“Worlds in Motion”
Age of Wisdom, Age of Foolishness (45)
President Obama’s much anticipated, eve of “9/11” anniversary, speech[i] on the ISIS situation was an ant-climax for the wannabe Warmongers. The President confirmed that he intends to fight ISIS by regional proxy, rather than with American “boots on the ground”; thus fulfilling his official oath to bring the boys home and his unofficial oath to maintain the Pivot away from the Middle East to China.
“Playing a 9-1-1 Formation.”
His shaky foreign policy strategy remains inviolate, despite serious attempts to violate it. The most serious Syrian violation, is that the Assad regime is the only force currently capable of making any kind of resistance to ISIS in[ii]. American bombing campaigns, which weaken ISIS, therefore strengthen Assad. This could be seen as more of an own goal than a violation. The President therefore needs other regional proxies to swiftly put their “boots on the ground”. The ultimate question is however, whether these regional boots will march against Assad, once ISIS has been dealt with. Presumably the President doesn’t care about this ultimate question, because he will no longer be in office when it is addressed.
Age of Wisdom, Age of Foolishness (41) “Axes of Evil”
The President’s problems are not only in the Middle East. Senator (R) Bob Corker rebuked him strongly for not consulting Congress, or seeking its approval, for the campaign against ISIS. The President’s emerging dictatorial style was observed in Age of Wisdom, Age of Foolishness (41) “Axes of Evil”[iii] , as an issue to be exploited by those who wish to impeach/sue him. Getting involved in a bombing campaign, in a far off land with no end game or exit strategy up front, without consulting, Congress is reminiscent of Nixon in Vietnam; which therefore puts the President in a very precarious position indeed.
“One can thus only conclude that the real strategy is to dismember Iraq; but to do so in a deliberately confused manner which cannot be clearly understood for obvious political reasons.”
Age of Wisdom, Age of Foolishness (43) “The Wild Geese (Chase)” amended this conclusion to include the dismemberment of Syria also.
It was therefore with great interest that we read the latest “rhetorical” analysis from the Brookings Institute, entitled “Is It Necessary to Destroy Iraq to Save It?” By way of playing devil’s advocate, public expectations have started to be managed.
The conclusion, from Age of Wisdom, Age of Foolishness (41) “Axes of Evil”[v], must now be amended again in light of this new development. Last week Iraq formed its new allegedly more inclusive government[vi]. America is therefore obliged to continue its support for the official Iraqi government; whilst making this support conditional upon greater inclusiveness and more devolved power to ethnic minorities. It is the devolving of power to these minorities, in particular the Kurds, which is the most interesting to watch. Unless greater autonomy and power is devolved to the Kurds, America will allow them to break away. This American federalist agenda therefore defines the nature of its new relationship with Iran.
America wishes to dismember the centralised political control in Baghdad either through devolved power, on an almost federal level, or through physical partition. In this way, Iran is supposed to be politically contained. In practice, as all the would-be regional proxies understand, politics comes from the barrel of the gun. Current American policy will therefore ultimately end with the gun barrel arbiter. Whilst the NATO summit in Wales was getting the headlines, as Britain and America began to build a coalition of nations to act against ISIS[vii], the Iraqi government was trying its best not to lose territory to the new oil producing state of Kurdistan.
The Iraqi government adjusted its legal case for the seizure of a tanker of Kurdish crude oil off-shore Texas[viii]. The case is no longer about the oil, but about nationhood. If the Kurds can set the legal precedent that they are recognised as having sovereignty over their cargoes, then nationhood swiftly follows. America appears to be objective on the case; but this objectivity is conditional as explained above.
“New (World) Order – World in Motion..”
The Iranian perspective on world events is fascinating. Ayatollah Khamenei opined that a “New World Order”[ix] was being created; in which the traditional alliances of Western interests were being undermined by new players. He specifically mentioned South America. This suggests that Iran is joining the BRICS’ Fortaleza Summit bandwagon; and creating a new economic system. Khamenei also understands that President Obama’s new strategy, of weakening ISIS, actually not only strengthens the Assad regime; but also strengthens Iran and regional Iranian proxies. In the absence of regional Sunni proxies, taking up the President’s offer of logistic and air support, Iran becomes the de facto most significant regional player.
Remember - “Dick and Boris Don’t Surf!”
