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posted on 09 February 2015

Epoch of Belief, Epoch of Incredulity (4) – “Disabling Acts”

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Epoch of Belief, Epoch of Incredulity (3) "Enabling Acts" discussed how the German Constitutional Court, ruling on the unconstitutional nature of QE, would effectively derail Mario Draghi's attempts at the American style QE that he had primed the markets for. So it was therefore, towards the beginning of last week, that the disabling of Draghi's American QE strategy occurred.

Having missed or lost big, when the Swiss abandoned the Euro currency peg, the Pavlovian response of the angry speculator was to go after another currency peg. The obvious choice was the Danish Kroner - [i]. The half-hearted attempt to maintain the peg, when the Danish central bank cut interest rates last week, only strengthened the conviction of those betting that the peg would be broken - [ii]. Something stinks in Denmark; however the smell may be the kind of debt crisis and property bubble like the one currently festering in Britain. Speculating against the Danish Kroner peg, therefore only makes sense if one expects the Eurozone to breakup; because if it does not Denmark will be forced into an ugly devaluation of its own sooner or later.

Jean-Claude Juncker gave more credibility to the "Brexit" option last week; when he opined that relations between Britain and Europe had deteriorated to the point that the EU was considering making some concessions to David Cameron on Eurozone reform - [iii]. Brussels is seemingly running scared of a breakup of the EU and the Eurozone.

In the meantime, Boris Johnson and David Cameron have now put their heads together to see how they will deal with Nigel Farage - [iv]. It was reported that Johnson has now been allowed full access to the Tory Whips and backbenchers. The reason given is that Johnson can rebuild his strained relationship with these groups, in order to make him leadership material should Cameron have to go.

In practice, a workable alliance between UKIP and the Tories is now under discussion with Johnson; since he is the one who Farage trusts and therefore is the one who can get close enough to remove the obstacle that Farage represents when the time comes.

Epoch of Belief, Epoch of Incredulity (3) "Enabling Acts" noted how Chancellor Merkel stood above the fray surrounding QE, whilst Jens Weidmann and the Wolfgang Schaeuble did the dirty fighting. With the result of Draghi's QE now more circumscribed by Weidmann and the German Constitution, she felt secure enough to emerge "pristine" on the side of the victor; who appears to be Draghi but in actual fact is Germany. The scene was set in Epoch of Belief, Epoch of Incredulity (2) "Role Reversals" which theorised that:

"Merkel's posturing should be read as the kind of extreme brinksmanship; in which Germany will threaten the very survival of the Eurozone, in order to extract the economic reforms it demands from each nation as the quid pro quo for QE."

Confirmation of this thesis came last week.

The jockeying for position, going into the ECB meeting, was interesting to watch. Holland signalled a classic Northern European tactic of passive aggression; by appearing to enable ECB QE whilst actually disabling the ECB and moving the Eurozone closer to breakup point. Klaas Knot opined that, as a Dutch ECB Governing Council Member, he was in favour of national central banks buying their own sovereign bonds, by up to 25% of the outstanding debt - [v]. This position was then confirmed by the Dutch Finance Minister Jeroen Dijsselbloem - [vi]. Ostensibly this gets around the alleged problem of mutualising the debt risk across the Eurozone. It does not however get around the German Constitutional Court, which will no doubt opine that Bundesbank buying of German bunds is unconstitutional.

In any event, Germany has a growing economy and a balanced budget, so the Bundesbank can decline to participate in national central bank QE because it is not warranted on economic grounds. The German Constitutional Court can therefore be skilfully avoided by Merkel, unless more democratic members of the German government force a motion in the parliament to ask for the court to rule on the matter. Since no damage has been done to Germany, there is little point in a constitutional challenge to the national central bank QE at this point in time.

Germany can thus afford to keep its bargaining powder dry on this occasion and await further developments. Germany and Holland can also plausibly deny they have created the chance of a Eurozone breakup, by alleging that they have supported QE. Mario Draghi then signalled that Germany had enforced this national central bank alternative to his American style QE proposal, when Der Spiegel reported that he had been in briefings with Merkel and Schaeuble about the specific option of national central bank QE - [vii].

National central bank QE falls well short of the scope and scale of what Draghi first signalled to the markets. The risk will become isolated with national economies at their central banks, which will themselves become insolvent because they cannot print the currency to honour the coupon and redemption payments on the outstanding national sovereigns debts. The German tactic is then to force them into further austerity, once they have hit their national central bank QE limits.

