The Longest Day
Age of Wisdom, Age of Foolishness (31)
The story so far:
“The heart and soul of Europe is up for grabs; and its people remain undecided.”
“My God! The invasion! They're coming!”
As Europe commemorated the liberation from tyranny, by an alliance of democratic sovereign nations in Normandy, the leaders of the commemorations shifted awkwardly with the irony that history was repeating itself. The bizarre thing is that yesterday’s defeated tyrants are now today’s liberators, in a process that will take the continent back to where it was at the beginning of the first Great War which led to the tyranny of the second. As Burke noted,
“Those who don’t know history are destined to repeat it”.
In the week that commemorated the D-Day Landings earlier this month, Mario Zelig prepared “Fortress Europe’s” monetary defences, against liberation by popular nationalist forces who no longer wish to be ruled by Germany’s gauleiters in Brussels. The fault-line in Europe, running through France, got deeper as the latest PMI data showed that the French economy is contracting[ii].
Europe faces another Reformation, which threatens a schism along the traditional religious dividing lines established by Martin Luther. The Northern Europeans once again wish to throw off the yoke of centralised tyranny, this time from Brussels and not Rome.
“Will these three little PIIGS get slaughtered?”
The Periphery has accepted the fiscal blessings of austerity as religious dogma; and will no doubt have its own peculiar and bloody Counter Reformation Inquisition. The Catholic Faith has always had a problem with usury; so that now neither lenders nor borrowers they be to such a degree that Mario Zelig feels the need to corrupt them with heretical QE. King Juan Carlos doesn’t wish to stick around for the Inquisition, so he is abdicating[iii]; in a gesture which suggests that the fault lines also run into the Periphery from France. The new King’s job is to hold his country together, as it splits along political and ethnic fault lines. The political fault line threatens the continuation of the Monarchy itself, with calls for a referendum on its existence[iv]. The ethnic fault line runs along the border with the Catalan region[v]. The Catalan leader Artur Mas has his sights set on a November 9th referendum[vi].
“Off with Juncker and Clegg’s Heads!”
In the Perfidious Albion, the current leader calls for a “Reformation”[vii] of the EU institutions. He has been advised to “axe” his current Lib-Dem wife; and rekindle the old flame of a dynastic courtship of UKIP in order to produce a political heir, which has longevity beyond 2015.
“There is method in the madness”
He began his courtship of UKIP by proxy, through dynastic alliances with the anti-immigrant parties from Denmark and Finland[viii]. His hope is that, by rebalancing the EU in favour of these parties, his eligibility as a suitor with UKIP voters will attract them away from their party, thus avoiding an embarrassing direct proposal that Nigel Farage may yet spurn. His behaviour has angered the “Eurocrats”, since it robs them of the power which perpetuates and financially rewards them, to such an extent that they will enact their revenge when he is at his most vulnerable. But more about this revenge later.
“Made for each other”
A far more popular marriage, with the yeomen of England, seems to be that between Boris Johnson and Nigel Farage however.
Their progeny will have the Tudor spirit that will sink the next Armada, go on to build another “pink” empire upon which the Sun never stops shining, see off the Hun when called upon to do so next time and win back the Ashes.
“World in Motion”
Who knows, perhaps England may even win another World Cup!
“He has a cunning plan!”
Behind the scenes in the invisible corridors of power, the Young Pretender Osborne received instruction from the Templars through their scheming agent Baron Kerr[ix], on how to gain the throne; and what to do with it once in power, at the Bilderberg meeting in Denmark last weekend. As readers of these chronicles of our times will know, from Age of Wisdom, Age of Foolishness (29) “Don’t Think, Feeeeeel”, Osborne is a Panelist[x] of the Atlantic Partnership. He will therefore have been briefed about the cunning plan to roll back President Obama’s “Geopolitical Taper”, which was vilified[xi] by fellow Panelist Niall Ferguson. Osborne will also understand that Britons are ungovernable in peacetime and magnificent in wartime. He needs to be careful of his handling of the economy however, which is still his primary mission. Should he fail in this endeavour, all bets are off for his continued political career. The signs are ominous. It was easy to refute the calls from the EU for measures to curb the UK property bubble[xii]; because this plays to the grand strategy of “European Reform”. More recently however, the IMF also warned on the risks in the property market[xiii], which will be much harder to reject. There will be an economic price to pay for playing to the Eurosceptic gallery and buying votes with rises in home equity. The Conservatives are writing cheques that the British economy cannot honour. There is therefore no reason why this price should not be paid, this side of the General Election; especially if the EU inner circle decide it’s time to reform British parliamentary politics rather than be reformed by it. All it takes are a few words and a few hedge funds, as we all know.
