Debt: There is No Jubilee - Hinde Capital

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Nov 8, 2010 - “Belt-tightening”: Scandinavia 1990s, S Korea, Malaysia post 1997. 3. Currency devaluation: US 1934 ..
DEBT: THERE IS

NO JUBILEE

DEBT: THERE IS NO JUBILEE The world has too much debt. In the book of Leviticus (Old Testament), a Jubilee year is mentioned to occur every fifty years, in which slaves and prisoners would be freed, debts would be forgiven. Today there is no Jubilee.

Gold & Silver Investment Summit Monday, 8th November 2010

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DELEVERAGING: GROWTH, AUSTERITY, DEVALUATION OR DEFAULT “Capitalism without failure is like religion without sin.” Charles Kindleberger, Manias, Panics and Crashes

How do you get rid of debt without Jubilee? Deleveraging: 1. Grow your way out: US post WW2, Japan post 1989 2. “Belt-tightening”: Scandinavia 1990s, S Korea, Malaysia post 1997 3. Currency devaluation: US 1934 Gold Reserve Act, UK 1949, 1967, (2008?) 4. Explicit default: Russia 1998, Argentina 2002 - 08

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

DEBT SUPERCYCLE ENDS: NO NORMAL DELEVERAGING DELEVERAGING PROCESS Deleveraging Recession Real GDP growth Debt GDP

10 years 10-year historic trend

1-2 years

2-3 years

4-5 years

10 years

Economic downturn starts as economy still leverages up

Downturn continues during the first years of deleveraging

Economic ‘bounce-back’ while deleveraging continues

10-year trend post-deleveraging

Average annual real GDP growth, % 1 Belt-tightening

4.7

0.6

-0.6

4.8

3.2

2 High Inflation

4.3

-1.7

-1.4

4.1

4.2

3 Massive Default

4.3

-1.8

-3.0

5.7

4.8

4 Growing out of debt

7.9

0.8

4.6

-0.5

n=16 n=8 n=7 n=1

Total n=32

12.81 -1.3

2.3 5.1

3.8

1 Deleveraging driven by off-trend growth is not linked to a recession. Source: International Monetary Fund; McKinsey Global Institute analysis

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

GLOBAL DEBT REDUCTION: WHAT YOU SHOULD DO? 1. Slash expenditure on entitlements 2. Reduce marginal tax rates on income and corporate profits to stimulate growth 3. Raise taxes on consumption to reduce deficits 4. Deliver by writing down liabilities in line with fall in asset prices 5. Structural reform – law and taxation changes

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

GLOBAL DEBT REDUCTION: WHAT ACTUALLY HAPPENS Financial Oppression: 1. Oblige (enforce) commercial banks to hold government debt and condemn bond investors to negative real interest rates 2. Central banks cut interest rates beyond “market” rate 3. Explicit default on debt commitments to politically weak groups or foreign creditors 4. Implicit default – inflate vis a vis quantitative easing and currency devaluation 5. Revalue risk assets higher vis a vis qualitative easing eg UK Asset Purchase Program

Gold & Silver Investment Summit Monday, 8th November 2010

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EXCESSIVE DEBT THAT CANNOT BE REPAID IN FULL Most developed countries had debt levels going into the Great Financial Crisis far beyond their means to service them. DEBT BY COUNTRY 2008 % OF GDP 500 450 400 350 300 250 200 150 100 50

Financial Institutions Non-financial business

Russia

India

Brazil

China

Canada

Germany

US

Italy

France

Switzerland

South Korea

Spain

Japan

UK

0

Households Government

Source: McKinsey Global Institute

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

PENSIONS: OFF BALANCE SHEET LIABILITIES Real situation is much worse than perceived. Pension liabilities will explode public sector debt levels. Politically, cutting pensions is intolerable. TOTAL DEBT & LIABILITIES AS % OF GDP 400% 200% 0% -200% -400% -600% -800% -10,00% -1,200% -1,400% -1,600% -1,800% Italy

