Age of Wisdom, Age of Foolishness (34)
The phenomenon of Blowback was much in evidence throughout geopolitics and the global capital markets last week.
Age of Wisdom, Age of Foolishness (33) “Good Fellas” observed the framing of the link between the threat of Islamic terrorism in the West and the “Islamic Caliphate of ISIS”. Social media, as both a viral recruiting tool and a medium of threat projection, is now being exploited on all sides.
“The Green, Green Grass of Home Grown Terror.”
In the latest viral semiotics, two “Islamic Men of Harlech” call upon their brothers to join them in Iraq[i].
“For Auld Lang Syne.”
They are joined in the video by a third “brave heart” from Aberdeen[ii]. The blowback from these individuals, apparently now threatens to blow the very Union apart. The question of whether these threats will make the Scots (and ultimately the Welsh) more likely to stay in the United Kingdom is apposite; and curiously coincidental with the run up to the Scottish Referendum and the UK General Election.
“ISIS, in the Museum, with the Kalashnikov.”
The inevitable involvement of Israel and the risk that this creates, by compromising the position of allied regional interests, was also observed in Age of Wisdom, Age of Foolishness (33) “Good Fellas”. This inevitability should be accepted, since the smoking gun of the Belgian Jewish Museum attack of May 24th has already been placed firmly in the hands of an ISIS confederate. The alleged attacker[iii], Mehdi Nemmouche was detained in Marseille with the smoking guns, a video confession supposedly to be released on social media and a flag bearing the insignia of ISIS. Nemmouche apparently fought in Syria, from January 2013, until his return to Europe in March of this year. Allegedly, he was apprehended through a stroke of luck, after a coach he was traveling on from Amsterdam was stopped for a routine drugs test by French Police. Perhaps his video should be played on a “Europe’s Dumbest Criminals” T.V. show. The plot thickened when it was reported that, at the time of the attack, two of the dead were former “members of the Prime Minister’s office”[iv]; which is allegedly code for intelligence service personnel. Media speculation at the time suggested that the attack was some form of reprisal by Hezbollah or Iran against members of Israel’s intelligence services. The beauty of hindsight, from the perspective of the recent developments in Iraq, provides a more enigmatic context. If Nemmouche was an ISIS operative, this negates the Hezbollah and Iranian connection, since ISIS is their sworn enemy. Or was Nemmouche just made to look like an ISIS operative? What this case illustrates is the point made in Age of Wisdom, Age of Foolishness (33) “Good Fellas”, that:
“The picture presented deliberately obscures the friend of my friend, enemy of my enemy and friend of my enemy etc; so that there are multiple permutations. Each character can therefore pursue their own agenda with impunity and also with the support of the other players”.
It is symbolic that Nemmouche is being tried by a court in Versailles. Versailles is the place where the infamous Sykes-Picot Agreement and Balfour Declaration, which ISIS is now avenging, were forced onto the Near and Middle East by the Great Powers. This “deliberately obscured picture” and the creeping Israeli involvement was embellished last weekend. ISIS captured a town right on the border with Jordan[v], moving ever closer to cross the Israeli “red line” on its border with this country. Hostilities recently increased with Syria on the occupied Golan Heights, when Israel retaliated with artillery for an unidentified Syrian attack which killed an Israeli youth[vi]. A selected Israeli source opined:
“The closer the fighting gets to Israel, the harder it will be for Israel to stay out.”
“There Will Be Blood.”
Age of Wisdom, Age of Foolishness (33) “Good Fellas” reminded readers of, the state of progress in, the birth of the new oil producing nation of Kurdistan. Israel became the first de facto state to recognize this new nation, when it took delivery of a cargo of Kurdish Iraqi crude; directly from the new state[vii] rather than from the Iraqi Oil Ministry. In so doing, Israel came into direct conflict with the Maliki Government of Iraq, such as it is. Since America is ostensibly committed to work with the Maliki Government to create a government which is more representative of a singular unified Iraqi state, Israel’s actions directly conflict with American foreign policy. This commitment was underlined by the presence of Secretary Kerry’s boots on the ground last week in Iraq[viii]. Kerry was most insistent that the Kurds should remain a member of the Iraqi polity[ix].There are further signals that Israel is now going it alone. At the latest Herzliya Conference, Prime Minister Netanyahu’s national security adviser Major General Yaakov Amidror opined that[x]:
"While the U.S. is an irreplaceable strategic ally, we need to be ready to do things on our own."