“Yesterday’s fish and chip wrapper could also be tomorrow’s”
The latest trade data showed that Britain is in full bubble mode[xiv]. Imports are being sucked in thanks to a strong Pound, which is being strengthened by the speculative flows into real estate. The strong Pound is also hitting exports. If Cameron overplays his reforming hand with the EU, Osborne could swiftly see himself in the same position as the hapless Chancellor Lamont when the Pound was kicked out of the ERM. Being an EU member still gives the Pound the halo effect of belonging to the Eurozone Trade Bloc. The latest trade data showed that exports outside the EU are collapsing, so Britain needs its EU partners more than UKIP understands; especially now that Mario Zelig has gone into action. The Pound is today’s safe haven, that is rapidly becoming tomorrow’s avoid currency. The elections in 2015 will take away the safe haven cover, so the trap door is opening right now. Students of central banker form, will know that Mark Carney excels at creating real estate bubbles and then jumping ship (and country) just before they burst. This time round, he has taken the precaution of protecting his credibility by opining the risks to the economy from the property market. He has however taken no action, short of asking the Treasury to scale back the “Help to Buy” scheme, to address the property bubble. In effect he has made it the Government’s problem, however the Government have stated clearly that they are now addressing the matter based on his recommendations. Both parties have therefore abandoned responsibility, whilst carefully pointing the figure of blame at each other, well in advance of the next crisis. In the meantime, house prices continue on their vertiginous trajectory. Mario Zelig’s latest actions, which will be discussed later, have just created the conditions to blow even more hot air into the property and import bubble, whilst choking off more exports; and creating an unsustainable situation.
“Take that Eurosceptic Dogs!”
Faced with the political “EU Reformation”, Mario Zelig was forced to take out the “Bazooka” and go for a monetary “Reformation” of his own. Benchmark interest rates were cut (still leaving room for more cuts), deposit rates went negative, the LTRO was expanded and the preparations were made for future outright Asset Backed Security (ABS) purchases. No stone was left unturned on the landing beach. His prepared statement[xv] read like a litany of “further-mores” and “in additions”, to such a degree, that the maximum emphasis was made on the comprehensiveness of the actions being taken. In Age of Wisdom, Age of Foolishness (30) “Adullamites” it was suggested that the magnitude of the political schisms in the EU were much larger than anything that Zelig could offer in return. He must be given credit for rising to the challenge with alacrity; and also for using a tactical execution of sustained operations going forward, with no pre-announced limit in terms of timing or quantitative magnitude. The market reaction was an initial knee-jerk rally, followed with polite scepticism, on the day of the announcement. Zelig is going to be tested all the way, but the European Wall of Worry is now being scaled. The Bundesbank is however providing a much needed leg-up for the climbers. Before retiring to the conclave in Lisbon, preceding the ECB announcement, Council Member Visco cryptically announced[xvi] that the “inflation projections” at sub-2% rather than the actual number itself are all that is needed to trigger the ECB action.
The Bundesbank’s latest inflation projection, conveniently reduced the inflation rate from 1.3% to 1.1% for 2014[xvii]. This is probably the closest the Bundesbank will ever be seen as endorsing quantitative easing. This endorsement is every bit as massive as Mario Zelig’s announcement the day before. The Zelig eponym must now be given to Jens Weidmann. Once again, Mario Draghi must be applauded for making the Germans more European, rather than vice versa. His Jesuit training and seminary at Goldman Sachs have not gone to waste. In Age of Wisdom, Age of Foolishness (10) “The American Jury Is Out, But the European Jury Has Voted”[xviii] it was suggested that:
“Japan was scheduled to provide the global liquidity in 2013, this year it will be the ECB.”
It has taken six months of manoeuvres, including a faux civil war in Ukraine and a Nazi revival in Europe, to finally mobilise the ECB’s resources. Clearly, it still takes a long time and a great deal of effort to convince Germans to change their minds. Anyone observing the D-Day ceremonies will be well aware of this historical fact.
