until the likes of Reddit and Wordpress began transacting in Bitcoins late last year that the fears expressed by Nakamoto began to become very real indeed. In fairly short order, the world's first Bitcoin ATM (picture, previous page) was installed in Nashua, NH, but it was more a curiosity than anything else, and Bitcoin remained firmly under the radar. However, after the ham-fisted attempts by authorities to steal depositors' money in Cyprus, the Bitcoin concept was catapulted into mainstream consciousness and onto the front pages of just about every newspaper in the world, as fascination with an alternative to fiat currency gripped the world (even though many purchasers of Bitcoins didn't have the foggiest idea what they were dealing with). The chart below shows a Google Trends search for the term 'Bitcoin', and as you can see, interest in it has gone ballistic. Remember this chart. It's not the last one like it you're going to see before we're done here.

Source: Google Trends

That surge in interest led to an extraordinary sequence of events over the past few weeks as Bitcoinmania struck in full force, overwhelming the exchanges upon which it trades and causing shutdowns, outages, and wild swings in price that have had even the most seasoned bubblewatchers scratching their heads.

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Mt. Gox, the largest Bitcoin exchange, which claims to facilitate 80% of Bitcoin transactions made in dollars and 70% of those made in other currencies, halted trading on Thursday after a wild week of price fluctuations and a staggering surge in account openings was capped by a denial of service attack. In a statement, the exchange accentuated the positive: (Mt. Gox): As expected in such a situation people started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine! To give you an idea of how impressive things were here are some numbers that we would love to share with you guys: The number of trades executed tripled in the last 24hrs. The number of new account opened went from 60k for March alone to 75k new account created for the first few days of April! We now have roughly 20,000 new accounts created each day. But this is what the last week looked like, viewed through the dispassionate medium of a chart:
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Bitcoin Price April 5 - April 13 2013 (Mt. Gox)

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100

50 April 5 April 6 April 7 April 8 April 9 April 10 April 11 April 12 April 13

Source: Bitcoincharts.com

Remember that chart we looked at a few minutes ago of Google Trends inquiries into 'Bitcoin'? Well, if we step back and look at a longer-term chart of Bitcoin performance, we see a very familiar pattern one that has occurred many times in the financial sphere over the centuries and that was the foundation for my presentation on 'Extraordinary Popular Delusions' last year:

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Source: Blockchain.info

Yes, it's our old friend the classic Bubble Wave chart. But it was the recent moves within that longer-term trend that were truly extraordinary, particularly on April 11: (Bloomberg): According to Mt. Gox, the largest Bitcoin exchange, the currency started out at $230, spiked to $266, touched a low of $105 and then settled at just above $170 (its now $123). Thats, in the course of the day, a 15 percent jump followed by a 60 percent plunge off the days high and ending with a substantial loss. And during the day, it wasnt even clear where bids and offers were, or what the price was at any given moment. Joe Weisenthal of Business Insider reported seeing Bitcoin prices of $90, $170 and $225 on different sites. Naturally, many were quick to leap upon the crash in Bitcoin to declare it dead and buried, among them Vanity Fair's Kurt Eichenwald: (Vanity Fair): In the aftermath of the oh-so-predictable crash, the Bitcoin fanatics have begun marshaling out excuse after excuse for why this non-investment investment lost so much of its value so fast. One was that hackers attacked some of the exchanges for Bitcoins and crippled it. Really? A hacker can wreck an entire market? More of a reason not to buy these things. But exchange operators have come out and said no, there werent hackers. Instead, the excuse they offer is that the price of Bitcoins fell because so many new accounts had opened and so many people wanted to buy them. That is something that could be advanced only by an investment fool if more demand causes a lower price, then Bitcoins are either not ready for prime time or simply do not act like any other financial instrument in the history of the world.

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Here is reality: Bitcoins are not an investment. They are an investment fad that someday could be a real digital currency, but if they continue to behave as they have, they will instead be nothing.... Heres the bottom line. Bitcoins are not a real investment; they are bets inside a casino. If the price goes back up, dont be fooled. In the parlance of popping investment bubbles, its something called a dead-cat bounce. People who are desperate to keep the game going rush back in, hoping to bring the price back up, but it never lasts. Then Slate's Eric Posner brought out the big guns: (Slate): Bitcoin is a fantasy. The Internets currency a secure, private, decentralized type of money that makes possible anonymous and virtually costless transactions across borders contains the seeds of its own destruction. More than anything else, it resembles a Ponzi scheme and the wild claims made on its behalf reveal a great deal about a libertarian strain of thinking with deep roots in the American psyche. However, a quick trip back in time shows the remarkable resilience of Bitcoin. As this October 2011 article from The Economist demonstrates, a burst Bitcoin bubble is nothing new: (Economist): Bitcoin, briefly the world's favorite cryptocurrency, is in trouble. It plummeted from a peak of around $33 per unit in June to just $2.51. In May Rick Falkvinge, the founder of the Pirate Party in Sweden, famously blogged that he was converting all of his Swedish-crown savings to Bitcoins. Five months on, he tweeted that after hoarding Bitcoins until they hit $18 or so, he had moved to a buy-and-sell pattern. Mostly sell, it seems. I currently don't hold any, he admitted. It is hard to say for sure why Bitcoin crashed the way it did. One plausible hypothesis holds that the currency's rise was the result of a speculative bubble. As the currency made more headlines around the globe (including in The Economist), less techie types wanted in on the action. Then, like Mr Falkvinge, they decided to cash in, and the bubble burst. One thing isn't in dispute, however: a lot of real virtual wealth was both made and destroyed last week, and that has led to yet more sensationalist headlines. Time managed to put the gyrations into a real-world perspective: (Time): The scale of the recent boom and bust has been staggering indeed. At the start of the year, a Bitcoin was worth $13.51. Earlier this week, it traded as high as $266. And on Thursday, it plummeted to less than $100, as one of the exchanges where Bitcoins are traded closed temporarily. This would be comparable to the exchange rate for the British pound soaring from $1.62 (where it was on Jan. 1) to $31.90 and then falling back to $12. This, in my opinion at least, is Bitcoin's Achilles' heel (at least for the time being): no viable currency can display such volatility and be acceptable to the masses.

