January 9th, 2015
in aa syndication
Age of Wisdom, Age of Foolishness (58)
The debate between the Northern and Southern Europeans, over the direction of fiscal policy in the Eurozone, is beginning to follow default national stereotypical behaviour. The Northern Europeans are rational and the Southern Europeans are emotional. The Northern Europeans intend to exploit the emotions of their Southern neighbours, in order to provoke the kind of irrational behavior which leads to mistakes.
This latest great schism was formally created at the Franco-German Financial and Economic Council in Aachen, the old capital of Charlemagne’s empire[i]. The struggle can be understood as a Hegelian dialectic. France and Germany have mutually exclusive theses for Europe. The struggle is now to see which nation and therefore which thesis will survive. If the Eurozone breaks apart as a consequence, so be it as it can always be recreated from the broken pieces.
Wolfgang Schaeuble gave the impending Eurozone crisis a little nudge early last week, when he opined[ii] that Angela Merkel was a more effective leader than Napoleon had ever been. This inflammatory remark was no doubt intended to inflame French passions into making an emotional mistake, rather than a rational decision in relation to the current fiscal and political debate. No doubt, it was also intended to draw Sarkozy and his supporters out into the open, where Germany can effectively neutralize his impact. The German tactics are employed by members of Merkel’s team rather than Merkel herself, to directly engage with the opposition, in a the German form of Good Cop/Bad Cop. Merkel therefore never lowers herself from the pedestal of the moral high ground. She is therefore above politics and beyond reproach; a position from which she can pick up the pieces and put Humpty Dumpty Eurozone back together again, after he falls. If her political opponents are stupid, they will fall from their own pedestals and engage in the dirty political skirmishing.
“Who’s Holding Herman?”
Michel Sapin is such an opponent. His inflamed Gallic sense of pride forced him to take the bait and respond to Schaeuble’s provocation; when he opined that German behaviour and criticism of national leaders is creating the nationalist backlash which endangers the Eurozone’s survival[iii]. Sapin has therefore identified himself as someone whom the Germans will have to remove going forward.
“Vichy en Rose.”
Manuel Valls, on the other hand, bears all the hallmarks of the kind of collaborator with whom Germany has successfully worked with historically. Last week, he called on French voters to back the economic reforms that the nationalists find too Germanic[iv].
“La Troisieme Route au Centre.”
Somewhere in the middle ground, between Le Pen to the right and Sapin to the left, the photogenic Emmanuel Macron fumbles around for the middle ground. Taking a page out of the Tony Bliar little black book of power, Macron has rebranded the Perfidious Albion’s “New Labour Third Way”[v]. Of his new Gallic plan he said, “this is a Clause IV moment”.No doubt he received tips on this strategy, when he met with “Mandie” at the Bilderberg meeting in Copenhagen earlier this year[vi]. George Osborne was also there; so presumably “Mandie” explained to him how to win the hearts and minds of the emibittered Northerners, during the breakaway sessions.
Osborne, has since then assiduously followed “Mandie’s” guidance; and rolled out the “Northern Powerhouse” campaign.
“Sheikh Rattle ‘n’ Roll.”
Last week, he was reminded that the “Northern Powerhouse” of Manchester is in fact the eighth Emirate of the United Arab Emirates, when he showed up to inauguarte the latest infrastructure investment being made in the city[vii].
“The Dead Big Existential Question?
The big French question however, is whether Macron is part of the “Sarko” return strategy, or if this is a separate venture. What seems more likely, is that Macron has the blessing of the Anglo-Saxons and the more Trans-Atlantic leaning Germans. What is also now clear however, is that there are various French liberation missions supported by interested foreign countries. One of them is German and rather painful in political and economic terms; the other potential two seem to be Anglo-Saxon, although they may all be one and the same.
In addition to the volatile French sentiment of the electorate, the other problem for them all is Mario Draghi. If he keeps “doing whatever it takes”, which only succeeds in maintaining the unstable status quo “sans reform”, there is no incentive for any economic reform at all. Draghi effectively takes away the incentive to reform, by propping up the unsustainable status quo.
Confirmation of the behind the scenes machinations in French politics were confirmed by the appearance of Jacques Attali in his traditional role of “President’s Whisperer”[viii]; a position which dates back to the days of the Cardinals Richelieu and Mazarin. Attali has had the ear of Mitterand, Sarkozy and now Hollande. He is also the eminence gris behind the meteoric rise of his former pupil Macron, through the French House of Rothschild to the Elysee.
Attali’s career also involved leadership of the European Bank for Reconstruction and Development (EBRD) , back in its pork barrel days; therefore the French input into the EU’s latest infrastructure investment initiative has some clear context. No stranger to controversy, Attali is an old Africa Hand, made notorious for his involvement in what was known as “Angolagate”[ix]; so new French foreign policy initiatives in its former colonial mandates can be expected to contain the characteristic Gallic whiff of scandal about them.