Age of Wisdom, Age of Foolishness (43) “The Wild Geese Chase”
The Iranian epiphany of a “New World Order” was swiftly met with Dick Cheney’s rather more traditional vision. Age of Wisdom, Age of Foolishness (42) “Level 3” observed; that “the invective from Dick Cheney, who has implied the President’s cowardice in the face of the enemy, will now reach new levels of opprobrium”. Cheney’s grand strategy is now to shape his party in preparation for war, with a War President for 2016[x].
The problem however, is that Americans are far less concerned about Terrorism than other issues, especially the economy[xii]. Cheney therefore needs an event to make Americans more focused on the Terrorism threat, between now and 2016.
“Express yourself…it’s one on one.”
The “New World Order” envisioned by Israel, is something that Cheney could live with; however it is something that will keep President Obama up at night. The soap opera of Israeli politics, which is supposed to serve as the model of the only democracy in the Middle East, served up another staged managed episode last week. Prime Minister Netanyahu now stands accused of being soft on Terrorism and derelict in his duty of protecting the nation, for the simple reason that he left some buildings standing in Gaza and several thousand of its inhabitants alive and in residence. Age of Wisdom, Age of Foolishness (18) “Beyond the Pale” identified the point at which Israel began its next major step towards the Single State behind the cover of events in Ukraine[xiii]. This theme was followed in Age of Wisdom, Age of Foolishness (24) “The Short Good Friday”[xiv] to the conclusion that:
“Israel on its present economic and political course is headed for a major conflict.”
The latest drama follows the same script. Prime Minister Netanyahu is now being challenged by his Economy Minister Naftali Bennett, who wishes to expand the settlement programme in the West Bank and generally destroy Hamas and all other enemies of Israel in the region. Netanyahu must therefore either get with the programme, to maintain his political office, or hand over to Bennett.
In either case the solution is the same. Netanyahu appears to have gifted a further military conflict either to himself or to Bennett. More interestingly, he already prepared this campaign well in advance by directly equating Hamas with ISIS. Uninformed onlookers have therefore been set up to accept what happens next. Readers should remember that in Age of Wisdom, Age of Foolishness (29) “Don’t Think Feeeel”, that Prime Minister Netanyahu clearly defined his position on Iran, when he said that:
‘The Americans say, "We will not let Iran have nuclear weapons." We say we should not let Iran have the capability to produce nuclear weapons’. [our emphasis]
He then directly anticipated and negated the future Obama policy of “proxy” fighting, which has just been announced, in Age of Wisdom, Age of Foolishness (35)“Red Lines/ Green Lights”[xv] ; when he said that:
“In the Middle East, my enemy's enemy is still my enemy”.
Finally, in Age of Wisdom, Age of Foolishness (42) “Level 3” , after the murder of James Foley, he said that:
“Hamas is Like ISIS, ISIS is Like Hamas”
It was observed that if this statement is repeated ad nauseam, ultimately it sounds like:
“Hamas is ISIS.”
Bearing in mind that Hamas is allegedly supplied with weapons by Iran; the absurd situation in which Iran is supplying its enemy in Iraq arises and logically conflicts with the “Hamas is Like ISIS” or “Hamas is ISIS” mantra. It is doubtful that this inconsistency will be observed by anyone however, when Israel goes up against Iran after the red herring of ISIS has been removed from the map. The members of ISIS are beginning to resemble the “useful idiots” that Lenin was familiar with, who are a means to a totally different political end. A group of terrorists who are everyone’s enemy, including sworn enemies, are a construct that serves the purpose of all involved.
The economic struggle between the West and the BRICS has begun to crystalize around the issue of climate change. The existing multilateral framework created by the United Nations to address climate change, namely the United Nations Panel on Climate Change (UNPCC), is seen by the BRICS as an attempt to control their economic development. India and China, the most famous polluters in the BRICS, are pushing back by avoiding the next summit[xvi].
“Off the Bench.”
In recognition of this emerging conflict, Henry Paulson has re-emerged onto the international stage; after having to endure some time on Team America’s bench with a damaged reputation from the Credit Crunch. He has chosen to emerge, in the focal issue of the climate change debate, with the creation of a new Chicago based NGO; which will attempt to influence policy actions by all the key players[xvii].