Clearly Draghi hopes that political backlashes against this enforced German and Dutch solution will provide him with the leverage he needs to deliver American style QE. The fact that in the Dutch proposal national central banks are sanctioned, by up to only a 25% limit on the amount of debt to be bought, means that they will not even move the needle in terms of unfreezing the lending markets in their economies.

As a result, they will then turn back to the ECB to bail them out; at which point Draghi will butt heads with Weidmann again. National central bank QE is thus good for a momentum rally in European equities, but then bad news for a sell-off when the speculators tumble to the implications of the ultimate outcome.

On the eve of the ECB meeting, it was becoming clear that the disappointment with national central bank bond buying would be overwhelming. The spectre of a press conference, with the figure of a perjured Draghi, having to explain why he had hinted at American style QE and failed to deliver it, was not in anyone's interest. In order to save the day, the ECB then started to leak a whisper number on the size of QE. This whisper number was 50 billion Euros a month through 2016 - [viii]. The market was a little disappointed.

The ECB then knew that it had to deliver something more than 50 billion Euros a month to avoid a disaster. It should therefore have come as no surprise when the ECB announced that it would be in fact purchasing 60 billion Euros worth of covered (10 billion), agency (5 billion) and sovereign bonds(45 billion) a month through 2016.

The devil is however always in the details; and the few sketchy details provided by Draghi clearly showed the hands of Holland and Germany. Draghi's announcement was actually quite vague on detail, despite being long on buzzwords and headlines. The plan resembles some nasty booby trap device, which has been prepared by Germany and, that is wrapped in a skin of big numbers and big words.

A further little devil in the announcement, is that the ECB will carry out buying in proportion to each countries contribution to the ECB's capital base. Germany currently is around 25% of the ECB's capital base. Greece is precluded from the bond buying in the next QE, unless it adopts more austerity post-election, so by implication it is already outside the Eurozone in practice; and Germany's equity share in the ECB has just gone up by default. The risk of loss is shared 80 to 20, between the national central banks and the ECB respectively; which therefore dilutes the equity of nations, who have capital in the ECB, even more harshly in favour of Germany. The national central banks are doing the heavy lifting ; so once they start to run out of funds to achieve their national bond buying limits, they will become insolvent so that the German share of the ECB's capital will rise even further.

Ultimately, Germany will be the controlling shareholder in the ECB; at which point Mario Draghi works for it and not for the rest of the Eurozone. Far from being the "Shock and Awe" that the pundits are saying that QE is, it actually represents the stealth takeover of the ECB by the Bundesbank. The devil of it all, is that QE is circumscribed by the fact that Draghi still does not have the mandate to print the Euros to make the coupon and redemption payments on all the bonds on the ECB's balance sheet. He therefore still faces insolvency risk. He does not have American style QE authority; therefore he is still beholden to Germany.

The details showed some compromise on the part of all sides involved; which will kill the QE patient slowly over time rather than all in one go. The loss-sharing portion, of the announced QE, will be limited to agency debt only. Agency debt losses are permissible under the German Constitution. Agency debt is issued by the agencies, through which the Germans intend to do due diligence on every alleged growth project which is submitted for funding. Funding will only be provided to those agencies which adhere to Germany's edict on meeting economic reforms.

The loss sharing agency debt buying, is therefore nothing like the transfer of wealth from Germany to its neighbours that it appears to be. National central bank sovereign debt buying will not incur the loss sharing that the German Constitution forbids. The national central bank portion is the poison pill, which overtime will silently kill the QE process. The 60 billion a month headline will however have sufficient "wow factor" to generate the kind of momentum rally that Germany and Holland can hide behind, by appearing to have been supportive of the whole exercise.

The resistance to QE was palpable and not just limited to Germany and Holland. In addition to resistance from Lautenschlaeger, Weidmann and Knot, there was also resistance from Nowotny (Austria) and Hansson (Estonia) - [ix]. A new Eurozone, within the Eurozone, is coalescing around the sound monetary policy base of Germany. The probability of a schism with Southern Europe and the creation of two currencies and monetary systems has increased.

It seems that Germany did not get what it wanted from the original Eurozone, so it is preparing to ditch it and set up an alternative. This process threatens to drag on, as a kind of Thirty Years War that once plagued the continent. Perhaps the only valuable signal that Draghi sent at his press conference, is the fact that a globally coordinated easing across central banks, of which the Fed is also a participant, is now in process.