“The Triumph of United Eurozone Love.”
The opening act in the new European drama began at La Scala last week, when a demostration against German economic hegemenoy broke out at the symbolic performance of Beethoven’s Fidelio[x]. It is a tale which tells of a heroine saving her imprisoned husband from political incarceration.
It therefore appeared, to Germans in the audience, as an allegory of Angela Merkel saving Matteo Renzi. Unfortunately, the Italian mob in the street outside saw it more as an allegory for further German domination. A performance of Beethoven’s Ninth or anything by Wagner would presumably have started a revolution.
Age of Wisdom, Age of Foolishness (57) “Uncensored” suggested that Italy would be the next domino to fall, following Greece again, in a repeat of 2012.
“A Promotion For Stavros?”
Sure enough, the Greeks set the process in motion, when Prime Minister Samaras gambled on calling early Presidential elections last week[xi]. Understanding that he has now come to the end of the line, in terms of what he can get away in terms of austerity, he must now seek a democratic mandate to continue to hack away at the Greek economy.
His Presidential choice Stavros Dimas is a traditional right winger, who will allow him to continue with austerity, “if” he is elected to uphold the constitution as the new head of state. Dimas is also a former European Commissioner, which will cover the base with the Troika. “If” is not a question speculators like to be asked; so they responded by destroying the prices of Greek assets.
“More Of Heads Up than a Wakeup Call.”
The use of imagery from the Godfather was deemed as “inappropriate” by some readers last week. With no apology, this “inappropriate” theme has been continued in the current report; because the behaviour of Italian politicians suggests that it is wholly appropriate to adopt it.
“If you can keep your head….”
European contagion then spread to Italy. Following the trigger of the Greek domino, Italian President Napolitano signalled that his own head will be sacrificed, on the alter of Italian democracy early in the New Year[xii]. His exit announcement was underlined by the concurrent general strike which brought the country to its knees[xiii]. Speculators, already rattled by the news from Greece, amplified the domino effect in the Italian capital markets.
And so, on to Spain and then France on the grand European tour of 2015
In the great debate, that is now unfolding on the economic consequences of the fallout in the oil markets, consensus is emerging that Europeans have been precluded from any stimulus that may have been occasioned. The European energy sector is the cash cow, for national fiscal authorities to milk the inelasticity of demand for oil and gas, in order to fund their budget deficits.
The fall in crude prices has therefore not been fully passed on to Europeans. The net effect is that inflation remains sticky and consumption remains weak. The resulting slow economic growth, will therefore make fiscal authorities even more dependent on energy taxes; which will simply exacerbate the situation and destabilize the Eurozone even more.
“What a Praet?”
The ECB’s appropriately named Peter Praet opined that the net effect will be deflationary[xiv]. As the saying goes, a man with a hammer only sees nails; therefore Praet signals that the ECB simplistically views the oil price slide as deflationary. In America however, as can be seen from the graph above, the impact of falling oil prices increases consumer purchasing power, because the fiscal authorities are not as overzealous milkers of the cash cow as the Europeans.
America will therefore enjoy an economic stimulus; in which producers and retailers, not connected with the energy complex, have improved pricing power. The Fed will therefore be adopting anti-inflation policies as the ECB adopts anti-deflation policies. The resultant slide in the Euro will however force the ECB to comply with the Fed’s agenda; before the Fed can throw the ECB a bone and begin the process of Helicopter Money creation, after the US inflation hurdle has been cleared.
“Coming to European Screens in 2015.”
Evidently Mario Draghi expects a re-run of 2012, when the Eurozone almost fell apart; because his intentions are to supply roughly the same amount of liquidity again that was supplied back then[xv]. If he is successful, the condition of stasis will remain; and nothing will be achieved.
If Europe is going to change, it needs an external force to shake it up. The Fed’s tightening cycle could be just the external force required. Merkel also sees a similar scenario evolving, because last week eased back on the drive towards a balanced budget; and introduced some fiscal wiggle room in order to deal with the incoming domestic slowdown[xvi]. The poor uptake, of the latest ECB long term funding initiative[xvii], suggests that the banks have already given up on the prospects of meaningful QE and are scaling back their lending exposures to their own economies.
As the Eurozone began to fracture last week, so did the UK Coalition[xviii]. The breakdown came over the issue of the magnitude of spending cuts, required in the next Parliament, in order to balance the books which have been further unbalanced by George Osborne’s recent pre-election fiscal profligacy.