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The perfect example of this flaw is Alvic Property Management, a company that specializes in the management of condominiums, cooperatives, and multifamily rentals in the New York metro area, and that announced to much fanfare last week that it was going to be accepting rent and maintenance payments in Bitcoins. The company certainly got all the publicity it could have hoped for; but, if they weren't light on their feet, that publicity might have cost them a small fortune had they accepted Bitcoins and not immediately converted them into dollars. So what now for Bitcoin? A couple of months ago, at an investment conference, I had a fascinating meeting with Trace Meyer, one of the leading figures in the Bitcoin phenomenon. He outlined both the simplicities and complexities of Bitcoin to me beautifully, so I emailed him this week to get his views on what had transpired. His reply was speedy and forthright: This recent crash is a very unusual event. All of the major exchanges had coordinated DDOS attacks while the bots were going crazy on the downside and the trading lag on MtGox was in excess of 1,000 seconds. I think it was orchestrated to hit confidence and 'shake the trees'. Anytime a material amount of bitcoins come on the market, like 5k+ blocks, they get snapped up almost regardless of the price. In some cases I have seen people hit the offers when they are $20 over the current trading range just to pick up bitcoins in blocks. And coupled with the trading lag, which may be exchange induced?, it can really impact stuff as I saw some trades that moved $750k from the volatility. This is the Wild Wild West! I think Bitcoin is in a 'melting-up' period and the price discovery is going to be very erratic. Coupled with the weak infrastructure, DDOS attacks and potentially other attacks it should be very exciting from a trading perspective. Plus, MtGox is processing about 1,000 new accounts per day, that want more than the $1,000/day limit, and are currently backlogged by about 18,000 accounts. They added 57,000 new accounts in March bringing the total to over 400,000. I think the bottom line is very few know how to value a bitcoin (there is so much information asymmetry) but everyone seems to want some and the nascent economy is having growing pains. Not unlike June 2011 except this time the economy is a lot more robust and the capital pools are a lot deeper. And I doubt this is the end of the upleg. (Incidentally, Trace's website is a fabulous resource for those amongst you who wish to understand this Bitcoin phenomenon a little better.) The teething troubles being experienced by Bitcoin are not surprising for such a complex, fledgling enterprise; but make no mistake about it, Bitcoin presents a clear and present danger to established fiat currencies, and that means it does likewise to governments and central banks.

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They will undoubtedly be watching it very carefully, and should it eventually manage to iron out the wrinkles and establish itself, they will at some point make it illegal. That will be technically impossible for them to do because of its architecture, but it will at a stroke be rendered 'monet non grata' amongst the law-abiding citizens of the world. Whether the threat of banishment is enough of a deterrent to keep people from using Bitcoin is going to depend upon the stewardship of the fiat alternative. Right now, there is absolutely nothing to suggest that governments and central banks are reliable guardians of their own currencies, so we await the verdict with interest. It is clear that Bitcoin is the start of something, not the end, but what that something is we cannot be sure just yet. One thing I am quite certain of, however, is that any predictions of Bitcoin's demise are likely to be dragged out for republication in years to come, much like Paul Krugman's famous 1998 critique of the Internet, which graces the front cover of this week's Things That Make You Go Hmmm.... As I said off the top this week, I think the appearance of Bitcoin is incredibly important and could well hold the key to the evolution of our monetary system in years to come; but for now, I'd rather have another alternative to fiat currency in my portfolio one that coincidentally also took a battering this past week: gold. As wild as the ride was in Bitcoin this week, the move in gold was, to me at least, far, far crazier; because no matter which way you sliced and diced things, gold's star should have been in the ascendancy in recent weeks. Firstly, we had the outright confiscation of depositors' money to aid the Cyprus bailout. Unequivocally positive for gold. Next we had the announcement that Cyprus would be a 'template' for other bailouts (i.e., your money is NOT safe in the bank). Unequivocally positive for gold. And, although this strategy was subsequently denied, evidence to the contrary in documents penned by the likes of the BoE, Fed, RBC, and RBNZ suggest otherwise. Then we had the announcement from Japan that they were going to double their monetary base in the space of 20 months. Once again, unequivocally positive for gold. Finally, this past week, it emerged 'surprisingly' (apparently) that the Cyprus bailout funds were woefully inadequate and that, instead of 17bn, 23bn would now be required; and, because of the intransigence of the Troika, the additional 6bn would have to come from a combination of depositors' funds and 'sales of excess Cypriot gold', as 10bn was to be the Troika's maximum contribution. Equivocally positive for gold. Let me explain.