Germany

France

Portugal

Cost of ageing

United States

United Kingdom

Structural deficit

Spain

Ireland

Greece

Initial debt level

Source: EU Commission, Eurostat, CBO, IMF, Morgan Stanley Research

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

AGEING SOCIETY: FEWER TAXPAYERS, MORE PENSIONERS A third of expenditure for governments is age and health related costs, which will surge as generation of baby- boomers retires and dependency ratios worsen (next 15-20yrs). OLD-AGE DEPENDANCY RATIOS – POPULATION 65+ / WORKING AGE, % FRANCE 70

GERMANY

60

ITALY

50

SPAIN SWEDEN

40

UK 30 EU-25 20

US

10

JAPAN

0

CHINA 1995

2005

2015

2025

2035

2045

Source: CBO, European Commission, National Institute of Population and Social Security Research

Gold & Silver Investment Summit Monday, 8th November 2010

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GOVERNMENTS WILL BE UNABLE TO REDUCE DEBT LEVELS Long term stable level of govt debt to GDP approx. 60%, the aging population negates likelihood of this target by 2030: Govts need to run a consistent primary surplus (ex-ante interest) of > 4%, ie achieving a run of 15 yrs at best surplus years ever to meet target. PRIMARY BALANCE REQUIRED TO STABILIZE DEBT/GDP AT 60% BY 2030 10

JAPAN

5

US UK GERMANY

0

-5

-10

-15 1970

1980

1990

2000

2010

2020

2030

Source: Citi Investment Research and Analysis, IMF, OECD. Projections taken from IMF Staff Position Note SPN/09/21.

Gold & Silver Investment Summit Monday, 8th November 2010

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SOVEREIGN DEBT: CROWDING OUT All countries are trying to borrow at the same time. GOVERNMENT DEBT OUTSTANDING (2010 FORECAST, % GDP) JAPAN GREECE ITALY IRELAND BELGIUM EURO AREA UNITED STATES PORTUGAL FRANCE U.K. CANADA GERMANY MALTA AUSTRIA NETHERLANDS SPAIN CYPRUS FINLAND SLOVENIA SLOVAKIA AUSTRALIA CHINA LUXEMBOURG 0

Gold & Silver Investment Summit Monday, 8th November 2010

50

100

150

200

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SOVEREIGN DEBT ROLLOVER RISK Most countries have very low average maturity levels, exposing them to rollover risk. Any increase in interest rates will raise borrowing costs. AVERAGE MATURITY IN YEARS OF SOVEREIGN DEBT 14 12 10 8 6 4 2

Gold & Silver Investment Summit Monday, 8th November 2010

Hungary

Finland

US

Norway

Australia

Poland

Canada

Japan

Netherlands

Belgium

Germany

Czech Republic

Sweden

Portugal

Spain

Switzerland

Ireland

France

Austria

Italy

Greece

Denmark

UK

0

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

THE MARKET KNOWS THE GAME IS OVER Governments are now held in such low regard by investors that in many countries corporate bonds trade at tighter spreads than their parent sovereigns. Corporate CDSs are tighter than sovereign CDSs. COMPANIES VS SOVEREIGNS CDSs

SovX Country CDS Index

Gold & Silver Investment Summit Monday, 8th November 2010

Oct-10

Oct-10

Oct-10

Sep-10

Sep-10

Sep-10

Sep-10

Aug-10

Aug-10

40 Aug-10

40 Jul-10

60

Jul-10

60

Jul-10

80

Jul-10

80

Jun-10

100

Jun-10

100

Jun-10

120

May-10

120

May-10

140

May-10

140

Apr-10

160

Apr-10

160

Apr-10

180

Apr-10

180

Itraxx Main CDS Index

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WHEN DOES THE GAME END? Either you cannot service your debt or your lenders lose confidence in your ability to service it at a particular rate. Excessive interest payments – Coupon payments too high to be serviced Excessive reliance on foreign capital – Foreigners tire of lending to you Governments will indulge in deficit financing

Gold & Silver Investment Summit Monday, 8th November 2010

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UK: A CASE STUDY IN HOW TO REDUCE YOUR DEBT

“Major” King: How I learned to Stop Worrying and Love Inflation Gold & Silver Investment Summit Monday, 8th November 2010

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UK: POSTER BOY OF THE CREDIT CRISIS “As I have said before Mr Deputy Speaker: No return to boom and bust” UK Chancellor, Gordon Brown 1997 and 2006

Extended business cycle caused by rates too low too long. Stability breeds instability. Rising house prices masked household debt to asset ratio reality. Housing ‘ATM’ and cheap money enabled unprecedented consumption boom. Government nominal spending doubled (1997- 2010). Govt. spending is 45% of GDP. Government did not reign in unfunded liabilities as life expectancy extended beyond retirement age. PEOPLE BELIEVED THEIR OWN BULLSH*T.

