Jeux Sans Frontieres
Age of Wisdom, Age of Foolishness (22)
In Age of Wisdom, Age of Foolishness “The American Jury is Out, But the European Jury Has Voted” January 11th 2014[i], it was concluded that :
Japan was scheduled to provide the global liquidity in 2013, this year it will be the ECB.
Since then, what has ensued in the markets has been the vigorous attempt to decouple European risk from American risk. This vigorous attempt has been embellished with the global-macro theatre of life “beyond the Pale” in Central Europe[ii]; in which “Team America” has put pressure on “Team Europe” to drive this decoupling with real policy action. This policy action was heralded by the Plunge Protection Teams, seen on the opening and closing of European and American stock exchanges; driving the price action to suggest this decoupling. The required policy action, to fundamentally support this technical picture, was finally supplied by Mario Draghi at his press conference last week; during which he announced the unanimous consensus in the ECB to employ further unconventional monetary policy tools. Since deficit monetisation is “Verboten”, said policy action can only mean the monetising of bank credit products rather than sovereign bonds. Draghi’s announcement therefore allowed European risk to fully decouple from American risk, after the latest US Employment Report gave further momentum to the continued “Taper” induced sell-off.
Age of Wisdom, Age of Foolishness “To QE Infinity and Beyond” used the allegory of science fiction films to illustrate the global-macro “forces” at work. The first signs of what lurks beyond “QE Infinity” came from Janet Yellen. The re-pricing of US risk, inspired by the move to “Qualitative Guidance and Easing” announcement at the last FOMC, received a quantitative push by Jeremy Stein[iii]. Stein is (or rather was) the individual who brought the last semblance of quantitative discipline to the Fed. He introduced the doctrine that monetary policy is inherently part of the tool kit that the Fed should use to control systemic risk. Up until Stein’s tenure, the dogma inculcated to policy makers assumed that only regulation on risk and capital could ensure systemic stability[iv].
Stein fashioned a microeconomic toolkit that targets specific asset classes for price adjustment, using collateral markets, in order to bring stability to the layers of Exter’s Inverted Pyramid that the whole economic superstructure is supported by. Rather than use the blunt tool of the base rates, Stein applied the scalpel of the repo markets for specific asset classes; to stimulate those that needed stimulating and deflating those that showed bubble characteristics. Stein’s approach was evident in the recent sell-off in US risk assets, after he opined that they had become inflated beyond their corresponding risk coordinates.
It seems however that Janet Yellen (and possibly also the Obama Administration) has become alarmed at the risk-off correction that Stein has created. This does not fit the new “Qualitative” fuzzy logic that now masquerades as Fed policy. Yellen became so alarmed at the violence of the correction, which had undermined all of the rally since her inaugural speech, that she saw the need to verbally intervene and cause a spike in US risk assets[v]. Dennis Lockhart also seems to have been spooked by the violence of the sell-off. He has started backstroking on the “Taper”, suggesting that if the economic weakness is due to more than the bad weather that the “Taper” may need to be suppressed[vi]. James Bullard also swiftly intervened to opine that persistent low inflation may prompt a “Taper” rethink[vii]. The beauty of the new era of “Qualitative Guidance” is its equivocation. Fed speakers can literally now move asset prices with words, based on their perception of where they think the equity markets should be. “Qualitative Guidance” therefore proves the point that the Fed is still targeting asset prices as a priority, rather than inflation or unemployment.
The Fed has no choice in the matter, since the size of its balance sheet directly corresponds to the level of risk asset prices in the absence of real economic growth. QE has created a bubble in risk asset prices that the Fed is now waiting for the “Helicopter” to justify, by boosting the purchasing power of the “Middle Class”. The Fed’s job is therefore to maintain this level of risk asset prices until the “Helicopter” arrives. It would seem that Jeremy Stein is less than impressed with the new era of “Qualitative Easing and Guidance”; as he has effectively dissented in his own way and gone back to the academic discipline of Harvard[viii]. His last act of dissent was to trigger the risk-off correction in US assets.
Not only is the Fed now bereft of intellectual capacity, but it is also heavily depleted in terms of bodies. This therefore gives Yellen greater authority amongst the dwindling numbers of colleagues; and concentrates even more power in her hands. In addition, it gives both Yellen and Obama the opportunity to stock the Fed with Governors who are of the “Qualitative School” of their liking. In the long run, when it is time for the “Helicopter” to land, it will be unopposed and very powerful in its resulting impact. In the meantime however, the Yellen dead cat bounce was short lived, because the speculators have now understood that they should be buying European risk and selling American risk.
“It’s a wrap”
The required European “force”, to fundamentally support this technical picture, was finally supplied by Mario Draghi at his press conference last week; during which he announced the unanimous consensus in the ECB to employ further unconventional monetary policy tools[ix]. Since deficit monetisation is “Verboten”, said policy action can only mean the monetising of bank credit products rather than sovereign bonds. Draghi’s announcement therefore allowed European risk to fully decouple from American risk, after the latest US Employment Report gave further momentum to the continued “Taper” induced sell-off. Draghi acknowledged the pressure exerted by “Team America”, through the agency of Christine Lagarde, with a classic European repost advising the IMF to provide the Fed with timely policy advice also[x]. “Team Europe” has got the message, but will do things its own way.