It would seem that Israel is already doing things on its own. Prime Minister Netanyahu’s take on the situation in Iraq, painted Israel’s best known “red line” clearly. In his first interview, since the ISIS crisis erupted, he suggested that America may be inclined to water down its position on the Iranian nuclear programme as a consequence of cooperation against ISIS[xi]. Presumably he left out the next sound bite, namely that Iran will see the threats from Iraq as a reason to accelerate its nuclear programme, for his next interview. ISIS is therefore a direct threat to Israel; and also an indirect threat via Iran. Netanyahu advised that President Obama should kill both these birds with the same stone.
“Onward Christian Soldiers.”
The rhetoric, regarding military intervention by America, has taken an interesting step within the GOP[xii]. Predictably, Dick Cheney and other architects of the Iraqi invasion, which led to the current situation, are calling for muscular intervention. Their critics however, have adopted a flexible position, which ultimately lends itself to intervention. Rand Paul is framing the current conflict as a war on Christianity. Whilst reluctant to commit American troops to fight for Iraqis who won’t fight for themselves, the door has been left wide open to a Crusade to protect Christianity by Paul[xiii]. At this point in time, it is very probable that the situation for Christians, in the Middle East and globally, is going to deteriorate more violently. The GOP is triumphantly marching on to war, consciously or otherwise. It is therefore logical to conclude that the escalating acts of barbarity against Christians in the Near East and Middle East and future acts against Christian targets globally are the catalysts for military intervention in the event of a Republican administration in 2016.
“Lies, Damned Lies and Statistics.”
It is becoming hard to determine if Gallup is producing topical polls on American attitudes to war in the Middle East out of genuine interest, or to create public opinion. A recent poll covered in Age of Wisdom, Age of Foolishness (33) “Good Fellas” found that the majority of Americans wish to keep Guantanamo Bay open. A new poll[xiv] shows that support, for military action in Iraq and Syria, is way below that polled in similar conflicts since Desert Storm. Support for military action is clearly much stronger, if America has been attacked. The Kosovo result however, shows that if NATO obligations are called upon public opinion can be overridden. The “Warmongers” therefore need something that either involves NATO or a physical attack on Americans. Another more recent poll[xv] shows that whilst the majority supported Obama’s exit from Iraq, this number is smaller than it was in 2011. At the current rate of decay, in the face of the escalating violence, one can imagine that this majority support for Iraqi exit will become a minority view by the time of the next Presidential election. By presenting the question, asking whether the sample approves/disapproves of Obama’s decision to withdraw from Iraq, a mendacious policy maker could easily infer the answer as the approval/disapproval of further military action, without specifically asking this different question. As Disraeli said, there are lies, damned lies and statistics. What matters for the “Warmongers” is that the vectors are moving in the right direction.
These vectors just received a substantial boost from Prime Minster Maliki’s decision to refuse John Kerry’s proposal[xvi] of a unity government to face the ISIS threat. Maliki has therefore chosen a civil war, which may split the country into three separate sectarian rumps, as a consequence of this refusal. American boots on the ground to defend a unified state is no option at all at this stage, since none of the parties involved wants it. President Obama’s epitaph will therefore include a triptych, of the three new states that were created out of his policy to exit. He will be remembered as the President who lost Iraq and squandered the legacies that Americans spent a great deal of money and lives achieving. Absurdly, or perhaps not, American interest is now served by ISIS until it removes Maliki; after which casus belli will be required to evict ISIS and restore order.
Age of Wisdom, Age of Foolishness (32) “School of Hard Knocks” and (33) “Good Fellas” noted the growing geopolitical threat of “Water Wars”, specifically in relation to the Turkish attempt to stem the flow of the Euphrates River[xvii]. The World Water Council has just officially acknowledged this threat[xviii]; and also included the threat to Egypt from conflict with Ethiopia over a proposed dam which will hold back the Nile.
The markets’ focus on geopolitical events totally obscured a signal from Mario Draghi last weekend that European interest rates are set to remain low through 2016[xix]. It is unclear whether Draghi felt compelled to send this signal, because Wolfgang Schaeuble[xx] and Andreas Dombret[xxi] cast doubt on the interest rate picture in Europe in light of the potential bubble in German assets, or whether he was responding to the growing general geopolitical risk. Whatever the cause, Draghi has responded with alacrity; and clearly signalled his intentions and capabilities to “do whatever it takes”.