Gold & Silver Investment Summit Monday, 8th November 2010

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UK HOUSEHOLD LEVERAGE WAS ON A HIGH Household leverage measured by debt relative to disposable income illustrates the obscenely large increases that took place from 2000 to 2008

HOUSEHOLD LEVERAGE MEASURED AS DEBT/INCOME INCREASED IN MOST COUNTRIES 2000

Total household debt % of disposable income 155

2008

180 160 140

139

130

128 124

111

105

112 114

96 81

98

69

69

60

48 34

Switzer- United South land Kingdom Korea Increase %

9

52

73

Canada Spain

25

88

United States

Japan

33

-10

Germany France

-14

44

Italy

75

Canada includes non corporate business, which exagerates its relative size compared to other countries Source: Hever Analytics; McKinsey Global Institute

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UK: NICE DECADE TURNS NASTY “Who would be prepared to lend with the fear of being repaid in depreciated currencies always before his eyes?” Georges Bonnet, the French foreign minister of the 1930s

NICE (Non-inflationary consistent expansion) turned nasty 2008 UK household debt as % of disposable income 160%; at worst US was 130% UK overall debt is nearly 5 x GDP; excluding unfunded liabilities, £10 trillion debt incl. unfunded liabilities, or £170,000 for every man woman and child

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UK GOVERNMENT, WHEN IN DOUBT SPEND £671bn Total Government spending in the financial year 2009-2010 Govt support for Britain’s Banks £850 bn + £100 mm on financial advice

£280bn Insurance cover for bank assets £250bn guaranteeing of wholesale borrowing by banks £200bn indemnification of BoE against losses for liquidity support £76bn purchase of RBS shares £40bn loans and funding to Building Society and Financial Compensation Scheme Source: National Audit Office

Gold & Silver Investment Summit Monday, 8th November 2010

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MOST GROWTH IN THE UK GDP IS COMING FROM GOVERNMENT Public sector is plugging the gap emanating from an ongoing deleveraging private sector. Governments effectively socialised private sector losses. UK NOMINAL GDP: PUBLIC AND PRIVATE (September 1961 = 100) 8,000

33%

7,000

31%

6,000

29%

5,000 27% 4,000 25% 3,000 23%

2,000

Private GDP Public/Private (RHS)

Gold & Silver Investment Summit Monday, 8th November 2010

Mar-09

Mar-07

Mar-05

Mar-03

Mar-01

Mar-99

Mar-97

Mar-95

Mar-93

Mar-91

Mar-89

Mar-87

Mar-85

Mar-83

Mar-81

Mar-79

Mar-77

Mar-75

Mar-73

Mar-71

Mar-69

Mar-67

19% Mar-65

Mar-63

21%

Mar-61

1,000

Public GDP

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UK FISCAL BALANCE: THE DEFICIT DOES MATTER “Major” King says UK faces a SOBER decade: Savings, Orderly Budgets, and Equitable Re-balancing EUROPE: DEFICIT/SURPLUS % GDP 2 0 -2 -4 -6 -8 -10 -12 -14

Now

Gold & Silver Investment Summit Monday, 8th November 2010

1 Year Ago

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GERMANY

CANADA

ITALY

EUROZONE

JAPAN

FRANCE

UNITED STATES

SPAIN

BRITAIN

IRELAND

-16

UK BIGGEST OVERALL DEBT IN G20 The UK has a debt problem much worse than the US’s. We are the most leveraged country in the world per capita. DEBT BY COUNTRY 2008 % OF GDP 500 450 400 350 300 250 200 150 100 50