The capital markets also finally got the message, so that now Spanish Yields can converge lower and trade through American yields, even as American yields are rising. The Fed can therefore “Taper” without dragging the term structure of European interest rates higher. In Age of Wisdom, Age of Foolishness “All the World’s a Stage” it was observed that
“The Fed is more interested in driving credit spreads wider, than in driving benchmark interest rates higher at this point in time. The “Taper” should therefore be viewed as a correction in yield spreads rather than a bear market in US fixed income”.
Coordinated actions by the Fed, ECB and their Plunge Protection Teams have now ensured that European yields have been insulated from the correction in US markets. US Treasuries have lost their benchmark yield status in the global capital markets. This will create some bizarre misallocation of capital and bubbles in global markets. Spain is clearly an absurd case in point; however when the tractor beam exerted by global central banks takes effect, absurdity in pricing becomes what has been termed a “new normal”. The duration of these “new normals” has so far outlasted the solvency of those who speculate against them based on risk valuation fundamentals.
Central bankers have become the “House”; and the “House” always wins (until it loses); but when it loses there is no-one left who has the contrary position. A new age, of power trading by central bankers, has eclipsed anything that the giant global-macro funds could aspire to. The big funds make their money from management fees, on large funds under management employed in trades that are minimal in risk, compared to the big bets being taken by the central bankers.
As usual, the dumb Feds are investigating the wrong form of market manipulation[xi].
Much fanfare has been made about the coming demise of High Frequency Trading and its inherent market manipulation. As usual, hiding in plain sight is the manipulation of these market manipulators by the policy makers themselves. The recent price discovery of European and American decoupling was done through the agency of the High Frequency Traders; who found their algorithms which supply and remove liquidity being gamed by the Plunge Protection Teams on the critical opening and closing times of the respective markets being manipulated.
Europe is now following its own path. Greece was given a sweetheart new deal by the Troika[xii]. Portugal’s creditors postponed another tranche of bailout aid, until after the upcoming European elections, to delay a politically risky decision on whether to extend more financial support[xiii]. Policy makers and central bankers are now playing games without frontiers.
Politicians employ the “Spin”, outlined in Age of Wisdom, Age of Foolishness “All the World’s a Stage”, to achieve their objectives.
Global “Spin” received a new “Spin Docteur” after the failings of Hollande at the polls last week. His new Prime Minister Manuel Valls, is a ringer for the doyen of “Spin” known as Tony Blair.
In Britain, the traditional home of “Spin”, Governor Carney was busy “spinning” a new line in “Guidance” after his total failure in this matter so far. The messenger will be shot and a new interest rate forecaster and team will be hired[xiv]. The Bank of England is starting to resemble the more famous of the country’s Premier League football teams; which have become notorious for their hiring and firing of coaches and management teams.
The game of Superpower chess in Ukraine continues to play to packed audiences[xv]. NATO made the big show of suspending cooperation with Russia[xvi], whilst Secretary Hagel rattled his sword about deploying an extra brigade of US boots on the ground in Europe[xvii]. A more cynical observer may opine that since America is withdrawing from Afghanistan, it will have several idle brigades with no missions to hand. With no missions, said brigades face disbanding with the attendant knock on effects throughout the employment chain at the Pentagon and industrial supply chain which lives off it. It would appear that a line is being drawn under the size of America’s armed forces. President Putin is also of a like mind, in relation to the size of the Russian military.
As was the case with the “Pivot”, Russian and American military doctrine in relation to scale and economy of force are congruent again. A crisis that supports this mutual position is therefore timely and fortuitous. Faced with all this rational mutual support and symbiosis, it is therefore absurd to accept the current “Spin” being presented that Western policy makers fundamentally misunderstand President Putin[xviii].
As we have said before, if President Putin did not exist the West would have to invent him. His actions thus far have firmly established him as a fully paid member of the “Committee to Save the World”. President Putin is an entirely rational actor, who plays the role designed for him with alacrity and panache…. almost too well to be taken literally as the irrational dictator portrayed in the western media. His latest rationally proscribed and irrationally presented act, was to increase the sophistication of the ordnance supplied to the Assad regime[xix].
Russia is now therefore a major player in Emerging Europe; and also the Syrian Civil War which indirectly leads to the relations between Iran with the West. Russia is therefore a fulcrum of America’s “Pivot” from the Middle East to Asia.
With this emerging multi-polar global-macro theme in mind, it was therefore interesting to take a closer look at America’s strategic interest in the Middle East. The global media presented President Obama’s recent visit to the Kingdom of Saudi Arabia as a defining moment, in which an energy independent America pressed the strategic reset button with its former ally. Of course when the media presents a party line, one must look for a totally different nuanced reality.