The situation in America has changed the game however. Climate change legislation has forced American energy generating companies to invest heavily in cleaning and scrubbing technologies. In addition, it has significantly reduced the price of the dirtiest coal inputs. As a consequence of enhanced technologies and falling prices, the dirtiest coal is now economically viable again. America’s vast coal reserves suddenly become another source of competitive advantage; in addition to its Shale Oil and Gas. In hydrocarbon terms, America is once again the leading global energy producing nation. America has therefore got the edge on China and the rest of the BRICS, under the current United Nations regime on climate change.
This is presumably why the BRICS, especially China and India, are pushing back against these rules. It will therefore take all of Paulson’s famous powers of diplomacy and persuasion; to engage the BRICS and other trade partners into playing by a set of rules which put America ahead of the game by default.
The passing of Jeremy Stein, from the Fed back to academia, was noted as a point of risk for the Fed’s permanently expanded balance sheet policy; and as a threat to the success of Stanley Fischer in pulling off his coup of getting the Fed’s “Third Mandate”[xviii] for capital market asset pricing governance endorsed by Congress. Stein’s replacements have recently been spotted carrying on his good work.
“New Minds and Hands.”
Tobias Adrian and Nellie Liang are now filling the large macroprudential shoes once worn by Stein. Adrian is a person of interest, because like Stein he is an MIT alumnus; which means that he comes from the same Saltwater school of economic thought as Bernanke, Draghi and Fischer. Adrian and Liang’s recent report[xix] suggests that markets are headed back towards bubble valuations, as liquidity remains high and interest rates remain low well into the recovery. This report is therefore a signal of an upcoming period of risk reduction in American capital markets; rather similar to what happened in Q1 when Jeremy Stein delivered a correction before he was banished by Yellen.
It is interesting to see that this anticipated risk reduction scenario is coming, at a time when a new round of Basel III compliance regulation is being applied to US Banks. The new Liquidity Coverage Ratio rules set limits on the amount of available cash that banks must be able to realise in order to avoid another Lehman moment. As usual, the rules are vague and open to misinterpretation regarding which assets qualify as requiring higher liquidity standards; especially those regarding mortgage assets. Banks must therefore assume a worst case scenario and retain more liquidity; which has the effect of reducing liquidity in capital markets and raising borrowing costs in the real economy.
The new Liquidity Coverage Ratio is therefore a discrete credit tightening event in its own right; which stands separately from the Taper and expected official tightening by the Fed some time in 2015. Age of Wisdom, Age of Foolishness (40) “Candide”[xx] observed how the tighter application of Dodd-Frank, under the watchful eye of Elizabeth Warren, had also discretely tightened credit. Combining Dodd-Frank with the new Liquidity Coverage Ratio, one can therefore see that credit has been significantly systemically tightened at the institutional level; well before the Fed has officially started its tightening cycle.
Should the Fed then start tightening in 2015, it will tip the economy and capital markets back over the edge. The inference is that the Fed therefore does not need to tighten; and may in actual fact have to ease to counter-balance the systemic tightness from the new liquidity and capital adequacy rules. Unfolding events in Britain and Europe, which will be discussed later, make the easier policy from the Fed a certainty in a world of uncertainty.
The Fed is also facing another threat to its autonomy and flexibility, which translates into a direct threat for Stanley Fischer’s “Third Mandate”, from Congress. A new bipartisan bill is being drafted which will significantly limit the Fed’s handling of monetary policy[xxi]. This political interference could not come at a worse time for the Fed, as it is considering some political interference in the economy of its own.
The way is being prepared for the permanent increase in the money supply; which will then be redistributed to the Middle Class via a reformed tax code in what will be called Helicopter Money. With the economy in recovery however, Yellen is in desperate need of weaker economic data to support this policy move. Her communications, through the FOMC and at Jackson Hole, have showed that she intends to frame the recovery as too fragile to tighten monetary policy. In order to land the Helicopter however, she will need something more substantial.
To add to the evidence in support of the Helicopter, a new study was released by the Fed last week in its September Bulletin[xxii]. This study broadly shows that the top 3% of the population by wealth have benefited specifically from QE; and in general by all economic policies since 1990. The inference is, that the way the US economy has been managed since 1990 must be re-evaluated and changed going forward; in order to broaden the base of economic prosperity and heal divisions in society.