Jens Weidmann chose to step into the debate[xxii]over the suggested loosening of fiscal austerity criteria in the upcoming European 2015 budget negotiations. It was noted in Age of Wisdom, Age of Foolishness (33) “Good Fellas”, that Germany fears the overheating risk to its economy from both looser fiscal and monetary conditions going forward. Weidmann called for tighter fiscal criteria, in recognition of the fact that the ECB has bought breathing space, rather than delivering a panacea with low interest rates. As readers will know, we believe that the ECB has created Eurosclerosis, by taking away the need to do anything more than service primary budget surpluses. In the absence of growth, it is unlikely that there will be any interest in tightening fiscal criteria; and we suggest that the upcoming 2015 budget negotiations will become an argument over the lack of growth policies. When Weidmann was finished with fiscal policy, he then moved on to monetary policy. He opined that it is not the ECB’s job to facilitate the Asset Backed Securities (ABS) market, in a direct warning to Draghi’s policy announcement at the last ECB meeting. Weidmann foresees that the ECB will become a repository for all the poor lending decisions made by the banks.
The obscurity of signals from the Bank of England appears to be deliberate. Andy Haldane has been swiftly trying to take back the rise in interest rates discounted by the markets. Haldane tried to guide expectations in the range of 2-3% base rates[xxiv]. He was joined by Governor Carney, who opined directly that the markets had got ahead of themselves, under intense questioning from the Treasury Committee[xxv]. Carney’s verbal intervention undermines his vulnerable credibility even further. His prevarication over interest rates increases has characterised him as an “unreliable boyfriend”. Carney and Haldane understand that the one way bet on Sterling appreciation, based on perceived economic strength is actually cooling the economy. The only thing driving the economy is the overheating housing market, which is sucking in more buyers of Sterling. Governor Carney then proved his reliability by applying limits on mortgage borrowing to the banks; so that banks can only have 4.5X salary mortgages as 15% of their book[xxvi]. In addition, George Osborne capped the Help To Buy programme at 4.5X salaries. Clearly, Help To Buy mortgages are being set at 15% of banks’ assets, to limit the damage from the bubble in this sub-sector. In addition, those trading up can only do so at a 4.5X salary multiple. Since banks aren’t lending to other borrowers anything like the volume that they do in mortgages, capping the mortgage lending at 15% of a bank’s assets will have an immediate negative growth impact. If lending was growing in general, the pain would not be so great. Since there is little lending going on, bank loan books are small; and this sets an overall weak denominator that must then be reduced by 15% for the capped mortgage business units. The weak lending picture in general, therefore makes the 15% cap even more limiting. Presumably, Carney thinks that banks will then start lending on lower salary multiplies, which will then knock on to create lower house prices. He ignores the supply side of the housing equation. If supply is not increasing, house prices won’t fall. This supply choke off is guaranteed, because the banks won’t lend to developers if they are seeing their mortgage books declining. What Carney is therefore doing is choking off the supply of new homes. This latest policy failure can be attached to his resume along with the failed initiatives of NGDP targeting and interest rate guidance. No wonder both he and Haldane are trying to guide interest rate expectations lower.
It is clear that the Bank of England is a full member of the new club of macroprudential central bankers, who believe that their mission is to manage asset prices. Their mission is to try and uphold an inverted monetary pyramid of assets, which is completely unstable and far larger than the real monetary value of the economy which sustains it.
As they play this game, the house of cards periodically collapses when real economic gravity intervenes.
Jeremy Stein was the thought leader of this school, which is basically a reinvention of Exter’s Pyramid[xxvii]. He was however expelled from school, back to academia, by Janet Yellen; because he committed the heresy of saying that interest rates should be included in macroprudential regulation. The school wants low interest rates and QE on the curriculum in perpetuity, despite the unintended bubble consequences for all asset prices. The more alarming unintended consequence is that this strategy provides no incentives for companies to hire workers, raise salaries and invest for growth. They simply raise prices, cut costs and invest in their own shares and those of takeover targets. Stagflation is the result of this reinvention of Exter’s Pyramid under the new title of Macroprudential.