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As crazy as this week's ride in Bitcoin was, gold was arguably even more confounding. We saw leaked FOMC minutes (which hinted at a withdrawal of Fed stimulus that just isn't coming, I'm afraid), a 'timely' recommendation from Goldman Sachs to 'short gold' a truly extraordinary call in today's increasingly uncertain world and then came Friday.

Source: Jesse's Cafe Americain

As you can see from the chart above, gold was battered on Friday, and the way in which it was sold off raises questions that even those who most staunchly believe that there could never, ever be any manipulation of the gold market will struggle to answer. (Manipulation of bonds, equities, interest rates? Sure, but never the gold market. Never.) Five hundred tons of paper gold contracts were sold dumped into the market on Friday. That is a lot of gold. In short, some people sold gold like they had a gun to their heads, in such a quantity and with such ferocity that the likelihood of their being a for-profit seller is right up there with my chances of winning this week's Masters. How big were the sales? (Dr. Paul Craig Roberts): Consider the 500 tons of paper gold sold on Friday. Begin with the question, how many ounces is 500 tons? There are 2,000 pounds to one ton. 500 tons equal 1,000,000 pounds. There are 16 ounces to one pound, which comes to 16 million ounces of short sales on Friday. Who has 16 million ounces of gold? At the beginning gold price that day of about $1,550, that comes to $24,800,000,000. Who has that kind of money?

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What happens when 500 tons of gold sales are dumped on the market at one time or on one day? Correct, it drives the price down. Investors who want to get out of large positions would spread sales out over time so as not to lower their sales proceeds. The sale took gold down by about $73 per ounce. That means the seller or sellers lost up to $73 dollars 16 million times, or $1,168,000,000. Who can afford to lose that kind of money? Who indeed? When the smoke cleared, gold had been slugged for $88 (or 4%) in a single day, and naturally the 'Bear Market!' gun went off: (UK Daily Telegraph): Gold entered a bear market on Friday, as the precious metal tumbled below the psychologically important $1,500 mark to its lowest level in 20 months.... I plan to write more a lot more on gold next time, but in the meantime take a look at this chart:
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Devaluation: Yen vs Gold

November 2012 - April 2013

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Japanese Yen Gold

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It shows the depreciation in two currencies, the Japanese yen and gold. I wanted to put a third currency, Bitcoin, on the same chart; but that wasn't possible due to the scale, so that one gets a chart all of its own (below). Since November, and taking out Friday's outsize move, gold the currency everybody hates and loves to call a bubble that has burst has steadily fallen by 9%. In the same period of time, the fiat Yen has been intentionally weakened fallen 20%.

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Bitcoin? Well, that coin of the realm is not quite ready for prime time as a store of value, as the following chart makes clear:
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Bitcoin % Appreciation
November 2012 - April 2013

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0 Nov 2012 Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013

Source: Bitcoincharts

The point is this: the era of fiat currencies is approaching yet another 'end point' due to the way such funny money is being abused by governments and central banks. Maybe Bitcoin or an alternative form of virtual currency will be ready to take their place when that end comes, but I seriously doubt it. The end is likely to come far too quickly for that.

Source: Sharelynx.com

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The only real viable alternative is gold whether in the form of the metal itself or as backing for whatever emerges from the wreckage of the fiat system but that worries people a lot more than it should. Take a look at the chart of US dollar purchasing power as measured in ounces of gold (above), courtesy of my friend Nick Laird and his excellent website www. sharelynx.com (it really is the single best resource anywhere on the web for gold charts). See if you can guess at which points on this 300-year timeline the US was either on or off a gold standard of some sort. I'd say it was on one more often than not, wouldn't you? **********

Before I disappear, a quick piece of housekeeping:

During the recent California Investment Conference in Palm Springs, John Mauldin and I started the camera rolling and sat down for a long chat with Ed D'Agostino. We had no idea where the conversation would take us, but as it turned out it took us in all kinds of interesting directions, from the US to Japan to Europe and beyond. We spoke about bond markets, equity markets and, of course, precious metals; so if you'd like to eavesdrop on our chat, just click HERE. I will be in Carlsbad to listen to the stellar line-up of speakers at the Altegris Strategic Investment Conference May 1-3, and I hope to see many of you there.