In the interest of avoiding being hoist by its own petard on guidance, the Fed is also trying to change its communication policy to signal that it is back to being data dependent; rather being committed to low interest rates for a “considerable” period of time[xxiii]. This will square the circle; so that the Hawks and the Doves will be back on the same page in terms of FOMC statements and signals. More importantly for Yellen, the Hawks have been eviscerated and silenced. Yellen has already “rope a doped” them, into agreeing to a “range of indicators” at the last FOMC. Needless to say, said “range of indicators” is equivocal.
There is therefore no consensus in the data which can lead to a data dependent rate hike in the near future. As the global economy slows, under pressure from geopolitical headwinds and assumptions that US interest rates will be rising, the probability that the data actually calls for rate cuts increases.
“Three F’s for Failure”
The Freedom, Fraternity and Federation of Britain’s vision, of a New World Order to compete with the emerging global trading systems, after the Credit Crunch, suffered a terminal blow over the weekend; when the Scottish “Yes” campaign took the lead for the first time. Any intervention of Her Majesty in the issue[xxiv], will no doubt only harden Scottish resolve to break free of the alleged yoke of oppression from London. The institution of the Monarchy itself is under threat; so wisely it will no doubt remain aloof from politics as it is constitutionally obliged to do, in order to survive.
“Not Your Dad’s Army.”
The real victors are however Nigel Farage and Boris Johnson. Both men can now capitalise on the political backlash from decent English men and women; who see tides of blood washing in from the Channel and “rivers of blood” fomenting in the immigrant camps in Calais, in addition to the new threat of Celtic immigrant invasion from North of the new border. Britain may appear to be falling apart, but England is coming together; and this is really what counts.
“Nearly at the top of the greasy pole.”
A Scottish “Yes” would effectively devastate the chances of New Labour, in its current configuration, of ever being elected again[xxv]. After a loss of prestige and blame appointing, the Conservatives will find that they are the natural party of English government, if they can heal the rifts with the UKIP defectors.
“His Life’s a Beach!”
Age of Wisdom, Age of Foolishness (43) “The Wild Geese (Chase)”
David Cameron is now regretting that he didn’t “hang ten” off John O’Groats rather than Cornwall; so that he could have got some campaigning in rather than being seen as out at sea when the ship of state went down. The Conservatives have been punished for their disdain for the provinces; and Labour has been punished for taking its provincials for granted. David Cameron and David Miliband are therefore damaged political goods and George Osborne is tainted; all of which leaves the way for Boris Johnson and Nigel Farage to carve out a new political party of spiritual Conservatives, whilst Labour and the Lib Dems fight over the rump of what is left of the Left. Both defeated parties are no doubt busily running the numbers, to see if it now makes sense to start campaigning for proportional representation seriously; as it may be their only political lifeline.
With a cheap Pound, no obvious political Left Wing and without the fiscal burden of Scotland, England will be an attractive place to invest once the dust has settled. Before this potential positive catalyst can occur however, the Scots must vote “Yes”; and then England must deal with the next shoe to fall from the expected Brexit from Europe, which will come with Farage and Johnson. Traditionally pecuniary in nature, in addition to being proudly nationalist, the Scots now have to weigh up the financial cost of nationalism. The threatened exodus of major employers, presumably followed by talented less patriotic individuals and capital flight may ultimately be enough to frighten the “No” vote back into the majority. Everything, including patriotism, ultimately has a price.
The political contagion from Britain created more panic in the Eurozone than it did at home. A swift perusal of the calendar, showed that the Catalans hope to have a referendum on secession of their own on November 9th[xxvi]. Prime Minister Rajoy is insistent that the courts will annul the legality of this referendum, but the markets are not as sure. The size of the Catalan economy and its debts to Spanish lenders, would be a disaster for the Spanish economy; which has just bravely adopted fiscal austerity and economic reforms.
Since Germany is still enforcing the National Resolution Mechanism, there is no hope of Spain getting bailed out until it has reached a point at which Eurozone exit becomes the only political solution. Scottish independence therefore is more dangerous for the Eurozone than for Britain. The Scottish problem overshadowed what should have been a constructive week for the Eurozone. France and Germany appear to have made the big compromise over economic stimulus.
“It is what it is!”