The Bank of England continued in its rapid metamorphosis; into an institution that is a pastiche of various global artifacts, with which Britons and their economic problems have very little in common. The Bank is therefore becoming a leader of global economic and environmental thought leadership, leaving the British people unprotected and at risk in its reforming wake. Governor Carney informed of further morphosis into a Fed clone, with the announcement that the Bank’s communication policy would more closely resemble that of the FOMC[xix].
The Bank’s latest stress test conditions, which are by far the most acerbic in the developed world central banking fraternity, signalled the kind of turmoil which average Britons will have to endure as the political leaders position the country in the vanguard of the global economy. Real estate prices were assumed to fall by 21%, economic growth was set at 7% below the ECB prediction and interest rates were predicted to rise from 0.5% to 4%. None of these vectors should be assumed to be a fanciful extreme worst case scenario.
A Eurozone Crisis, followed by the “Brexit” and an ensuing Sterling crisis, in which hard and financial assets are dumped, are easily par for the course over the next two to three years. The Bank was therefore hiding its own baseline case in plain sight, disguised as a stress test. It was therefore amusing to see the Bank opine that the property market would hold up to gradual rises in interest rates, whilst the impact on consumer spending would be negligable[xx].
Age of Wisdom, Age of Foolishness (57) “Uncensored” developed the theme of the Bank becoming the thought leader on global warming. This theme was supported last week, from the democratically elected policy making body, when Ed Davey suggested that all FTSE listed companies would be obliged to make reporting disclosures on their CO2 emission liabilities.
Since the FTSE-100 is dominated by the energy companies, now that the banks are in the hands of the taxpayers and the FCA, such a move effectively caps the upside of this index. Such a move will no doubt spawn the next bubble in clean energy stocks, once it has been voted through the Commons.
Davey’s words also suggest that the LibDems are just about to reinvent themselves as the Green Party, in order to entertain any notions of political longevity. Exxon added an element of realism into the debate however, when it opined that all attempts at CO2 emissions control were doomed to failure as long as the World’s number two and three polluters (India and China) refused to play by the civilised rules of the West[xxi].
“All Your Dreams Are Made…..”
Age of Wisdom, Age of Foolishness (51) “Culture Shocks”[xxii]
Fresh from his entrance onto the Mount Olympus of the geopolitical Titans, via the stepping stone of Manchester’s “Northern Powerhouse”, Jim O’Neill took up another burden of mankind. In doing so, he signalled how the civilised West will deal with the uncivilised polluters who do not play by the established rules. O’Neill’s latest crusade is ostensibly to save billions of lives and dollars that will be lost to drug resistant chains of Superbugs.
What this suggests is that the developing world will be afflicted with the Superbugs, whilst more civilised nations will erect the barriers to migration which will effectively quarantine them; in a similar way to the current trial run with Ebola that is now being tested in vivo. Presumably this brake on the exponential increase in the global population will also mitigate the risks to global warming threats. O’Neill now requires a neat acronym, like the famous BRIC, to go with his new mission.
Australia has become the poster child of economic and political suicide in the G20 nations. Last week, John Fraser came in to bat as Treasury Secretary; the designated “Anchorman” to prop up the innings and avoid a series whitewash[xxiii]. As a former asset manager, Fraser’s job will be to convince the speculators not to dump the Aussie Dollar and for portfolio managers to reverse the current secular flow from the Aussie into the US Dollar.
The Treasurer, Joe Hockey signalled that the Australian banks already have a large capital shortfall[xxiv]; and are therefore not well capitalised enough to deal with any more economic headwinds and capital flight. What neither men has said is that public spending will suffer, something that the previous PM Julia Gillard was ostracised for U-Turning on.
It seems that Australia has bet massively on China continuing with its exponential growth, in order to move the Australian growth needle. This bet is not working. The knee-jerk response, involving a large monetary response and a fall in the currency, is already having some perverse economic outcomes. Low interest rates are stimulating a housing bubble. A weaker currency is stimulating inward investment, from Chinese property speculators who are taking their chips off the table at home and looking for opportunities abroad.
Unfortunately, these Chinese speculators are viewed by some Australians as the answer to the missing growth story. To other Australians, most notably Clive Palmer the power behind Abbott’s throne, these said Chinese are “mongrels” and an economic problem[xxv].
This inward investment flow is however not a panacea; but rather a signal of the weakness in China, which will ultimately be a headwind for Australia. Australia has therefore just ditched its commodity bubble, for a real estate bubble which is even shorter lived. This dangerous ambiguity was evinced in the latest unemployment figures[xxvi]. On the face of it, the employment situation improved. Closer inspection shows that the job growth is in the bubble sector of the property market.
“Pimp My Currency Flows.”