David Cameron’s alleged “four letter word”[xxviii] treatment, on his proposed EU reform and his embrace of the Eurosceptics, now threatens to push the country to the “Brexit”. A “Brexit” would cause Sterling and the UK economy to lose the Halo of the ECB’s pro-growth monetary policy. The Bank of England would then find itself being forced to raise interest rates dramatically to support Sterling; and in so doing would kill the economy in the process. Carney therefore finds himself between a rock and a hard place, in which his only tool is words. Unfortunately, this tool becomes useless, if the words are not followed by actions; and also if the words keep changing. Mark Carney is gradually losing economic control of the situation. If David Cameron loses political control of the situation also, a currency and interest rate crisis will swiftly follow. His former Bullingdon Club chum, Radoslaw Sikorski was fulsome in his use of the four letter word to characterize the fate of Cameron; the same can be said for Sterling if Cameron succumbs to the four letter ending. This spat between former undergraduate chums and the use of four letter words, illustrates the deterioration of the situation to a level that has now become personal rather than just political. Sikorski believes that Cameron’s embrace of Euroscepticism is a betrayal of their friendship and an attack on the Polish nation. Jean Claude-Juncker is no doubt more polite in his use of the English language, but his sentiments are presumably as personal as those of Sikorski. He is on record for refusing to “grovel” to Cameron, so one can assume he has taken it personally. Cameron, in trying to avoid the trap being sprung by his Eurosceptic colleagues, has thrown himself into a trap sprung by the Eurocrats. His position has already been weakened, in the wake of the conviction of his spin doctor in the phone hacking trial[xxix].
The Chinese central bank did its bit to remove geopolitical obscurity, by opining that the country should join the Trans Pacific Partnership (TPP); in order to leverage off the growth that this free trade zone will create[xxx]. The PBOC understands that political tensions with its neighbours are starting to get dangerously out of hand. China needs growth more than it needs a conflict with its neighbours, or a conflict in the Middle East which threatens its oil supplies. The PBOC therefore made a political call, on behalf of the political leadership. By doing so, China also just gave a huge boost to Obama’s “Pivot”, which risked getting bogged down in the Ukraine and the Middle East. In Age of Wisdom, Age of Foolishness (33) “Good Fellas” Premier Li Keqiang was observed in London, strongly affirming his commitment to growth and rational behaviour as a cooperative global economic partner. This affirmation also appears to extend as far as Washington.
This pro-active Chinese behaviour may however be a noisy distraction from the bursting of a commodity loan finance bubble[xxxi], which was allegedly a pyramid scheme based on fraud. Exter’s Pyramid in China, has no Golden base; which is a huge problem for central bankers. Central Bankers pretend the Gold Standard is dead, but in fact it is obscured by the layers of paper assets which they are busily inflating and manipulating. With no Gold at the base however, it’s game over. The investigator is low-balling the size of the fraud at $15 billion, however it is clearly several times this since it involved a chain of lending based on false invoices. China may not have the domestic financial position required to achieve its growth targets after all, since previous growth was based on false invoice accounting for goods and services produced, in addition to false invoices for non-existent commodity collateral to finance the said false invoices for goods and services. China resembles a huge paper trail of IOU’s, for things that were never made financed by collateral that does not exist. The real hard currency that was invoiced has clearly left the country, so now China wishes to re-engage with the global trading system to earn some more hard currency. A great Yuan Crisis to rival the Great Rouble Crisis is brewing.
Now that the quiet period surrounding the last FOMC meeting has expired, the Fed has reverted to its own sectarian divisions which threaten to obscure its message. Charles Plosser picked up where he left off, before the FOMC, with an increasingly Hawkish speech which implied that the Fed has nearly met its targets for the dual mandate. This implies that QE should end now. Swiftly moving to counter-attack Plosser, Bill Dudley opined[xxxii] that the markets were premature in their discounting of rate increases. He was then contradicted by Bullard, who said that rates may go up as soon as March 2015[xxxiii]. He also seemed to concur with Plosser’s assessment of mission accomplished by the Fed. Bullard does not vote this time and he is notorious for changing his tune, so the sell-off he created shows how weak the equity markets are at these lofty levels. All this uncertainty had traders getting managed by risk rather than managing their risk.
JP Morgan could no longer hold out against the Fed’s obscuring of the inflation picture. Morgan has moved glacially from a disinflation to an end of disinflation call[xxxiv]. This falls far short of a true inflation call; however it gives Morgan the opportunity to look good with investors by at least calling the end of disinflation, even if not calling for inflation outright. Such perceptions are the currency of credibility which banks now trade off. Presumably JP Morgan is following the TIPS market; in which the five year inflation break-even has just hit a thirteen month high[xxxv].
“New Cards Please.”