Financial Institutions Non-financial business

Russia

India

Brazil

China

Canada

Germany

US

Italy

France

Switzerland

South Korea

Spain

Japan

UK

0

Households Government

Source: McKinsey Global Institute

Gold & Silver Investment Summit Monday, 8th November 2010

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UK CURRENT ACCOUNT: CAN THINGS ONLY GET BETTER? Domestic Private Sector Financial Balance + Govt Fiscal Balance – Current Acct Balance = 0 “The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus.” Rob Parenteau (2010) But the UK will have a damn good go at exporting its way to growth. UK CURRENT ACCOUNT 2

10

0 0 -2 -10

-6 -20 -8 -10

-30

-12 -40 -14

Current Account (Quarterly)

Gold & Silver Investment Summit Monday, 8th November 2010

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Mar-97

Mar-96

Mar-95

Mar-94

-50 Mar-93

-16

12 month

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Rolling 12 month

Quarterly

-4

GILTY PLEASURES: PSNBR EXPLODES After bailing out banks government borrowing is still rising. PSNBR is £140bn on a twelve month rolling basis. This is a rise by almost a factor of 4 from 12 months ago.

PUBLIC SECTOR NET BORROWING (£bn) 160 140 120 100 80 60 40 20 -20

Gold & Silver Investment Summit Monday, 8th November 2010

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Jun-10

Sep-09

Dec-08

Mar-08

Jun-07

Sep-06

Dec-05

Mar-05

Jun-04

Sep-03

Dec-02

Mar-02

Jun-01

Sep-00

Dec-99

Mar-99

Jun-98

Sep-97

Dec-96

Mar-96

Jun-95

Sep-94

-40

BOE: PLUGGING THE HOLE There is not enough foreign demand for the amount of gilts issued. Sterling is not a reserve currency. No one needs to own £ denominated bonds. FOREIGN HOLDINGS OF GILTS AND YOY CHANGE IN ALL GILTS OUTSTANDING 60%

245,000

50% 195,000

40% 30%

145,000 20% 10%

95,000

0%

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Mar-97

-10% Mar-96

45,000

Foreign Holdings (£ mns) (LHS) Foreign Holdings as % of Gilts Outstanding YoY Change in All Gilts Outstanding

Gold & Silver Investment Summit Monday, 8th November 2010

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“REAL” SPENDING CUTS: WHEN LESS IS NOT MORE Nominal Spending will not reduce over projected horizon of 2014/15, as Treasury/OBR will not maintain spending in line with inflation. Inflation assumptions used are 3.2 to 4.2% not the BoE target rate of 2%. And there you have the INFLATIONARY dynamic!

Source: The BBC

Gold & Silver Investment Summit Monday, 8th November 2010

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BOE: MONEY PRINTING NEVER FELT SO GOOD The Bank of England has been more aggressive than any other central bank in expanding its balance sheet. EXPANSION OF MONETARY BASE FOR BOJ, BOE AND FED 0 ON HORIZONTAL AXIS = MARCH 2000 FOR BOJ; MARCH 2008 FOR BOE AND FED 300 275

Change in Monetary Base (0 Months = 100)

250 225 200 175 150 125 100 75 0

6

12

18

24

30

36 42 48 54 60 66 72 78 84 90 Months from 1 year before QE was implemented QE Starts Here

Gold & Silver Investment Summit Monday, 8th November 2010

BoJ

BoE

96

102 108 114 120 126

Fed

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BOE BECOMES THE GILT MARKET BoE bond purchases have been over £200 bn. BoE owned almost a third of all conventional Gilts outstanding last year. BoE’s proportion of Gilt holdings have gone down slightly, only because it has paused its buying while the DMO has been issuing new gilts like they are going out of fashion. BANK OF ENGLAND GILT HOLDINGS AS A % OF OUTSTANDING 35% March 09 is when the BoE's Asset Purchase Facility (ie QE) began. The BoE now holds close to a third of all conventional gilts.

