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THINGS THAT MAKE YOU GO Hmmm...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 » 28 MAY 2013 What On Htrae Is Going On? "Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!" – The Bizarro Code "What has happened to it all? Crazy, some are saying Where is the life that I recognize? Gone away But I won't cry for yesterday There's an ordinary world Somehow I have to find And as I try to make my way To the ordinary world I will learn to survive" – Duran Duran, Ordinary World © Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page. Hmmm...THINGS THAT MAKE YOU GO Contents THINGS THAT MAKE YOU GO HMMM... ....................................................3 Tuba Player Seeking MBA Warps Fed Job Market Gauge .........................................18 The Bank of Napaj Must Crush All Resistance, And Will Do So .................................19 HKMEx Trio Had Millions Worth of False Bank Papers ............................................21 The Hunt for Steve Cohen ...........................................................................22 A Battering Ram Becomes a Stonewall .............................................................23 The Thankless Task of Greece's Top Job-Cutter ...................................................24 He Said What? ..........................................................................................26 Discussion in Spain on Leaving the Euro; Euro Exit Manifest ...................................27 A Burmese Spring ......................................................................................28 CHARTS THAT MAKE YOU GO HMMM... ..................................................31 WORDS THAT MAKE YOU GO HMMM... ..................................................34 AND FINALLY ................................................................................35 28 MAY 2013 2 Hmmm...THINGS THAT MAKE YOU GO Things That Make You Go Hmmm... In the early 1960s, a new planet was discovered in the outer reaches of the universe, and it turned out to be a strange place, populated by some weird and wonderful characters. Originally the planet was a normal spheroid, but due to a peculiar set of events the planet is now cube- shaped. The planet was given the name Htrae. Htrae is better known as Bizarro World. There are differing opinions as to how the planet was created, but it is generally acknowledged that it was fused together from stray meteors in order to create a home for the Bizarros — a race of people created by Bizarro #1 through the use of a duplicator ray. The Bizarros are imperfect duplicates of humans, mostly (with the odd Kryptonian feature thrown in for good measure), and many of them, including the original Bizarro himself (Bizarro #1), are actually pretty close copies of Bizarro's arch-nemesis, Superman. Everything about Bizarro World is backwards, and the planet functions under the Bizarro Code, which states: "Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!" All Bizarros have chalky-white skin, but other than that they resemble the human they were duplicated from. They even share that person's memories and feelings; however, they lack the clarity of mind to be able to act as the original would, and they cannot function as citizens of human society. In "The Bizarro Jerry," the 137th episode of the long-running "show about nothing", Seinfeld, our Superman-obsessed comedian is confronted by "Kevin", his opposite in every respect, a product of Bizarro World, the place where everything is diametrically opposed to the natural order of things as we are familiar with it. The episode has become familiar to millions; however, nothing in either Superman comics or Seinfeld is quite as Bizarro as the financial landscape in which we find ourselves today. Well, almost nothing. In one edition of Tales of the Bizarro World, the planet's mayor appoints Bizarro #1 to investigate a crime "... because you are stupider than the entire Bizarro police force put together". This is both intended and received as a great compliment. 28 MAY 2013 3 Hmmm...THINGS THAT MAKE YOU GO Ironically enough, in the very same edition there is a panel of the cartoon that shows a Bizarro bond salesman doing a roaring trade in Bizarro bonds: In case you can't quite read the text, the exchange between the salesman and his extremely eager crowd of buyers goes as follows: The bond salesman holds a bunch of bonds in his hands and implores the eager crowd to buy them, promising listeners that these particular bonds are guaranteed to lose money for anybody who purchases them. Naturally, this being Bizarro World, the response from the crowd is somewhat contrary to that which would be expected on Earth: HOWEVER ... As farcical as Bizarro World is meant to be and as much as