Markets do not like obscurity, so they must weaken in order to prove the central bankers who see the need for more easy money right. The house of cards is allegedly being blown down, by geopolitical threats, so the macroprudential casino bosses must break open a new deck of cards. The blowback from ISIS is the most convenient explanation to rationalise all this to Mr Market’s satisfaction.
In the midst of this geopolitical obscurity, the “Quiet American”[xxxvi] Nathan Sheets chose his moment to reappear and communicate what America’s global strategy is[xxxvii]. This strategy can be broken down into three pieces. Firstly, America wishes to promote global macroeconomic stability through macro-prudential responsibility. Secondly, it wishes to stimulate growth in its trade partners’ economies. Finally, it will do what Sheets described as “preparing our economies to absorb the headwinds associated with shifting demographics”. The first two can be put under the general heading of economic growth. The third suggests that there is a growing actuarial time-bomb, associated with the aging societies in the developed nations, which needs to be addressed. Clearly growth will ameliorate this problem, by employing the currently underutilised younger generations who have no assets to support the assets of the aging asset rich. Japan is a classic case in point, however other developed economies are getting there fast. Japan singularly failed to create growth, so it is relying on its central bank to inflate its way out of the problem. Just as the Fed thinks that its work of QE is done, Nathan Sheets tells them that they will have to keep going. Last time, Age of Wisdom, Age of Foolishness (33) “Good Fellas” signed off with the observation that it was business as usual for the currency debasers, as the Gold Price came back to life. The “Quiet American” suggests that this process is a matter of US Treasury policy. He also implies that there is a large house of cards in the real economy, which is about to collapse and therefore needs a new supply of monetary cards to mitigate. This new house of cards is the financial liability for the aging demographic, which cannot be financed by the real income of the young demographic that is supposed to support them. Clearly, monetary inflation is supposed to maintain the value of the assets of the aging demographic, so that they do not need to call on the limited resources of the young demographic. Unfortunately however, the policy to maintain asset prices creates the economic conditions which mean that the young demographic don’t have any real skin in the game. Just to make sure the young demographic do not turn against the aging demographic, a foreign threat traditionally from the Middle East is used to maintain social cohesion at home in the West. It’s a classic game that has been played many times since the early 1990’s.
“The ‘H’ in Jackson Hole.”
Jackson Hole approaches, where Yellen will attend this time; so it will be important to see how the other hand, that creates the Dollars to honour the Treasury’s IOU’s, behaves in light of Sheets’ recent remarks. Only a permanent increase in the money supply can do what Sheets suggests, so it could be time to fire up the chopper and fly in a new deck of cards.
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- John Kerry urges Iraq's leaders to stand united in face of Islamist insurgency
- Kerry Urging Kurds to Help Form United Government in Iraq
- Netanyahu adviser: Israel must be ready to act alone against Iran
- Israel Warns U.S. That Militant Threat in Iraq May Serve Iran’s Nuclear Aims
- Dick Cheney and Rand Paul clash over Iraq
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- Iraq PM rules out national emergency government
- Syria’s Looming Water Calamity
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- Draghi Says Unlimited Cash Through 2016 Is Rate Signal
- Finance Minister Warns of Dangerous Signs in German Real Estate
- Draghi’s Calm Markets Spark Concern of German Risks: Euro Credit
- ECB's Weidmann calls for stronger euro debt rules
- UPDATE 1-Bundesbank chief - do not turn ECB into Europe's bad bank
- UPDATE 1-Bundesbank chief - do not turn ECB into Europe's bad bank
- Carney Jilts Investors as U.K. Rate Message Tempered
- Carney at Tolerance Limit as BOE Acts to Curb Housing Risks
- Terminal Velocity 2013
- Polish MPs ridicule Cameron's 'stupid propaganda' aimed at Eurosceptics
- Cameron apologises over Andy Coulson appointment
- PBOC’s Ma Urges Joining TPP to Boost Growth, Report Shows
- China Finds $15 Billion of Loans Backed by Fake Gold Trades
- Dudley ‘Wouldn’t Put Too Much Weight’ on Mid-2015 Rate Rise
- U.S. Stocks Drop as Bullard Says Rates to Rise by March
- So Long, Disinflation, as JPMorgan Sees Global Prices Rising
- Treasuries Gain on Durable-Goods Drop as Economy Shrinks
- The Quiet American
- UPDATE: Tsy Offl Nominee: Need To Implement Lessons of Crisis