30%

25%

20%

15%

10%

5%

Gold & Silver Investment Summit Monday, 8th November 2010

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Nov-09

Oct-09

Sep-09

Aug-09

Jul-09

Jun-09

May-09

Apr-09

Mar-09

0%

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UK - IT’S THE LEVEL STUPID “It’s the level, stupid – it’s not the growth rates, it’s the levels that matter here”

Mervyn (Major T.J.) King (“Kong”)

UK NOMINAL GDP: PUBLIC AND PRIVATE 400,000

95,000 85,000

350,000

75,000 300,000 65,000 250,000 55,000 200,000 45,000 150,000

35,000

Total GDP

Gold & Silver Investment Summit Monday, 8th November 2010

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Mar-97

Mar-96

Mar-95

Mar-94

Mar-93

Mar-92

Mar-91

25,000 Mar-90

100,000

Govt GDP

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NICE ONE MERV: INFLATION IS DOING ITS JOB UK Debt to Nominal GDP is falling. UK Nominal GDP is at new highs. Debt is fixed, while GDP grows nominally. The real burden of debt is eroded as inflation rises unexpectedly. UK RPI Vs CPI 6%

4%

2%

0%

-2%

RPI - CPI

Gold & Silver Investment Summit Monday, 8th November 2010

RPI

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Jul-03

Jan-03

Jul-02

Jan-02

Jul-01

Jan-01

Jul-00

-4%

CPI

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UK: THIS TIME IS NOT DIFFERENT The UK has suffered a severe banking crisis, whereby debts have merely been transferred, not extinguished... yet. Large banking crises and deleveraging processes typically lead to sovereign crises. The UK will be no exception. PROPORTION OF COUNTRIES WITH BANKING AND DEBT CRISES WEIGHTED BY THEIR SHARE OF WORLD INCOME 45 40

45 Banking Crises

Percent of Countries

35

40 Debt Crises

30

30

25

25

20

20

15

15

10

10

5

5

0

0

1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Source: Reinhart and Rogoff, Banking Crises, An Equal Opportunity Menace

Gold & Silver Investment Summit Monday, 8th November 2010

35

Year

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TOO MUCH DEBT LEADS TO INFLATION UK implicit default risk high as inflation arises potentially from debt monetisation.

INFLATION AND EXTERNAL DEFAULT: 1900-2006

50 Correlations: 1900 – 2006 0.39 excluding the Great Depression 0.60 1940 – 2006 0.75

Share of countries in default

45 40

Percent of Countries

35 Share of countries with inflation above 20 percent

30 25 20 15 10 5 0

1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004

Source: Reinhart and Rogoff, Banking Crises, An Equal Opportunity Menace

Gold & Silver Investment Summit Monday, 8th November 2010

Year

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HIGH (HYPER) INFLATION IS A POLITICAL OCCURRENCE “The figures demonstrate clearly that deficits amounting to 40 percent or more expenditures cannot be maintained. They lead to high inflation and hyperinflations…” Peter Bernholz “Monetary Regimes & Inflation...pp.71”

High (hyper) inflation is caused by financing huge public deficits through money creation. Even 20% deficits were behind all but four cases of hyperinflation. The UK deficit may be 11.5% the size of the UK economy, but currently the UK deficit is over 25% of all government spending.

Gold & Silver Investment Summit Monday, 8th November 2010

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DEFICIT LEVELS RELATIVE TO EXPENDITURES BEFORE HYPERINFLATION King monetized 100% of the UK budget deficit. This makes the UK a prime candidate for hyperinflation. Unfortunately we don’t have any gold to protect us. BUDGET DEFICITS BEFORE FIVE HYPERINFLATIONS 100% FRANCE BOLIVIA 80%

BRAZIL

% of Spending monetised

POLAND GERMANY 60%

40%

20%

30% -4

Source: Monetary Regimes and Inflation, Peter Bernholz

Gold & Silver Investment Summit Monday, 8th November 2010

-3

-2

-1

0

1

Years prior to money reform

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JAPAN: MONETARY MIKADO

Japanese debt is like a bundle of “Mikado” sticks, try to remove one and the whole lot could collapse...