China refused to miss out on the action. To continue to mitigate the attempts to deflate the Shadow Banking Bubble, the China Banking Regulatory Commission eased the loan-deposit ratio, by reclassifying the kind of deposits that can be included in the calculation[xix]. This is more of a cosmetic, rather than pure monetary stimulus however. The World Bank immediately opined that continued pursuit of growth will vitiate against the need for economic reform; and ultimately create unsustainable growth which will go bust[xx]. China prefers to cross that bridge when it gets to it however; suggesting that this bridge has already been arrived at and that the policy makers are dealing with it in the same old way.
Age of Wisdom, Age of Foolishness (30) “Adullamites” observed President Obama setting out the conditions for creeping American unilateralist military action, by sponsoring the indigenous resistance forces in countries facing challenges from America’s enemies. In a further weak attempt to hand-off the ball again, the President offered his European allies one billion US Dollars in the form of a “European Security Fund”[xxi] to bolster their defences. The whole deal looks like something from the “to do” list, hastily drawn up over the previous weekend by the Bilderbergers in Denmark. Critics will observe that this is roughly what America spent per week in Afghanistan and Iraq, so it seems egregiously underfunded. The same critics will also wonder why Germany is not picking up more of the tab, since ultimately it is the country that is really threatened. No doubt President Obama will be having these discussions with his European allies, when they get off the beaches in Normandy. The symbolism, of the token gesture in the new fund, is more important than its financial substance at this point. It signals another point of global conflict escalation. And it also shames “Team Europe” into action, to defend itself for once, on an occasion commemorating yet another historic American global bailout.
Age of Wisdom, Age of Foolishness (30) “Adullamites” suggested that President Obama’s West Point[xxii] speech had painted targets on Americans living abroad. It also suggested that, if history is rhyming again, a process ending in an event similar to “9/11” is now underway; at which point the threshold of the Obama “principle” on unilateral military action will be crossed. FBI Director James B. Comey seems to be thinking along the same lines. Syria now represents the same threat as Afghanistan did in 1980’s and 1990’s. He recently said that:
“We see Syria as that, but an order of magnitude worse in a couple of respects. Far more people going there. Far easier to travel to and back from. So, there’s going to be a diaspora out of Syria at some point, and we are determined not to let lines be drawn from Syria today to a future 9/11.”
The sum of all the FBI’s latest fears began last week, with the death of America’s first official suicide bomber in Syria[xxiii]. The subject was appropriately named Abu Huraira “Al Amriki”. “Al Amriki” means “the American” in Arabic. The legend is simple enough and follows the story line of Conrad’s The Secret Agent. A disaffected and slightly mentally challenged youth, from an immigrant shop-keeping family fallen on hard times, is influenced to become an anarchist. The youth dies in an act of sabotage, which is intended to provoke the authorities to harden their attitude towards immigrant dissidents. The precedent is also simple enough. The FBI were previously involved in trying to prevent lines being drawn from Afghanistan and the Caucasus, back to the World Trade Centre in the late 1990’s. They failed; and the rest is history. The lines from the Caucasus spectacularly failed again in 2013 at the Boston Marathon, so the precedents of both FBI failure and Syrian connection have now been established for the record leading up to the next event.
Putting the ‘F’ Back in Federal Reserve
It is a plot that originated in Britain; and could equally apply to its own notorious first suicide bomber, who was introduced in Age of Wisdom, Age of Foolishness (15) “Putting the ‘F’ Back in Federal Reserve”[xxiv].
In Syria itself, the real Weapons of Mass Destruction are in fact the country’s precarious water resources[xxv]. Rebels have now targeted the water supplies, in order to deny the Government controlled areas access to water and hydroelectric power. Turkey has also become involved, by holding back the Euphrates in its own reservoirs. The water crisis knocks on further down river into Iraq. A regional humanitarian crisis is unfolding, in something that has not been clearly defined in President Obama’s conditions for unilateral intervention. America recently announced that it will deliver thirty six F-16’s to Iraq[xxvi]. This could be viewed as an escalation of the crisis in military terms. Since the Iraqi government is nominally Shi’ite, this could also be viewed as a sale to Iran in the same way that Iran was sold F-14’s just before the Shah was overthrown. Saddam Hussein’s air force was gifted to Iran, before “Shock and Awe”, so there is a tradition of arming Iran to be upheld. Turkey flies F-16’s, so it will be an interesting contest; and perhaps more of a fair fight than is currently being seen in Syria. Both Turkey and Iraq are US allies, so there must be no hint of American favouritism in the coming World’s first “Water War”.