When awareness grows, that the ECB's QE is of much less value than the headline 60 billion a month suggests, the pressure on the Fed to respond with more easy money will become even greater. Immediately following the ECB decision, when interviewed by the Bild newspaper - [x], Weidmann injected the fatal doubts which will slowly unravel the whole QE process; and then push the national central banks into the insolvency that will trigger systemic ECB system insolvency.

In relation to this ultimate outcome, it's worth noting Age of Wisdom, Age of Foolishness (55) "Yes Virginia" - [xi] has already reported that the Dutch have signalled that they have plans on the shelf, for the return of the Guilder, should the Eurozone break apart. It is therefore worth speculating that the motive of Germany and Holland, in forcing through national central bank QE, has been to hasten the return of national currencies or at least a strong and a weak currency replacement for the current Euro. The strong replacement would be used by the North and the weak by the South. France would then be forced to decide if it wanted to be strong or weak in currency terms; a dilemma that used to threaten the Franc perennially before the Euro came into existence and it was allowed to cheat. If France opted to be a strong currency member, it would then face years of austerity.

Germany has also been observed, preparing for this outcome by, creating a budget surplus. A second confirmation that Germany is preparing for this outcome was quietly signalled by the Bundesbank last week; when it confirmed that it had actually accelerated the pace of repatriation of its foreign Gold holdings - [xii]. Germany's new currency, in the event of the "Gerexit" or Eurozone breakup, will also be backed by Gold in addition to the "blood and honour" of the German people. Readers may also remember that the hard currency contingent of the Swiss polity similarly wanted the Swiss National Bank (SNB) to hold 20% of its reserves in Gold - [xiii]. Given that Gold just got cheaper in Swiss Franc terms, after the recent Euro "de-pegging", such a move would now be much cheaper for the Swiss. Cheap Dollars could be acquired with strong Swiss Francs and then exchanged for physical Gold. The Swiss Franc could then be weakened against Gold to make the economy competitive again. Gold Bugs will now be carefully watching the SNB's Gold holdings for evidence of this fiendish plot.

Joining all the golden dots, to the recent Swiss move to "de-peg" the Swiss Franc from the Euro, one can see that what Keynes referred to as " a barbarous relic" will be worshipped in the new global foreign exchange regime, that is emerging as the next phase of permanent QE is unleashed upon currencies by the Trans-Atlantic agenda. Germany will now hold half of its Gold in Frankfurt, one quarter in New York and the rest in Paris and London.

Germany therefore has covered all the bases for a return to the Gold Standard; or at least any new currency regime based upon Gold, as a consequence of the collapse of the fiat monetary system backed by debt, which America applies to the global economy with varying degrees of success. The fundamental bid for Gold was noted in Epoch of Belief, Epoch of Incredulity (3) "Enabling Acts". The bid seems to be getting stronger by the day.

To get back to the current point on the timeline, from this future "idol" speculation, the entry of the victorious Chancellor Merkel onto the field of battle must now be described. She chose the auspicious Martin Luther King Day to opine her own "I have a dream" soliloquy; or perhaps she was honouring the original Germanic eponym, which seems more likely under the circumstances. Her vision confirms the thesis in Epoch of Belief, Epoch of Incredulity (2) "Role Reversals", that she is trading QE for reform. The thesis should however be extended with the additional observation that she is not in fact trading, but enforcing reform whilst appearing to trade QE. Germany no longer trusts other Eurozone countries to reform their economies; so it is forcing the solution. If the Eurozone breaks up, as a consequence, Germany is prepared and also able to walk away from the wreck relatively unscathed.

Merkel is clearly leading the second "Reformation" in Europe, based upon the reform of its economy and polity. The EU and the ECB is viewed with the same suspicion as that of the Papacy in the first iteration of the European Reformation.

In a speech, only a hammer's throwing distance from the ECB and Mario Draghi's head in Frankfurt, Merkel opined that she would not stand in the way of the ECB; with one major qualification however - [xiv]. To drive the nail home, into Draghi's head, she openly praised him by name for his constant efforts to make Eurozone economies reform. She then went on to eviscerate what was left of him by opining that, despite his good intentions, he was being taken advantage of by insincere countries which were using his QE to avoid the painful reforms required.