Gold & Silver Investment Summit Monday, 8th November 2010

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JAPAN: A TIPPING POINT FOR SOVEREIGN DEBT Japan over the last year issued more JGBs than tax revenues it collected. This is not sustainable. Japan’s fiscal situation has been dire for some time. Either Japan will right itself through political reform, ie debt restructuring and tax increases and these would likely not be enough - or it will be a prime candidate for hyperinflation. !"#$%&&'()*+$,-(./$0

JGB TAXES, EXPENDITURES AND JGBs ISSUED

TAX REVENUE, EXPENDITURES AND JGBs ISSUED

100%

120

120

100

100

80

80

60

60

40

40

20

20

0

0

90% 80% 70% 60% 50% 40% 30% 20%

JGBs Issued / Tax Revenue Tax Revenue / Tax Expenditures

JGBs Issued Tax Expenditures

Tax Revenues

1(2+$3

Gold & Silver Investment Summit Monday, 8th November 2010

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2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

0%

1985

10%

HYPERINFLATION, ‘BABURU KEIZAI’ ENCORE? Japan’s debt levels are now at levels only seen historically in hyperinflationary countries. By 2010 gross debt to GDP will be over 200%. Net debt is 110% of GDP, which is better, but the asset side is owned by private sector, so does not help government financing even if they attempted confiscation. To understand Japan debt dynamics click here: http://www.hindecapital.com/reports GOVERNMENT DEBT / GDP 300 250 200 150 100

Gold & Silver Investment Summit Monday, 8th November 2010

Belgium

Spain

Greece

Italy

Singapore

Jamaica

Lebanon

Japan

Zimbabwe

50

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

BOJ SHIRAKAWA GOES ‘STRANGE LOVE-LY’ NUCLEAR Shirakawa rides the Bomb, Oct. 5th BoJ statement allows unlimited bond purchases and all but the kitchen sink. October 5th, 2010 BOJ implements comprehensive monetary easing policy change 35 tln yen: 1. Overnight call rate to remain at 0 to 0.1 % (“encouraged”). 2. Maintain ZIRP on basis of the “medium – to long term price stability” (“forever”). 3. Establishment of a 5 tln yen Asset Purchase Program – “temporary” measure to purchase government securities, ABCP, corporate bonds, ETFs, J-REITS.

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

LAND OF RISING SUN SETS SOONER Japan has a history of 180 degree turns: Isolation to engagement and militarism to pacifism. Meji Restoration – restored Imperial rule in 1868 and disposed of Shogunate rule enabling capitalism on Western scale instead of feudalism. Yoshida Doctrine – post WW2 pacifism and economic development, in spite of US encouragement for rearmament. PM Yoshida: Japan renounces “war as a sovereign right of the nation and the threat or use of force as means of settling international disputes.”

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

A GOLDEN JUBILEE 2010... Ms. Watanabe sells her bonds as Japan reflates, rearms and purchases gold. 900 tln yen worth JGBs is 10.588 tln USD at 85 yen At $1,300 troy oz gold = 8.14bn ounces or 253,000 tonnes (8.14bn/31250) gold But if gold at $13,000, Mrs Watanabe only needs 25,000 tonnes

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

BUBBLES: NASDAQ AND SOVEREIGN BONDS? Public debt, actually, has always had a Ponzi-like characteristic. “The global financial system continues to be unsound in the same way that a Ponzi scheme is unsound: there are not enough cash flows to ultimately service the face value of all the existing obligations over time. A Ponzi scheme may very well be liquid, as long as few people ask for their money back at any given time. But solvency is a different matter – relating to the ability of the assets to satisfy the liabilities.”

John Hussman

250 Equity fund inflows

200

Bond fund inflows

150 100 50 0 -50 -100 -150 -200

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

Source: Behavioral Investing, James Montler

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

DEBT IS MONEY, GOLD WAS MONEY, WILL BE MONEY... 1914 Federal Reserve Act: Fed could create currency and reserves as long as Federal Reserve kept a minimum of 40% gold reserve against FRN (dollars). US Money Supply Backed by Gold = US Gold Reserves x Gold Price ($/oz) US Monetary Base