*******
So what do we have this week to interest you? Well, obviously we can't go a week without hearing about Cyprus or for that matter what Cyprus means to Germany with elections looming, and what Germany means to Cyprus with savage austerity looming. We also take a look at the launch of the new party that may cause Frau Merkel a headache or two between now and September. Perhaps unsurprisingly, the clairvoyants at the Fed and the BoE don't see any signs of equity bubbles despite their pumping billions into the global economy (but then, they didn't see any signs of a housing bubble either, I suppose); however, Dr. Paul Craig Roberts sees all kinds of shenanigans in the gold market; and Portugal's President (rather unfortunately) sees no way his country can repay its debts. The bank deal in Europe looks set for a rocky ride; US consumer confidence and retail sales have put up some disappointing numbers; and if central-bank clairvoyants need any tips on spotting equity bubbles, the chart on page 28 may be of some help to them.

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We have a list of Bitcoin resources for those of you who haven't reached saturation point yet; and in our videos section there's more Bitcoin, some Andrew Maguire (talking about the precious metals smackdown this week), and yours truly chatting to Jim Puplava about a whole bunch of stuff. We also get to hear soothing words from the IMF who in the same week that they lowered their forecast for global growth for the second time this year opined that billions in QE won't cause inflation ... so that's a relief.

Until Next Time. ******* Cyprus faces economic meltdown as EU-IMF refuses extra aid
Cyprus must take on an extra 5.5bn in the cost of its bail-out, a sum equivalent to a third of the island's annual GDP, without any additional help from the European Union and IMF. The extra financing burden is expected to push Cyprus into a Greek-style economic meltdown and takes the cost of the Cypriot bail-out to over 135pc of the tiny Mediterranean island's GDP. The Eurozone's finance ministers, meeting in Dublin, have told Cyprus that there will be no extra help for it to raise 13bn it needs to find as the condition for unlocking 10bn of EU-IMF loans. Despite an original deal for 17.5 billion last month, the EU-IMF troika now estimates the cost of rescuing Cyprus from bankruptcy is 23bn, with all the additional money coming from the island. Germany, facing parliamentary opposition to the 10bn bail-out, has insisted that there can be no question of increasing the amount that eurozone will pay to save a Cyprus, an island that many Germans regard as being a haven for money laundering and corrupt Russian oligarchs. "The contribution from international creditors will not change," said a spokesman for the German government. Germany is taking a hard line amid splits in Angela Merkel's Christian Democrats ahead of a vote on the Cyprus bail-out next week, with opponents warning that parliamentary approval will be "impossible" unless the island assumes the extra costs. Maria Fekter, the Austrian Finance Minister, warned that unless Cyprus can show that it is ready to pay the extra bills for its bail-out the 10bn in EU-IMF funds will be blocked in the national parliaments of creditor countries, such as Austria and Germany. "If the figures don't add up, there probably wont be consent in national parliaments," she said.

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Increasing the humiliation for Cyprus, Mario Draghi, head of the European Central Bank has written to Nicos Anastasiades, the Cypriot President, ordering him to stop angry MPs from criticising or investigating the Cypriot central bank. "There is a letter which requests respect for the Cypriot central bank's independence and to refrain from bringing pressure," an EU source told AFP. Panicos Demetriades, the head of the central bank of Cyprus has been blamed by many on the island for bungling the bail-out, leading to the near collapse of the Cypriot banking sector and the closure of the country's second biggest bank. President Anastasiades has written to EU institutions in Brussels pleading for "extra assistance" form European regional policy funds to help get Cyprus through the shock of finding the extra bail-out cash without its economy collapsing. "The letter from President Anastasiades has nothing to do with asking for more money than the sum agreed," said a Cypriot official. "It is about a request for more support and financial assistance from our EU partners in the middle-term because of the financial and economic situation Cyprus is facing. For example, it asks about finding ways to use EU structural funds in better ways to help Cyprus." A European Commission official said that there would be extra cash available for Cyprus from EU funds aimed at helping the poorest regions of Europe. "The Cypriots are asking for help in the form of technical assistance with structural funds absorption which is what we have committed to provide through the Task Force for Cyprus that is being established," said an official. The latest developments rattled markets on Friday morning....
*** UK DAILY TELEGRAPH / LINK

The Know-It-All Party

This weekend, the anti-euro Alternative for Germany party will celebrate its official launch in Berlin. Interest in the group has been growing in recent weeks, but pollsters say its chances of landing seats in the federal parliament this fall are still slim. A little suspense is pre-programmed. On its Facebook fan page, the Alternative for Germany has been counting down the days until the conference on Sunday, when the party will be officially launched. "Five, four, three, two " There's even a punchy slogan: "Straight talk instead of Sdatives". Bernd Lucke, the 50-year-old who is co-founding the party and will likely be its first national leader, says the mood is "euphoric."

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Source: Der Spiegel

The Alternative for Germany party wants to shake up the traditional party landscape in the country during federal elections this September with its message of "putting an end to the euro." The party is calling for the "orderly dissolution of the euro currency zone." So what do they want to do, return to the deutsche mark? Lucke describes that path as "one option." The party still hasn't defined much in terms of its party platform, but its founders have argued for the right to hold national referenda as well as streamlining tax laws. More than anything, they aim to attract voters with their "no" to the common currency. "The euro is dividing Europe," says Lucke, whose day job is as an economics professor at the University of Hamburg. "No common currency is required to ensure Europe's peaceful unity," he adds. The party wants to offer something different than the euro rescue policies to which Chancellor Angela Merkel's government repeatedly claims there are "no alternatives." Backers of the new party hold little regard for the rescue funds and bailout packages created in recent years and feel they have a better solution for escaping from the crisis. And even though the euro-exit scenarios they provide remain vague, their criticisms of Chancellor Merkel's policies have fallen on welcome ears.