Mindful of this property bubble, the Australian Prudential regulatory Authority told the banks to limit mortgage lending growth to 10% per annum, add a 2% interest rate buffer to mortgage loans and also to set a mortgage interest rate floor of 7% when assessing borrowers’ ability to pay[xxvii].
Having had the rug pulled from under it by the slowdown in China, Australia has just had its housing growth driver significantly decelerated by its own regulators. The RBA held back on further rate cuts last week, because it needs to prudently maintain an interest rate support for the currency and also to keep a lid on the property bubble. The policy mix backdrop however, is not one which inspires the confidence of domestic long term investors to reverse investment outflows.
For Australian investment funds, the investment destination of choice is the safe haven of the US Dollar. These flows also seem to have upheld the Australian tradition of disenfranchising the indigenous natives in search of the promised land. The US Masters Residential Property Fund of Australia is currently buying up huge tracts of Harlem and Brooklyn in the search for value[xxviii].
“Silk Road to the Danger Zone.”
China’s new foreign policy strategy, referred to as the “Bamboo Curtain”, was observed to have officially launched in Age of Wisdom, Age of Foolishness (57) “ Uncensored”. This contemporary Cultural Revolution was given further notoriety last week, with the emergence of a showcase trial of its former national security chief Zhou Yongkang[xxix]. China signalled that it will use American tactics against it by applying “big country diplomacy with Chinese characteristics”. This modus operandi was very evident at the annual Central Economic Work Conference.
President Xi Jinping has “Sinocised” the American oxymoron “New Normal”[xxx] in reference to the missing growth in the Chinese economy. In order to preserve the “New Normal”, the Chinese regulators have tightened collateral rules, so that only AAA rated securities[xxxi] can be financed through collateral markets[xxxii]; and the state controlled media has been enlisted to project a more neutral view on the equity market[xxxiii].
China also seems certain to adopt the American oxymoron of “Gunboat Diplomacy”; as it signalled that going forward its submarine fleet will get nuclear warheads[xxxiv]. The manufacturer of China’s answer to the F-35 also made the absurd claim that its tactical envelope will give it supremacy over its American rival[xxxv]. Chinese rhetoric is getting a little too carried away, to be taken seriously by anyone other than its own people.
China was however able to score some technical points by highlighting American hypocrisy, in relation to its occupation of the moral high ground, after the latest Senate revelations of the horrors of rendition during the W era[xxxvi].
The Obama administration’s selection of this inflammatory subject, in order to claw back some of the political initiative from the resurgent GOP, shows just how desperate it has become. The Democrats would now hand America’s greatest enemy a tactical victory, at the expense of its own international prestige, in order to gain some political capital. The American economy is also fatally wounded. Never having fully recovered from the “Taper Tantrum” in 2012, which led to the first European Crisis which was followed by more QE, the US housing market has been in a slow motion version of the previous collapse, ever since the ending of QE was suggested seriously over the summer.
Long term owners of American housing have turned net sellers[xxxvii].
Foreclosure activity picked up for the first time in 27 months in November[xxxviii]. Even though foreclosure starts ticked up, actual foreclosure filings decreased; suggesting that lenders are sweeping the latest problem under the carpet again, just as they did back in 2007/08[xxxix]. This unfolding crisis is not however a Tsunami, of the same magnitude as that which was felt in 2008. If anything, the last two housing market panics of 2009 and 2012, after the big one in 2008, have all been met with oceans of QE from the Fed. Each uptick in foreclosures has therefore been lower in magnitude and shorter in duration than between 2007 and 2008. Consequently, each housing wobble should be viewed as a catalyst for a monetary expansion, rather than a full-blown market crash.
There is absolutely no reason to suspect that the Fed will not deliver again this time, with more of the same, especially now that Europe threatens the whole global financial system. In fact, there is every reason to suspect that the next cloud contains the silver lining of Helicopter Money, that Janet Yellen is scheduled to land.
Age of Wisdom, Age of Foolishness (54) “Taper Tantrum Redux” suggested that the US Shale Oil patch would be the place that evinced a classic bubble liquidation phase. Apparently this phase has begun[xl]. Deutsche Bank belatedly made the connection that the Fed’s QE has been responsible for this bubble.
CreditSights Inc suggests that the default rate on Shale Oil bonds will now double. In all of the hysteria, now developing in the Oil Market and Equity Markets, it is worth repeating the qualified statement made in Age of Wisdom, Age of Foolishness (54) “Taper Tantrum Redux”:
American energy independence is therefore an illusion, courtesy of the Fed.
American Shale now faces either being shut in the ground, because the price is too low to make it economical to exploit and/or will run out, as the accelerated decline curves of US Shale wells fall exponentially faster than for the giant oil fields found in other global locations. Starting from a lower oil price base, American policy makers will have to deal with this illusion during the next two Presidential administrations of the Presidential Cycle.