Theoretical Gold Price ($/oz) = (US Monetary Base x 0.40) US Gold Reserves

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

GOLD: THE CURRENCY OF FIRST RESORT Solving our equation for additional monetary base of $600bn by June 2011, using 40% rule implies a fair value gold price of U$4,000 / oz. US GOLD RESERVES AND GOLD PRICE $10,000 Current Theoretical Gold Price (end 2009) 100% of Monetary Base = $7,700/oz

Price of Gold ($ oz)

40% of Monetary Base = $3,100/ozz $1,000

Actual Gold Spot Price = $1,355/oz

100% of Monetary Base 40% of Monetary Base $100

$10 1920

1930

1940

1950

1960

1970

1980

1990

2000

Source: Thanks to EIV Investments, LLC : Dr. F. Conrad Engelhardt IV

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

2010

WHEN ARE WE WRONG? Korean and Vietnam “American” War saw surge in US money supply. In 1971 using a 40% ruling the price of gold should have been $119 troy oz. It was $35. It was fixed. This discrepancy led to Nixon breaking the gold window and voting for gold. US GOLD RESERVES AND MONEY SUPPLY

Gold Reserves as Percent Money Supply

160%

$2,100 Gold Reserves to Money Supply Ratio High (gold Expensive)

140% 120%

Money Supply Doubles

$1,800 $1,500

100% $1,200 80%

40% 20% 0% 1920

$900

Historical Range of Gold Reserves to Money Supply Ratio

60%

$600

Gold Reserves to Money Supply Ratio Low (Gold Undervalued) 1930

1940

$300

1950

1960

1970

1980

1990

2000

$0 2010

Source: Thanks to EIV Investments, LLC : Dr. F. Conrad Engelhardt IV

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

A CRISIS OF CONFIDENCE: GOLD IS THE DEFAULT CHOICE “When you run these big debts, the problem is not with your children or your grandchildren, it’s in our lifetime.” Kenneth Rogoff 2010 Sovereign countries rarely default alone. The world may survive a Dubai, Greek or Latvian default but what happens if a major G7 country defaults such as Japan or...? SOVEREIGN EXTERNAL DEBT: 1800-2006 PERCENT OF COUNTRIES IN DEFAULT OR RESTUCTURING 60

Percent of Countries

50

40

30

20

10

0 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Year Source: Reinhart and Rogoff, This Time Is Different

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

“Gold is the hedge against political instability and government default” (A Gold Warrior, 2010)

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

HINDE GOLD FUND: A UNIQUE INVESTMENT • A long bias gold bullion fund with close adherence to USD spot gold price • A managed gold investment in three share classes EUR, GBP or USD • A potential return in excess of the spot gold price • A cheap method of owning physical allocated gold • A secure method of owning physical allocated gold • An investment in growing gold ounces vis a vis up to 25 % small cap mining holding • A liquid investment, no subscription or redemption fees, and same month dealing

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

HINDE GOLD FUND: A HIGHLY SECURE INVESTMENT Increased Risk

Default Risk

Default Risk

Other

Increased Risk

Swaps & Derivatives

Physical Bullion ETFs (warning hotspot)

Comex & Tocom Futures (warning potential hotspot)

Unallocated Gold Bullion

Wealth Store Wealth Store

Safer

Allocated Gold Bullion (stored at secure vaults in viable jurisdiction) Safer

ETFs and other vehicles for gold investment have inherent risk investors may be unaware of. An investment should hedge out all possible credit risk. Hinde Gold Fund achieves this by investing in allocated gold held in a reputable Swiss Private Bank.

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

HINDE CAPITAL Hinde Capital’s structure ensures the firm’s operations are thoroughly audited and transparent.

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

HINDE GOLD FUND Hinde Gold Fund is a managed gold investment. It aims to outperform the gold price, while smoothing any downside volatility. HGF RELATIVE PERFORMANCE: GOLD (Last 12 Months)

15%

10%

5%

0%

Monthly Relative Outperformance Cumulative Relative Outerformance (RHS)

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Nov-09

-5%

HINDE GOLD FUND Hinde Gold Fund has performed well against other assets since its inception. HGF COMPARATIVE PERFORMANCE: SINCE INCEPTION 160 Inception to Oct 2008 - Fund Benchmark: 50% Equity, 50% Bullion Nov 2008 to Present - Fund Benchmark: 100% Bullion 140

120

100

80

60

Hinde Gold Fund MSCI World GDM

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

Nov-07

Sep-07

40

OUR GOLDEN SECRET TO SUCCESS: A BRILLIANT COMPUTER MODEL...