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In recent weeks, the new party claims to have attracted more than 7,000 members, and state party groups are forming all over the country. Around 1,300 supporters are expected at Sunday's party convention. The venue can't fill any more. In some respects, Sunday's limits are helpful for the party, which is already having trouble controlling its membership roster. In Germany, mainstream parties have to carefully check each new member to make sure that he or she doesn't have former associations with radical right-wing extremists, which could reflect poorly on the party itself. But Lucke says there is so far no evidence that any political radicals are trying to infiltrate the party. For weeks now, Alternative for Germany organizers have been sending out the message that they are in no way seeking to attract right-wing populists or right-wing radicals with their criticism of the common currency....
*** DER SPIEGEL / LINK

Dont make us Fhrer

HITLER moustaches and swastikas defiling pictures of Germanys chancellor, Angela Merkel, have become a recurring motif in the iconography of the euro crisis, most recently in Cyprus. Scapegoating is inevitable during financial upheavals, says Marcel Fratzscher, president of DIW Berlin, a think-tank. Germany, he suggests, has taken the place of the IMF during the Asian crisis of the late 1990s, with Mrs Merkel playing the role of Michel Camdessus, the then IMF boss who was pictured in 1997 with folded arms, standing over a humbled Indonesian president signing up to harsh austerity measures. But scapegoating can be dangerous if the goat is powerful and it begins to feel victimised. The Germans are not yet openly angry. That would be out of character in a people who have, since the second world war, been eager to atone for the past and be good European partners. In one recent poll, 34% of Germans even said they empathised with the wrath of the southern Europeans. But the mood is shifting. The southerners may see Germany as forcing excessive austerity on them and showing insufficient solidarity, but Germans have a different view. First, they feel they have already shown solidarity. Almost a quarter of a century after the fall of the Berlin Wall they still pay a solidarity tax to eastern Germany. Some also transfer taxes to weaker German states such as Bremen. Many conclude that, once in place, solidarity ceases being voluntary and instead becomes a yoke. They also bear much of the risk of euro bail-outs, even though a study released this week by the European Central Bank showed that the average German household has less wealth than the average Spanish, Italian and Cypriot one (though this is partly because German households tend to contain fewer adults and are more likely to be in rented accommodation).

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Second, they argue that Germany recognised a decade ago that it was not competitive and undertook painful reforms that are now paying off. The crisis countries should follow suit. And third, Germans think the euro crisis was largely caused by rule-breaking (even by Germany itself), which must not be repeated. As one diplomat puts it, solidarity is important, but it should follow rules. It is not just ad hoc giving. Together, these attitudes often have the sound of a morality tale. Indeed, the English term moral hazard, which has no direct German translation, has become a staple of discourse in Berlin. Originating in the economics of insurance, it refers to the incentives to take risks when other people stand to pay for any damage. The fear is that German rescue money could cause the crisis countries to duck their reforms. The Germans are not alone in these views. The Dutch, Finns and Slovaks broadly share them. What makes Germany different is that it is big and central. To historians such as Brendan Simms of Cambridge University, author of a new book, Europe: the Struggle for Supremacy, this sounds eerily familiar. Europe has long grappled with the German question. Sometimes Germany was too weak, sometimes too strong. Or, as Henry Kissinger, a former American secretary of state, put it, referring to Germany just after unification in 1871, it was too big for Europe, but too small for the world. Today, Mr Simms argues, it sits uneasily at the heart of an EU that was conceived largely to constrain German power but which has served instead to increase it, and whose design flaws have unintentionally deprived many other Europeans of sovereignty....
*** ECONOMIST / LINK

Fed, BoE Officials Don't See Signs of Emerging Equity Bubbles

Policy makers from the Federal Reserve and the Bank of England said they see few signs of equity price bubbles in the U.S. and the U.K., countering criticisms record stimulus is stoking excessive risk-taking. I dont think were in that kind of territory that obviously makes these asset prices unsustainable and at a bubble level, Bank of England policy maker David Miles said today during a panel discussion at the Boston Fed. While this is something we have to keep monitoring at the Fed, I dont see these risks now, Minneapolis Fed President Narayana Kocherlakota said to reporters after speaking at the same forum.