With this speech, Merkel confirmed many things. Firstly, she confirmed that Germany is indeed trading QE for economic reform. She also confirmed that the current status quo of QE before reform, is in fact putting her chariot in front of her horses; which is strictly verboten. Going forward, economic reform must come before QE. To underline the fact, the day after she spoke, Portugal refinanced a bailout loan from the IMF, by issuing bonds with a lower coupon than the original IMF loan - [xv]. Portugal then had the temerity to announce that it wanted to pay the IMF loan back a year earlier than the bailout schedule requires. Portugal has simply kicked the can down the road into a bond debt that is more serviceable, thanks to the ECB's bond buying programme. The bond market is only open to Portugal because the ECB is buying. In effect, the ECB is financing Portugal's early debt repayment and underwriting the cost of Portugal's access to debt capital. The latest iteration of QE, which she will not challenge, is national central bank buying with a cap. This is a token gesture of good faith, which however carries the huge stick of threatening to make the national central banks and ECB insolvent if they go overboard and hit their buying limits. Merkel therefore offered the carrot and waved the stick in her speech.

Nobody should be in any doubt that Germany is in full control of QE. It now remains to be seen, if Draghi will fight back after being fatally wounded; and continue with his plans to provide liquidity to the national central banks in order for them to hit their QE buying limits in one shot or if he will drip feed it. It also remains to be seen, if Draghi will continue with his crusade for the American style version of QE that he promised originally. Germany and Holland have now perjured his words by signalling that limited national central bank QE will occur instead.

Originally he said that:

"All members of the Governing Council of the ECB are determined to fulfil our mandate," and "Naturally, there are of course differences over how that should be done, but there aren't endless possibilities."

The only possibility to which he alluded has now turned out to be German; and not American form that he led the markets to believe was imminent. Based on what Holland and Germany have signalled and Draghi has announced, he has perjured himself; and in so doing destroyed all his credibility with the Trans-Atlantic economic thinkers behind QE. It is clear that he is no longer in control; and that in fact Jens Weidmann is the de facto President of the ECB and its true spokesman. Draghi's guidance means nothing and his actions are ultimately controlled by Germany.

Merkel threw him a bone and a job, by insisting that he was an ally in the crusade for economic reform. In practice this means that Draghi will now be viewed as a "Gauleiter". Once compromised through being associated with German control, he will have lost his value to the Trans-Atlantic team. He will then become a target for the venom of the European resistance to austerity.

First the markets will discount this view and vote with their feet; secondly the slower witted peoples of Europe, who still believe what they read in their national newspapers, will start to understand the truth.

It is at this point, that a grassroots political backlash will then be orchestrated against German control of Europe. This grassroots backlash will have a decidedly anti-German tone; that will be stirred up in the Anglo-Saxon media, by the likes of Rupert Murdoch, along with the call for the global panacea of American style QE form all central banks .... including the Fed itself.

John Williams began to clear the decks for Helicopter Money to land, early last week, when he opined that the global headwinds were the biggest threat to the US economy. These headwinds are causing him to radically scale back his view of the timing and necessity of tightening - xvi].

Chritsine Lagarde's IMF then assisted Williams by cutting its growth forecasts, for the global economy in general, whilst raising it for the US - [xvii]. Readers will remember that when the World Bank cut its forecasts, the previous week, that markets sold off heavily. On the IMF's announcement, the rally began as markets began to discount the inevitable easing in global liquidity (ex-Germany and Switzerland) that will now follow. The key signal in the forecasts was the raising of the US growth number; since the only way the US can achieve any growth , when faced with a global slowdown, is through fiscal and monetary expansion of its own. The IMF is therefore looking, beyond the ending of the Fed's tightening, into a new easing cycle. The volatility in the FX markets, which just got boosted by the Swiss National Bank, was therefore thrown an even bigger curve-ball.

FX traders don't know whether to discount the Fed's reversal of policy into a weaker US Dollar or to discount, the strengthening of the US economy relative to its partners and the expected global QE from other central banks, into a Stronger US Dollar. The gift of volatility just stopped giving to FX traders.

Former Bank for International Settlements (BIS) Chief Economist "Mr. White" has seen where all this, what he terms "beggar thy neighbour QE", is going; and it is not a pretty sight. Last week, he opined on the race to the bottom of the pool in the ensuing great currency debasement dive - [xviii]. White accurately forecast the Credit Crunch, so when he speaks investors should listen. Nobody is interested, in the words of "Mr. White" at this point in time, least of all policy makers and central bankers who all want to go with the flow.

It is all starting to look as though Jean-Claude Trichet's key signal - [xix] that soon all central banks and policy makers will be easing in tandem, observed in Epoch of Belief, Epoch of Incredulity (1) "Beginning the End" - [xx] ,was right on the money.