The Stagflation signal, which Janet Yellen steadfastly ignores, was steadfastly highlighted in the April consumption and expenditure report. Salaries and consumption are down, whilst inflation has just started to pick up. The impact of Corporate America’s Stagflation strategy is clearly evident in the data. Margins have been boosted, by raising prices and cutting operating costs. Age of Wisdom, Age of Foolishness (26) “Milking It for All It’s Worth” suggested that the Fed may wish to study the cases of CEO’s raising prices, cutting costs and investing in their own shares (or those of a rival via merger) rather than in growth. This corporate behaviour, in response to Stagflation, begets further Stagflation; and frustrates the Fed’s attempts to create growth, with the application of liquidity which gets invested on “Wall Street” rather than “Main Street”. The resulting price-earnings multiple expansions create the bubbles in equity valuations. In Age of Wisdom, Age of Foolishness (30) “Adullamites” readers’ attention was drawn to the Q1/2014 Corporate Profits data. It was said that:
“The Q1 2014 Corporate Profit number showed that in the face of flat growth in profits, ever since the alleged recovery began, that the strategy of buybacks and raising prices has been the only game in town. The rewards of this strategy stalled out in Q1/2014, hence companies like HP are cutting even deeper and raising prices and buying back shares even more aggressively.”
It would appear that the penny is now dropping.
“Déjà vu all over again”
Profit Decline Waves U.S. Economy Caution Flag: Chart of the Day
Albert Edwards noted[xxvii] that earnings are reversing even as equities are rallying. Then the Fed’s favourite mouthpiece Jon Hilsenrath hinted that some Fed members, with the notable exception of Yellen, are worried about this disconnect between equity prices and real earnings[xxviii]. The implication is that they are between a rock and a hard place. If they ease to stimulate growth, they will just get more of a bubble via the price-earnings multiple expansion. If they continue to “Taper” and even to tighten however, they will trigger a collapse in equities which will then force them to do more QE again, should the sell-off trigger a recession. These Fed members understand that the limits of the benefits of QE have now been reached for the real economy. All that is left is pure upside for stocks. This conundrum was clearly evident on the big sell-off, in the NASDAQ and Russell, following the weak ADP jobs data and then the massive squeeze later in the day immediately after the release of a weaker forecast Q2/GDP number.
The Nifty Fifty Market
Drilling down into the indexes is very illuminating[xxix]. Most of the smaller capitalization stocks within these indexes have been getting hit; as investors run into the larger capitalized stocks within the same indexes to reduce risk. This intra-index rotation is far more important than the inter-index rotation that has seen flows into the Dow and S&P, causing their relative outperformance over the last three months. The intra-index rotation has now caused the larger capitalized stocks within the Russell and NASDAQ to actually mask the underperforming smaller stocks and drag the whole indexes higher. These flows have now allowed the Russell and NASDAQ to regain broader market leadership from the Dow and S&P; which many who haven’t drilled down believe is because the “Taper” will be scaled back and followed by a new easing cycle. As Montaigne observed, nothing is more believed in than that which is least understood. Large Cap stocks in all equity indexes are now driving the indexes higher, as a consequence of capital flows driven by bearishness rather than bullishness. The “Taper” and fears of rate hikes are now driving stocks higher; and conversely when there are fears of an economic slowdown stocks rise on the expected looser monetary policy response from the Fed. Jeremy Stein was possibly the only Fed official who really understood this, but he has now left the party. The great bubble in equity valuations has now been unleashed, by this asymmetric trade-off of Fed outcomes. The only thing that will end it, is a meaningful rise in interest rates, which even Richard Fisher and Charles Plosser agree is years away. CEO’s don’t have to do anything except keep raising prices, keep buying back stocks and keep buying up competitors.