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Central banks from across developed economies have deployed unorthodox and littletested easing to fuel economic growth. The Federal Open Market Committee in March reiterated its plan to buy $85 billion in bonds every month until the labor market outlook improves substantially, while pledging to monitor the costs and benefits of unprecedented accommodation. We dont have a lot of experience with large-scale asset purchases and they can entail risks, Chicago Fed President Charles Evans said during the panel discussion at the Boston Fed. Weve looked at a lot of things and theres nothing in that horizon that causes me great angst. Evans votes on monetary policy this year; Kocherlakota does not. Since cutting the benchmark interest rate to near zero in December 2008, the U.S. central bank has tried to fuel growth by expanding its balance sheet to $3.23 trillion and providing more guidance on its policy aims. Several Fed officials said the central bank should begin slowing the pace of its asset purchases later this year and halt it entirely by year end, according to minutes of the March 19-20 FOMC meeting released this week. Kansas City Fed President Esther George said this month record stimulus for more than four years may create financial instability that could hurt employment over time. We should not underestimate the risk of an extended period of zero interest rates and the accompanying incentives that may lead to future financial imbalances, George said on April 4 in El Reno, Oklahoma. Such imbalances could unwind in a disruptive manner and cause the labor market recovery to stumble. Georges comments reflected her dissents this year in her first votes as a FOMC member. The BOEs Miles, along with Paul Fisher and Governor Mervyn King, voted to increase bond purchases by 25 billion pounds ($38 billion) in March, though were defeated by the remaining six members of the Monetary Policy Committee, who voted for no change. The MPC majority said there was a risk of adding to stimulus at a time when the inflation rate remains above the BOEs 2 percent goal. The MPC also kept its bond-purchase target unchanged this month, at 375 billion pounds ($576 billion). The minutes of that meeting will be published on April l7, a day after March inflation data. Consumer-price growth accelerated to 2.8 percent in February....
*** BLOOMBERG / LINK

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Assault on Gold Update

I was the first to point out that the Federal Reserve was rigging all markets, not merely bond prices and interest rates, and that the Fed is rigging the bullion market in order to protect the US dollars exchange value, which is threatened by the Feds quantitative easing. With the Fed adding to the supply of dollars faster than the demand for dollars is increasing, the price or exchange value of the dollar is set up to fall. A fall in the dollars exchange rate would push up import prices and, thereby, domestic inflation, and the Fed would lose control over interest rates. The bond market would collapse and with it the values of debt-related derivatives on the banks too big too fail balance sheets. The financial system would be in turmoil, and panic would reign. Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollars exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached. According to Andrew Maguire, on Friday, April 12, the Feds agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesnt have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price. A naked short is when the short seller does not have or borrow the item that he shorts, but sells shorts regardless. In the paper gold market, the participants are betting on gold prices and are content with the monetary payment. Therefore, generally, as participants are not interested in taking delivery of the gold, naked shorts do not need to be covered with the physical metal. In other words, with naked shorts, no physical metal is actually sold. People ask me how I know that the Fed is rigging the bullion price and seem surprised that anyone would think the Fed and its bullion bank agents would do such a thing, despite the public knowledge that the Fed is rigging the bond market and the banks with the Feds knowledge rigged the Libor rate. The answer is that the circumstantial evidence is powerful. Consider the 500 tons of paper gold sold on Friday. Begin with the question, how many ounces is 500 tons? There are 2,000 pounds to one ton. 500 tons equal 1,000,000 pounds. There are 16 ounces to one pound, which comes to 16 million ounces of short sales on Friday.

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Who has 16 million ounces of gold? At the beginning gold price that day of about $1,550, that comes to $24,800,000,000. Who has that kind of money? What happens when 500 tons of gold sales are dumped on the market at one time or on one day? Correct, it drives the price down. Investors who want to get out of large positions would spread sales out over time so as not to lower their sales proceeds. The sale took gold down by about $73 per ounce. That means the seller or sellers lost up to $73 dollars 16 million times, or $1,168,000,000. Who can afford to lose that kind of money? Only a central bank that can print it....
*** DR. PAUL CRAIG ROBERTS / LINK

Billions of pounds of QE unlikely to cause inflation - IMF

Central banks can unleash billions of pounds more quantitative easing with little threat of stoking inflation, according to analysis by the International Monetary Fund. Work by economists at the Washington-based institution found the historic link between unemployment and inflation has weakened over the past several decades and that even a sharp fall in joblessness would not lead to spiralling price rises. Looking to the future, our analysis suggests that ongoing monetary accommodation is unlikely to have significant inflationary consequences, as long as inflation expectations remain anchored. In this regard, preserving central banks independence is key, the IMF said in a prereleased chapter of next weeks World Economic Outlook. Indeed ... any temporary over-stimulation of the economy perhaps stemming from misperception about the size of output gaps is likely to have only small effects on inflation. The findings will be welcomed by the Chancellor, who is pinning his hopes for growth on the incoming Bank of England Governor Mark Carney. Mr Carney has indicated he is willing to take radical action to revive growth in the UK. The Bank has already injected 375bn into the economy through QE, the largest monetary stimulus of any developed country as a proportion of GDP. Sir Mervyn King, the outgoing Governor, has called for another 25bn for the last two months but has been outvoted by his fellow policymakers. It also follows comments by IMF managing director Christine Lagarde over the weekend, when she described Japan's massive new money priting programme as "a welcome step". However, she warned there was "a limit to how effectively monetary policy can continue to shoulder the lions share of this effort". The IMF based its analysis on the relationship between unemployment and inflation. Orthodox economics teaches that falling unemployment can cause rising inflation, as well as the inverse.
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However, the IMF said the relationship between inflation and unemployment is much more muted and that the main driver of inflation was now long-term [inflation] expectations. As a result, it said the key to keeping inflation under control was central bank independence and a commitment to price stability. The greatest risk for inflation, just as in the 1970s, is the possibility that expectations will become disanchored, the IMF said. In short, the dog did not bark because the combination of anchored expectations and credible central banks has made inflation move much more slowly than caricatures from the 1970s might suggest inflation has been muzzled. And, provided central banks remain free to respond appropriately, the dog is likely to remain so....
*** UK DAILY TELEGRAPH / LINK