So overwhelming is this feeling in Britain, even the two Hawks on the MPC succumbed to the global seduction, that the Bank of England is now unanimously moving towards an easing bias - [xxi]. The UK economy is however experiencing rising employment and wage pressures, according to the Bank's nemesis the Office of National Statistics (ONS) - [xxii]. The MPC will therefore have to spin the wage increases as rising in real terms, against the backdrop of falling inflation, in order to justify its stance. If output starts to fall, as per the famous global headwinds however, any continued rise in wages actually begins to resemble falling productivity; which the MPC is obliged to respond to with tightening. Clearly the MPC is taking a big punt on productivity, which will be reflected by Sterling falling harder and risking an uptick in inflation.

Even the Canadian central bank joined the party and "surprised" - [xxiii] the market with a rate cut on the eve of the ECB's decision. All eyes are now on the hapless Australians to follow their Commonwealth brothers and sisters. Australia has traditionally been a global central bank leader when it comes to moving interests up or down. This time however, the parlous state of its economy means that the Aussie Dollar is in freefall mode; so that the RBA may have to wait for the Fed to signal the tightening is off before it eases.

For readers still wrestling with accepting the realities and implications, inherent in the portrayal of the brave new world of Emotional Finance in these reports, the spiritual home of this new martial art of economic policy making provided a key signal that perhaps one should become even more paranoid. David Cohen, Treasury Undersecretary for Terrorism and Financial Intelligence has been nominated by the President to become Deputy Director of the CIA. Global-Macro Intelligence, of the kind created and disseminated by KeySignals, about the alleged economic warfare behind all the headlines, would seem to be vindicated by this signal from Washington and Virginia.

The institutions of Europe were originally set up, through the agency and funding of the United States, in order to create a "United States of Europe" that would defeat the Soviet Union and uphold the American way. Ever since Germany was able to get re-united, things seem to have been going in reverse from an American perspective however. So wide is the gap, between Germany and America currently, that both nations spy on each other more than on any of their alleged enemies. Angela Merkel's "Reformation" will no doubt be viewed as an act of "Economic Cold War" by many in Washington and Virginia. Both countries have prepared for economic war, so it now becomes the most probable outcome.

America has suddenly noticed that whilst it "pivoted" to China, "took-down" Russia and "contained" ISIS that Germany has sneaked up and outflanked it in economic terms. Germany's traditional strategic weakness occurs when it fights on two fronts; so the question becomes whether Germany will be pulled in both directions again. Thus far, it has not taken the bait; and has prepared to challenge America's own strategic weakness which is debt. A Cold War stalemate already exists.

Following up on Angela Merkel's Martin Luther moment, President Obama had a Martin Luther King moment of his own in the State of the Union Address - [xxiv]. The President is in a curious position. He must ensure his legacy and reputation for having achieved some of the "Change" that he promised. He must also hand over the ship of state, in some shape or form, to a new leader possibly from another party. His opening remarks followed the theme that is playing at Davos, about America returning to its leadership position in the global economy.

The President would like his popular cause, referred to fondly as the "Middle Class", to participate in this return to strength; which has thus far been disproportionately enjoyed by the "Asset Owning Class". The "Middle Class" formed the basis of his address; from which he then delineated a course of action which will bring them economic prosperity and national security. In economic terms therefore, the "Middle Class" will be the beneficiaries of his suggested wealth redistribution. Presumably, this will come through the original formula of Helicopter Money, to create a permanent increase in the money supply, which is then redistributed via a reformed tax code.

On foreign policy, he signalled that America will continue to "Pivot" towards China; and promote free trade in Asia through the Trans Pacific Partnership (TPP). America will also avoid having any boots on the ground, getting bogged down in regional conflicts which harm the "Pivot", by fighting through proxies and global entities such as NATO. "Hispanic Spring" is now to be formally given policy status through the evolving bridgehead in Cuba.

The game changer in the Middle East, involving a rapprochement with Iran, is still on the President's agenda; however the Republicans swiftly responded by asking Prime Minister Netanyahu to address Congress on the subject - [xxv]. Obama then fired back by refusing to see Netanyahu when he visits - [xxvi]. Iran is going to be one of the political hot potatoes that can lose votes for any would- be President; so it will be interesting to see how the new relationship fares during the Presidential campaign. The Mossad, on the other hand, seem to have the same dream as President Obama; which may in fact turn out to be a nightmare at the polls for Netanyahu. The Israeli intelligence agency cautioned Congress - [xxvii] from enacting new sanctions against Iran. Perhaps regime change in Tel Aviv has now become the more likely outcome. The new American fiscal stimulus, to accompany the permanent increase in the money supply, will be in education, infrastructure and medical technologies. Climate Change policy has become more nuanced, as a result of America's emergence as a major oil exporter.