They will pursue an economic stimulus, predicated on loans from the European Investment Bank (EIB) to corporates[xxvii]; thus by-passing Mario Draghi’s Asset Backed Security (ABS) purchase initiative. Under the EIB funded model, there is no deficit increase for countries involved, nor is the ECB obliged to break the rules and monetize anything. France and Germany therefore pushed Draghi out of Eurozone politics; and refused to provide state guarantees for the ABS he intends to purchase[xxviii].
It may be that Draghi ends up buying all the EIB bonds that get issued however; but at least this will appear not to break the taboo on deficit monetization or moral hazard from the ECB taking credit risk. After being admonished by France and Germany on the guarantees and having the utility and credit quality of the ABS programme questioned by Weidmann, a more humble but more persistent Draghi adopted the tone, that the ECB is a critical partner in the programme of incentivising economic reforms based on capital investment across the Eurozone[xxix]. This could be read as code for Draghi saying that the ECB will buy the EIB bonds, now that there will be no sovereign guarantees on the ABS. Ever the MIT pragmatist with Jesuit training and a Goldman pedigree, Draghi has become the great facilitator; which makes him more indispensable than any elected politician.
“EU take the high road and I’ll take the low road
And I'll be in Scotland afore ye
But me and my true love will never meet again
On the bonny, bonny banks of Loch Lomond.”
The Scots unfortunately destroyed what should have been a rally in European assets; and any political capital that France and Germany were looking to take to the bank with their electorates. Scotland’s application to the EU for membership, therefore moves to the bottom of the pile; and it is most likely that the IMF will be unleashed upon it as retribution. After this retribution, England will no doubt be asked to take back what is left of Scotland; thus is the fate of small countries which annoy large ones and upset their plans.
It was far more amusing to watch the cosy world of EU politics; deftly trying to be inclusive to save itself, whilst contradicting the tougher choices which its officials are supposed to make. The first joke was the appointment of Pierre Moscovici, to be the official in charge of policing the Eurozone budget deficits[xxx]. The punchline was delivered with perfect Gallic timing; when France announced that it was “being serious” and cutting its growth forecasts for this year and next, so that it would not meet its deficit targets[xxxi]. In terms of credibility this is like putting the fox in the henhouse. Wolfgang Schaeuble didn’t get the joke; and continued to demand economic reforms, rather than increased budget deficits to stimulate economic recovery[xxxii]. It is clear however that despite what he says, that Germany is making some massive concessions; which must also mean that the Eurozone is close to breaking point.
“Lord Hill Has Eyes….. for Europe.”
The next joke from Jean – Claude Juncker was the announcement that a Brit would be in charge of policing banking regulations for the EU. When one stops and looks at the parlous state of the British banking system, which had to be nationalised and is currently undergoing numerous investigations for price rigging in its capital markets, it is hard to think of a nation less qualified to police a banking system of any repute. This appointment is clearly aimed at keeping Britain within the EU tent, rather than an appointment on merit. In fact, in these two appointments the EU has shown itself to be the antithesis of meritocracy.
Whilst the Europeans tried to get a deficit neutral economic stimulus, which still relies on debt off the ground, Japan fell on its sword and became the first developed country to start considering strapping on more sovereign debt again. Abe’s economic adviser Motoshige Itoh, signalled this course of action[xxxiii]; when he suggested that Japan would need a supplementary budget this year in order to meet the headwind of the expected Sales Tax rise in 2015. Japan is therefore borrowing growth from well beyond 2015, to meet tax receipt targets in 2015. Growth, between now and the intended Sales Tax hike, has been taken from the future; and the economy will meet a massive headwind which negates this growth once the taxes are paid.
Japan is therefore keeping its head above water, whilst making the pool of debt in which it is drowning even deeper. The Yen began its next leg down as a result of this intended course of action. The size of the next stimulus was signalled at $47 billion[xxxiv], which the markets took in their stride; thereby giving Japan the green light to go ahead and start eroding its long term fiscal position further. Japan was actually rewarded for its fiscal indiscipline with a weakening Yen and rally in its equity market. Abe is by now starting to think that he has got away with it on Abenomics. As all speculators know however, it is better to travel than to arrive. In a world in which all central bankers are racing to the bottom Abe is being rewarded for going with the flow.