This nuance is provided by a cursory observation of the pattern of American Crude Oil imports since the Shale Boom began. Immediately one sees that American oil imports from the Gulf Countries and Latin America have remained static. Imports from Africa have fallen, as the Light Sweet Crude fraction in domestic Shale Oil has substituted for the similar fractions from Africa. America therefore has retained strategic political interest in the Gulf Countries and also Latin America.
The “Pivot” in energy terms, is therefore from Africa to Asia. Africa is clearly a region in which America can afford to risk collateral damage to its energy interests. In the great tournament, America can therefore sacrifice pieces on the African board when it makes moves. Europe and China are less able to sacrifice pieces on this board; which makes for an interesting geopolitical dynamic on this continent.
We would suggest that the global-macro theme for Africa going forward is therefore anything but the rosy future opined by the Emerging Market asset managers; who are talking up the growing affluence throughout the continent. As in the past, Africa is more likely to be the dark alleyway where the nastier moves of the new chess game are played out. The Plunge Protection Team has not shown the same interest supporting African assets as it has in supporting European ones. African assets will therefore get taken down by the “Taper”. This takedown will be accentuated by the competition of American Shale Oil with the African Light Crudes. Capital will leave Africa, creating a balance of payments crisis.
One can foresee clearly, the role that the IMF will play in Africa once the balance of payments crisis occurs. Christine Lagarde has already opined on the subject of Africa. In 2012, when Greece was undergoing paroxysms, she said "I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time. Because I think they need even more help than the people in Athens”.
Funnily enough, Africa is already a subject close to Stanley Fischer’s heart. A native of Zambia, he also reacquainted himself with the continent during his time at the IMF. This re-acquaintance became inflammatory when Fischer left the IMF in 2001, to head the Bank of Israel. During his time at the IMF he had befriended a native of Burkina Faso named Alassane Ouattara; who had been Prime Minister and was being groomed by the institution to become the next President of Ivory Coast. The Ivory Coast legislature then made a law banning Muslims from becoming President. This then led to the religious civil war that blighted the country; and later was folded up into the larger conflict of the War on Terror that became Arab Spring. Ouattara was installed and maintained with French military intervention, the country where his wife was born and has nationality. Events since then have degenerated to such an extent that Ouattara is trying to acquire Israeli military hardware and assistance to support his regime[xx]. Since Arab Spring took hold in North Africa, the dominoes have continued to fall across the continent. Ivory Coast is a vignette of what to expect going forward.
It was interesting to see the first signs of life stirring in the moribund and defeated GOP; just as the geopolitical picture was returning to one of their understanding. Senator McCain was already on his high horse, after the events in Ukraine.
“Digging Up George Plantagenet”
The most telling signal however came from a scion of America’s own Plantagenet dynasty. The “genista” of this family is named Bush. As the GOP worldview goes back with affection, to the fondly remembered days of the Cold War, it is no surprise to see this family of renowned Cold Warriors; testing the waters to see if its tarnished reputation still has the political capital required for one of its scions to run in 2016.
George W Bush, blew the dust off some of his old oil paintings[xxi]; and opined the tale of Putin’s Dog to remind America that cometh the hour cometh the man[xxii]. Like all wartime leaders, such as Churchill and Hitler, “W” likes to paint. If current American leaders are failing to read Putin, the people can rely upon the Bush family to read him correctly. The response to “W” has been forgiving, especially as his father defeated the Soviet Union and Saddam Hussein. Obama may have terminated “OBL”, but it was “W” who did all the hard work. It was amusing to watch the Obama administration currently undergoing torture by Congress, for torture policies that “W” originally secretly signed into existence. This observation clearly shows that all is forgotten and that the way is now open for a Bush to run against a Clinton in 2016.
- The Two Economic Juries of the Atlantic
- Beyond the Pale
- Stein Says Fed Should Weigh Financial Risks in Stoking Job Gains
- Jeremy Stein Brings More Salt To the Fed's Table
- Financial Times article
- Fed’s Lockhart: If Weak Growth Persists, Outlook for Rate Increases May Change
- Bullard Says Slowing of Inflation Might Prompt Taper Delay
- Fed Governor Stein Resigns to Return to Teaching at Harvard
- Draghi Deflation Fight Seen on Different QE Path to Fed
- The Wall Street Journal
- Washingtonpost Article
- New troika deal sets Greece range of targets but no immediate austerity measures
- Portugal's Bailout Exit Delayed
- Carney Rebuilding BOE Forecast Standing Picks Analysis Chief (1)
- Let's Settle Our Conflict With Russia Once And For All By Playing Hungry Hungry Hippos
- Ukraine crisis: Nato suspends Russia co-operation
- Hagel Says U.S. Mulls Adding Brigade to Counter Russia
- Hagel: 'Misjudging Putin' not the problem
- Putin Defies Obama in Syria as Arms Fuel Assad Resurgence
- Israeli links to Ivory Coast army project
- George W. Bush Has New Paintings Of 24 World Leaders, Including This Haunting One Of Vladimir Putin
- George W. Bush's Story About Vladimir Putin's Dog Explains So Much