A cursory glance at the US politicians shows that they are in partisan election mode, preparing for 2016. The chances of any meaningful bipartisan agreement on any economic stimulus between now and 2016 are limited. The “Warmongers” in the GOP are currently in the ascendency, suggesting a military fiscal stimulus is the most likely outcome. The recent sale of F-16’s to Iraq supports the thesis that this is already happening. The sale of military hardware is probably the only thing either side of the House can agree upon.
“No Man Left Behind”
The “Warmongers’” case has been bolstered by yet another “Team Obama” spectacular own-goal, in the case of Bowe Bergdahl. “Team Obama” has allegedly traded Five Taliban enemies for one alleged deserter[xxx]. The trade with the enemies was spun as being a tactic to speed up the closure of Guantanamo[xxxi], but nobody is buying it. Having tried to close the book on military adventure, with the Rangers’ credo of “No man left behind”, the situation has degenerated back to the normal “FUBAR” which seems to haunt the “Team”. To compound the iniquity, allegedly eight men died[xxxii] whilst searching for the alleged deserter. The President’s haste to secure a foreign policy score and his insistence on a cheesy photo opportunity with the alleged deserter’s unconventionally photogenic family, can only be seen as the kind of mistakes that Napoleon would have encouraged in an opponent. The ability of “Team Obama” to consistently wrestle failure from the jaws of victory, in all its initiatives from Obamacare to Bergdahl on a regular basis, suggests design rather than serendipity. There is no “i” in team and apparently there is no “Team” either.
“Some folks are born, made to wave the flag.”
The Bergdahls appear to be straight out of a more contemporary abridged version of The Secret Agent.
“It ain’t me, It ain’t me, I ain’t no fortunate son”.
A possibly even more incendiary “Team Obama” mistake however, was the decision to recognize the Palestinian Unity Government which embraces Hamas[xxxiii]. Having watched F-16’s being sold to Iraq and now having seen Hamas indirectly recognised by America, Israeli consternation is no doubt turning swiftly into military operational planning. Semantics makes the step, between alleged deserter and traitor, just a small matter of political persuasion. The step of recognising an elected Arab government, which then turns out to be antipathetic towards American interest, has already been made in Egypt; so a repeat of this error may prove to be even more difficult to explain when it all goes wrong again. The move to impeach Hillary Clinton, over the Benghazi affair[xxxiv], has now been given some fire support from the Bergdahl affair. Once again, National Security Adviser Susan Rice is the fall guy[xxxv]. President Obama’s field dressing, on the beaches of Normandy and also with the underfunded “European Security Fund”, looks like the application of a sticking plaster to a gaping, fatal political wound.
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- Cameron warned UK might quit EU over president - Spiegel
- David Cameron accused over 'dubious' European Union partners
- Bilderberg 2014: George Osborne and the man at the centre of everything
- AP Panelists
- Niall Ferguson: The Black Swan Investors Should Fear
- Tories dismiss EU advice to cool UK housing market
- IMF Says U.K. Must Act to Curb Risk From House Prices
- U.K. Trade Balance Widens as Exports to Outside EU Decline
- ECB President Mario Draghi’s Prepared Remarks after Rate Cut Decision
- Visco Says ECB to Act If Low Inflation Projections Confirmed
- Bundesbank Cuts Prices Forecast as ECB Fights Low Inflation
- The Two Economic Juries of the Atlantic
- China Regulator Pledges to Expand Credit as Economy Slows
- China’s Focus on Growth Goal Risks Reform Delay, World Bank Says
- Obama Unveils $1 Billion Europe Security Fund
- Obama West Point speech in full with analysis
- American who killed himself in Syria suicide attack was from South Florida
- Putting the ‘F’ Back in Federal Reserve
- Syria’s Looming Water Calamity
- Lockheed to deliver first of 36 F-16s to Iraq this week
- Profit Decline Waves U.S. Economy Caution Flag: Chart of the Day
- Market pulse
- The Nifty Fifty Market
- Did the U.S. Trade 5 Taliban Terrorists for an Army Deserter?
- Taliban Swap Reflects Obama’s Drive to Close Gitmo Prison
- Exclusive: The story you haven’t yet heard about Bowe Bergdahl’s desertion
- Netanyahu ‘deeply troubled’ by Obama’s decision
- Clinton Bears Responsibility Over Benghazi, Cheney Says
- Susan Rice Is the Biggest Loser in Bergdahl Affair