Following from his much publicised "Bromance" - [xxviii] with David Cameron, in preparation for his speech, Cameron's "nudge policy" on cyber-security - [xxix] seems to have worked. National intelligence agencies will now be empowered to do more invasive surveillance of American citizens and their private communications; allegedly out of necessity from the recent Sony hacking and the Charlie Hebdo massacre. Terrorism has now been folded into cybersecurity, thanks to the recent well publicised threats that have occasioned this merger. It is interesting to speculate, whether the President could have pulled off this further erosion of the constitution without the opportune timing of these events and the support of "Bro Cameron".

Not to be outdone, French Prime Minister Valls had a dream of his own; that is more of a dystopian nightmare by comparison. Valls chose to refer to the kind of integration experienced by second and third generation French Muslims as "Apartheid" - [xxx]. In more refined French company it is known affectionately as "French Colonialism"; and is upheld as a tradition to this day. Whilst the media focused on the inflammatory headline, the more worldly observer put this all into the context of the current French predicament within the Eurozone. France needs QE and fiscal stimulus at any cost. Valls was therefore drawing a dotted line, which will be thickened in due course, between economic austerity and the lack of opportunity for young French Muslims. Extrapolating the thickening line a little further, the rise of the Far Right in opposition to the disenfranchised French Muslims, who react with violence, is therefore a symptom austerity.

The line of blame for this symptom then leads to Germany; so that Germany once again can be identified with the rise of the Far Right in Europe. The insidious French logic illustrates the levels of desperation and ingenuity that the current situation is stimulating. Germany is unwittingly playing along, if the leader of its Pegida Anti-Islam's infamous Selfie - [xxxi] is anything to judge by.

By the end of the week, Japan was the one-legged man at the butt-kicking global stimulus party. The BOJ took the momentous decision to abandon its 2% inflation target - [xxxii]; whilst still paying obeisance to Abe by increasing and expanding its QE programme - [xxxiii]. The BOJ has however acknowledged that it is now pushing on a string, in terms of trying to move the inflation needle with QE. Perhaps more worryingly the Labour Minister opined, that in fact Japan Inc. is suffering from the related problems of low productivity and un-competitiveness - [xxxiv]. This bombshell basically implies that cheating by weakening the Yen, in order to appear to be competitive, might be working for Japanese equity investors but not for Japanese CEO's. Jens Weidmann would no doubt have much in common with this gentleman.

The two bombs, from the BOJ and Labour Ministry, effectively destroyed the P&L of positions relating to the weak Yen trade. This situation is even more threatening, because thus far this year leveraged positions betting on a weaker Yen have increased even though the position has not been working in P&L terms - [xxxv]. A swift look at what is happening to those who had the wrong leveraged bets on the Swiss Franc will inform as to where the new pain in the forex market will come.

For those readers who need to keep the score, in the Copa America tournament that is also called "Hispanic Spring", Mexico just kicked off. The eponymously named President Pena Nieto is now taking some stick, over his relationships with businessmen who are in receipt of tasty government contracts - [xxxvi]. The ghost of Hosni Mubarak watches with interest.

Moving beyond the ECB event horizon, attention will soon be returning to China. At Davos, Premier Li Keqiang was hard at work fooling the "1%" that China's "New Normal" is no cause for concern - [xxxvii]. The "1%" fell for it hook, line and sinker because they assume that the PBOC will respond to the "New Normal"; with more QE which will put China back on its hyperbolic growth curve of the past. Chinese equities therefore look like a good momentum trade to the "1%". There seems to be another classic disconnect of cognitive dissonance developing. China is clamping down on margin trading, which clearly vitiates against the momentum trade. In addition, more cities and regions are revising down their own growth targets, as the "New Normal" filters down from the central planners to the rest of the country - [xxxviii].

At the annual congress in March, China is expected to lower its growth forecast and hence its growth target to 7%; because China always hits its targets. It seems more like the growth target is being lowered to match the economic reality however. Failure by China to announce a QE programme, commensurate with that recently announced by the ECB, in March will be a major disappointment. It will also be another trigger for the Fed to U-Turn on tightening and bring forward the schedule for easing.

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