France plans currency swap line with China

France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London, the China Daily on Saturday cited Bank of France Governor Christian Noyer as saying. Yuan deposits in Paris amount to 10 billion yuan ($1.6 billion), making it the second largest pool for the Chinese currency in Europe after London. Almost 10 percent of Sino-French trade is settled in yuan, also called the renminbi or RMB, according to French data cited by the official newspaper. "The Bank of France has been working on ways to develop a RMB liquidity safety net in the euro area with due consideration of a supporting currency swap agreement with the People's Bank of China," Noyer told the English-language newspaper. The yuan's internationalization and bilateral financial cooperation could be among the main topics during French President Francois Hollande's visit to China in late April, the paper said. French Foreign Minister Laurent Fabius paid a two-day visit to Beijing this week. The planned swap line would be the latest in a string of bilateral currency agreements that China has signed in the past three years to promote use of the yuan in trade and investment. It followed a similar step by the Bank of England to set up a reciprocal three-year yuan-sterling swap line with China. Britain, always anxious to maintain London's status as Europe's biggest financial center, launched an offshore yuan currency and bond market to great fanfare last year. Noyer said Paris has been committed to strengthening its position in corporate bonds and shortterm negotiable debt securities markets as well as the associated trading infrastructure, to promote wider use of the yuan.

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In 2011 and 2012, the total value of offshore yuan-denominated bonds issued by French corporates was nearly 7 billion yuan, twice the value of bonds issued by their British counterparts, according to a report by Paris Europlace, an association that supports the French financial industry and promotes Paris as an international financial center. A survey by the association, the China Daily reported, also showed that 50 percent of French companies have used yuan-denominated products and services....
*** REUTERS / LINK

Former Portuguese Prime Minister Says "Portugal Cannot Pay Its Debts," Calls for "Argentine-Style Default"
"Portugal can not pay what you owe and however much they impoverish people, however much they steal the money to people who have it, not be able to pay what you owe. And when you can not, the only solution is not pay. " The president of Portugal, Mario Soares, socialist, argues that it is impossible for Portugal to return all of its foreign debt. That's why he asked to make a Argentine-style default to avoid economic collapse. "Look at Argentina, was in crisis when he said we do not pay. And something happened?" asks Soares. "No, nothing happened," he says in an interview with Antena 1, airing tonight and that includes the Business Daily. During interview, Soares, who was also prime minister, has called for the overthrow of the government, has criticized the European Commission President, Jos Manuel Barroso and launched a series of warnings to the President of the Republic, Cavaco Silva. The former head of state also defended as imperative the change in government and an end to austerity. "This desire to be useful to Mrs Merkel is ruining the country and forcing him to sell everything. Within two years, this government has destroyed almost everything in Portugal," he says. For Soares, "Any politician with a modicum of common sense when booed as are the government every day, [with people] calling them thieves should have the dignity to go. But they cling to power," he concludes.
*** EL ECONOMISTA (TRANSLATED) / LINK

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EU Set to Clash on Bank Deal as Germany Sees Treaty Limit

European Union nations are set to clash over plans to centralize the handling of failing banks, as Germany warned that the bloc is running out of road to adopt crisis-fighting measures under its current treaties. German Finance Minister Wolfgang Schaeuble told his EU counterparts at a meeting in Dublin April 12-13 that there isnt enough of a basis in the EUs current rulebook for building a common authority and fund for bank failures. Other nations, including France, Luxembourg, and Denmark, are urging swift progress on putting in place a resolution system, amid concerns that treaty changes would cause unacceptable delays. Its absolutely necessary that all elements of the banking union are set up as soon as possible, Luc Frieden, Luxembourgs finance minister, said in an interview. It doesnt make sense to set up a single supervisory mechanism if we dont at the same time envisage a European resolution fund and a European deposit guarantee scheme. The European Central Bank and Michel Barnier, the EUs financial services chief, have called for the creation of a European Resolution Authority, backed with a common fund, to intervene at crisis-hit banks in the euro area, saying the step is an essential part of efforts to build a socalled banking union that would untangle the fates of lenders and sovereigns. Barnier has said that he will present draft legislation in June. A banking union only makes sense if we have mechanisms for the restructuring and resolution of banks, Schaeuble said. But if we want these European institutions, we need treaty changes. Whoever wants stronger integration steps has to be ready to back institutional changes in the EU and to actively support them, he said. The readiness and the drive to do that vary sometimes. Jeroen Dijsselbloem, who chairs meetings of euro-area finance ministers, said the German position meant some limited treaty change was inevitable for the EU to make further progress toward a fully-fledged banking union. The Germans made very clear that they dont consider that the current EU treaties provide a basis for centralized bank resolution, Dijsselbloem told reporters. If we want to make further steps, we must look at a limited treaty change on this issue. EU nations have injected 1.7 trillion euros ($2.2 trillion) of support to their banking systems since October 2008, according to European Commission data. The colossal intervention, coupled with the fiscal crisis that then struck nations weakened public finances, prompted a vow from EU leaders to taxpayers off the front line of bank failure.