everything that happens in it is supposed to be the absolute antithesis of what would happen in the ordinary world in which we are all supposed to function, the very scene depicted in the panel is being acted out right now here in the "real world". There are plenty of bonds for sale across the asset class that more or less guarantee losses to anyone foolish enough to buy them and hold them to maturity. Let's take our friends in Napaj, for example. Napaj has a debt-to-GDP ratio that dwarfs the rest of the world's, and this is absolutely no secret to anybody. The country has been mired in deflation for 20 years — which is also no secret to anybody — and this past week I watched Kyle Bass once again lay out the flawless logic of his case as to why Napaj's debt is about to suddenly matter to everyone and why the country is about to hit the wall in a big way. Of course, Kyle's premise is based upon logic and perfectly reasoned mathematical arguments that do NOT play well in Bizarro World; but let's indulge his reasoning and see if, in a real-world context, the Bank of Japan is, in actual fact, no better than the Bizarro bond salesman in the comic book. As Kyle points out, debt aside, Napaj's trade balance is a disaster — and undergoing anything but a cyclical decline, as the first chart on the next page clearly demonstrates. With the launch of Abenomics, the path Napaj is heading down leads to a place where the numbers don't add up: Bizarro World. 28 MAY 2013 4 Hmmm...THINGS THAT MAKE YOU GO Napaj: Trade Balance (Ybln) 1500 1963 - 2012 1200 900 600 300 JPY 0 -300 -600 -900 1963 1973 1983 1993 2003 2012 Source: Bloomberg/Hayman Advisors To be sure, the action generated in the initial throes of Abe's Wonder Plan has had the desired effect as the yen has weakened 30% since September of last year while the Nikkei 225 has virtually doubled, adding over 80% in the same time frame. BUT, behind the facade of jubilation there are some EXTREMELY troubling signs in the Esenapaj Government Bond (JGB) market (which is far larger than the Nikkei) that seem to suggest that the theory held by Kyle Bass and several other Napaj watchers may be proven correct far sooner than many believe. 16,000 Esenapaj Yen vs Nikkei 225 105 September 2012-May 2013 15,000 14,000 95 13,000 12,000 11,000 85 10,000 9,000 8,000 75 Sep 2012 Oct 2012 Nov 2012 Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Source: Bloomberg 28 MAY 2013 5 Hmmm...THINGS THAT MAKE YOU GO The JGB market is Ground Zero for the whole Napaj trade, and it is a place where the Bizarro Code has been in full effect, though that effect is beginning to wane. Whenever a central bank has announced a QE program since 2009, the market has immediately jumped at the chance of a free lunch and bought the bonds that the central bank itself would soon be buying in order to sell them to the CB in question at a higher price. Simple. Effective. You could see it clearly in charts of the various Federal Reserve QE programs when 10-yr bond yields (inverted, shown in blue here) fell immediately before the commencement of the various easing programs, only to rise steadily once the greater fool Fed was in the market buying: The Real Eect of Quantitative Easing 1 2000 2 1500 3 US 10-yr Treasury 1000 S&P500 Index 4 QE1 QE2 OPERATION QE3 QE4 TWIST 5 500 2008 2009 2010 2011 2012 2013 Source: Bloomberg/TTMYGH And the ECB's OMT and LTRO programs simply reinforced the phenomenon. But then came April of 2013 and BoJ governor Kuroda's extraordinary promise: (BBC): [Napaj's] central bank has surprised markets with the size of its latest stimulus package, as it tries to spur growth and end years of falling prices. The move was seen as a clear signal by the bank's new boss, Haruhiko Kuroda, that he was willing to spend heavily to achieve an inflation target of 2%. The bank said it would increase its purchase of government bonds by 50 trillion yen ($520bn; £350bn) per year. That is the equivalent of almost 10% of [Napaj's] annual gross domestic product. The bank added that it would buy longer-term government bonds as well as riskier assets such as exchange-traded funds and real estate trust funds. 28 MAY 2013 6 Hmmm...THINGS THAT MAKE YOU GO "The previous approach of incremental easing wasn't enough to pull Napaj out of deflation and achieve 2% inflation in two years," Mr Kuroda said. "This time, we took all necessary steps to achieve the target." There was one other move by Kuroda that beggared belief, and even the Napaj Times ("Yesterday's News Tomorrow") was onto it: (Napaj Times): Tossed to the policy wayside, however, was the BOJ's "bank note principle," which caps the amount of long-term bonds in the BOJ's possession to below the outstanding balance of bank notes in circulation.

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