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

HINDE CAPITAL: INVESTMENT MANAGERS BEN DAVIES, CEO Ben Davies ran trading for RBS Greenwich Capital in London where he managed a macro portfolio. He started his career in 1995, trading in the Credit fixed income market at Credit Lyonnais, moving to IBJI as a fixed income specialist and finally to Greenwich Capital in 1999. He graduated with a BSc in Management from Loughborough University. Ben Davies and Mark Mahaffey, former colleagues from RBS Greenwich Capital, established Hinde Capital in early 2007, primarily to focus on the precious metals and commodity sector. MARK MAHAFFEY, CFO Mark Mahaffey has 24 years’ experience in the international markets, having held senior posts at several leading investment banks. He trained as a fixed income specialist at Daiwa Securities before joining Midland Montagu as Director of the US government trading desk. In 1990 he jointly set up the Greenwich Capital office in London where he managed a portfolio focusing on global macro themes, before joining IBJI in 2001. His most recent appointment from 2005 was Managing Director of Bank of America London Proprietary desk.

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

HINDE CAPITAL: CONTACT INFORMATION Hinde Capital 10 New Street London EC2M 4TP United Kingdom Email Ben Davies, CEO: [email protected] Email Mark Mahaffey, CFO: [email protected] Phone +44 (0)20 7648 4600 www.hindecapital.com

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.

HINDE CAPITAL: DISCLAIMER Hinde Gold Fund Ltd is an open-ended multi-class investment company incorporated in the British Virgin Islands. This document is issued by Hinde Capital Limited, 10 New Street, London EC2M 4TP, which is authorised and regulated by the Financial Services Authority. This document is for information purposes only. In no circumstances should it be used or considered as an offer to sell or a solicitation of any offers to buy the securities mentioned in it. The information in this document has been obtained from sources believed to be reliable, but we do not represent that it is accurate or complete. The information concerning the performance track record is given purely as a matter of information and without legal liability on the part of Hinde Capital. Any decision by an investor to offer to buy any of the securities herein should be made only on the basis of the information contained in the relevant Offering Memorandum. Opinions expressed herein may not necessarily be shared by all employees and are subject to change without notice. The securities mentioned in this document may not be eligible for sale in some states or countries and will not necessarily be suitable for all types of investor. Questions concerning suitability should be referred to a financial adviser. The financial products mentioned in this document can fluctuate in value and may be subject to sudden and large falls that could equal the amount invested. Changes in the rate of exchange may also cause the value of your investment to go up and down. Past performance may not necessarily be repeated and is not a guarantee or projection of future results. The Fund is categorised in the United Kingdom as an unregulated collective investment scheme for the purposes of the Financial Services and Markets Act 2000 and their Shares cannot be marketed in the UK to general public other than in accordance with the provisions of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemption) Order 2001, as amended, or in compliance with the rules of the Financial Services Authority made pursuant to the FSMA. Participants in this investment are not covered by the rules and regulations made for the protection of investors in the UK. Participants will not have the benefit of the rights designed to protect investors under the Financial Services and Markets Act 2000. In particular, participants will lose the right to claim through the Financial Services Compensation Scheme. The securities referenced in this document have not been registered under the Securities Act of 1933 (the “1933 Act”) or any other securities laws of any other U.S. jurisdiction. Such securities may not be sold or transferred to U.S. persons unless such sale or transfer is registered under the 1933 Act or is exempt from such registration. This information does not constitute tax advice. Investors should consult their own tax advisor or attorney with regard to their tax situation.

Gold & Silver Investment Summit Monday, 8th November 2010

All material is compiled from sources believed to be accurate, but no accuracy can be guaranteed. The presentation is for information purposes only and is not a solicitation to invest. Unauthorized reproduction or distribution is strictly prohibited.