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I think that its possible to do this rapidly in the framework of the current treaties, Barnier told reporters in reference to the resolution plans. He intends for the authority to work closely with existing EU institutions, while retaining independence, he said....
*** BLOOMBERG / LINK

Bitcoin Bookshelf
The Crypto Currency, The New Yorker, October 2011 The Rise & Fall of Bitcoin, Wired, November 2011 Bitcoin Goes Parabolic, Mike Krieger, March 2013 Why Bitcoin is Just Getting Started, Trace Meyer, April 7, 2013 The Bursting of the Bitcoin bubble, The Economist, October 2011 Mining Digital Gold, The Economist, April 13, 2013

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Charts That Make You Go Hmmm...

After rising optimism early in the year, the American mood appears to be souring
quickly as the Reuters/University of Michigan consumer sentiment index fell to its lowest level in nine months, down from 78.6 in March to 72.3 in the first of two readings for April. This is consistent with the plunge in consumer confidence reported last month by the Conference Board; however, surveys from both Gallup and Bloomberg have recently indicated steady consumer confidence. The current reading on consumer sentiment equals the low of July 2012 and, prior to that, youd have to go back to December of 2011 as the nation emerged from the debt ceiling crisis to find a lower reading.

Source: Tim Iacono

The current conditions index fell six points to 84.8 while the expectations component dropped from 70.8 in March to 64.2 this month. One-year inflation expectations fell two-tenths of a percentage point to 3.0 percent, the lowest reading in nine months, and five-year inflation expectations were unchanged at 2.8 percent. Due largely to payroll tax hikes on January 1st, Americans now expect to see lower after-tax incomes and the labor market outlook remains weak, some 32 percent of respondents saying they expect the jobless rate to rise while only 24 percent see it decreasing.
*** TIM IACONO / LINK

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The Relative Strength Index (RSI) is a momentum oscillator that measures

the speed and change of price moves. The RSI moves between zero and 100 and is considered overbought with a reading above 70 and oversold when below 30. Note that the RSI can sustain an overbought (oversold) reading in a strong up (down) trend.
*** MACRO MONITOR / LINK

Source: Macro Monitor

Wondering where Bitcoin searches are

most popular? Well, look no further than this chart, which shows Russia and the United States as the most curious nations as far as Bitcoin is concerned. So far, very little interest in China. So far...

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Source: Doug Short

The Advance Retail Sales Report released [Friday] morning shows that sales in March
came in at -0.4% month-over-month, the worst monthly report since June of 2012. Today's headline number came in below the Briefing.com consensus forecast of no change. Even with cheaper gasoline prices, shopper frugality apparently kicked in. Perhaps we're finally seeing some changed behavior in the wake of the 2% FICA tax increase.

Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population....
*** DOUG SHORT / LINK

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Words That Make You Go Hmmm...

This short video is a great entry

point into the world of Bitcoin. It does a pretty good job of explaining how it came about and how it works.

CLICK TO WATCH

Andrew Maguire has been a metals

trader for 40 years, and his thoughts on the massive takedown in gold and silver this week are well worth listening to.

Whether Andrew is completely right or not is beside the point. With what is happening around the precious metals markets (Cyprus, BoJ, Fed, etc.) being so unequivocally good for gold and silver, it's absolutely amazing that the prices (at least in paper form) should be falling so dramatically. CLICK TO LISTEN

This past week I chatted with Jim

Puplava of Financial Sense about Japan, Korea and currency wars, gold and gold mining shares, and central bank leasing of the precious metal.

CLICK TO LISTEN

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and finally...
I watched this very short clip from the 1970s again this week after a gap of about 20
years, and it still makes me laugh, so I'm tossing it in here. This is exactly how I picture meetings of the Eurogroup to be...

CLICK HERE TO WATCH

Hmmm...

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Grant Williams
Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singaporea hedge fund running over $250 million of largely partners capital across multiple strategies. The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between us and our investors. Grant has 26 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses. Grant has been writing Things That Make You Go Hmmm... since 2009. For more information on Vulpes, please visit www.vulpesinvest.com

*******
Follow me on Twitter: @TTMYGH YouTube Video Channel: http://www.youtube.com/user/GWTTMYGH Mines & Money, Hong Kong 2013 Presentation: 'Risk: It's Not Just A Board Game': Fall 2012 Presentation: 'Extraordinary Popular Delusions & the Madness of Markets': California Investment Conference 2012 Presentation: 'Simplicity': Part I : Part II As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes fundsthough I will not be making any specific recommendations in this publication.

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