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posted on 01 July 2015

Epoch of Belief, Epoch of Incredulity (24): The Magnificent G-Seven

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G-7 opined a number of fine buzzwords, including Climate Change and disease threats, in order to conceal its real global agenda. Hence the nitty-gritty of what really went on behind closed doors last week, was conveniently hidden behind the unfolding FIFA scandal.

As a knee jerk signal, David Cameron called upon his G-7 colleagues to strengthen global governance and clampdown on corruption - [i]. Governance, both corporate and political, will therefore be the agency of change that furthers the global agenda.

Cameron's return to Blighty was less triumphal. He had intended to capitalise on Emmanuel Macron's lifeline, of a Two Speed Europe integration proposal - [ii, that would have given him wiggle room on the EU referendum. Alas it was not to be. Having threatened to sack Ministers, who don't campaign to stay in the EU, he was forced to U-turn by the Eurosceptic Tory faithful - [iii]. He therefore edges closer to the Downing Street exit as Britain edges closer to the Brexit. Just to give him a little nudge, the stalking horse of Boris Johnson reached out to the rebels and opined that they must be allowed to follow their hearts and minds; even if this leads the country through the Brexit door.

George Osborne did his bit for his own Prime Ministerial ambition and launched the "Osborne Rule" at the Mansion House - [iv]. He will therefore introduce legislated counter cyclical fiscal policy, to create budget surpluses in growth periods and vice versa in recessions. The current state of UK growth suggests that he may therefore just be about to boost the deficit further, even though he has just announced that £ 12 billion in cuts must be found. The "Osborne Rule" is therefore big on headline, but seems to vitiate against the current drive towards further fiscal austerity in practice.

Greece was clearly a topic of private discussion at G-7; and hence it was that the G-7 was able to opine a unified view that the Greeks should get serious about negotiations with the Troika - [v]. Jean-Claude Juncker, the man who sees Anglo Saxon plots in everything, then tried to translate this unified approach into action; after the Greeks had taken the unilateral step of missing an IMF payment. What was notable, was that nobody at G-7 dared to mention the Grexit; thus confirming the suspicion that no political leader has the intestinal fortitude to be remembered as the person who triggered it. This of course gives Alexis Tsipras greater room to play to the gallery of Socialists who are making his life precarious at home.

In practice however, despite the apparent Greek perverse behaviour, the gap between the two sides is narrowing; even though it may appear to be diverging. The narrowing gap over the primary surplus shows just how close the two sides are coming to convergence - [vi]. Tsipras continued to appear inflammatory by presenting the ultimatum that the Eurozone will fail if Greece Grexits, along with his vague proposals for a negotiated compromise - [vii]. He protests a just little too much and too loudly to be credible though. If he didn't already exist, he would need to be created for such an event as this. He has been called a Useful Idiot; and his utility for the EU is clearly his ability to bring Greece and the EU together whilst simultaneously appearing to trigger the Grexit.

This comedic utility was evinced last week when Juncker made a big show of the obvious fact that the Greeks lie when they negotiate - [viii]. Everyone knows this fact; in fact this is how Greece along with Goldman's help got into the Eurozone. It is apparently a revelation to Juncker, who made such a big noise about Tsipras's lying; and by so doing boosted Tsipras's street cred with the Socialists back home. With such enhanced credentials, he could now tell them to adopt austerity; and they would still think that they are following an anti-austerity agenda. As with all things in Behavioural Economics, it's about how things are framed and who frames them. Having burnished his anti-austerity credentials, any deal that Tsipras makes will be viewed as anti-austerity in Greece; even when it is not in practice.

There seems to be something about leaders of the IMF, chaos, leather and France. Whilst her predecessor and fellow countryman was getting off the hook for "aggravated pimping" - [ix], at the orgies he admittedly attended, the new leader of the IMF was indulging in some dark fantasies of her own making. Epoch of Belief, Epoch of Incredulity (23) "Keep the Faith" observed "La Dominatrix" challenging the Fed to dare to tighten before 2016 - [x].

At the time it was noted that she had obviously been told that the Greeks would miss their latest IMF payment. It was also wondered what she was seeing on the globalmacro horizon to justify this call to Yellen. Following her trail of stiletto heels last week, she made another footprint when her team walked away from negotiations with Greece - [xi]. Is she knowingly walking towards the Grexit one wonders?

Meanwhile, Merkel and Schaeuble played to the gallery, making the most of their fabricated rift over Greece. Allegedly Merkel still holds out for a political solution that will keep Greece in, whilst Schaeuble wants to cut the Greeks loose - [xii].

The German gallery certainly has fallen for it. Carsten Schneider, the myopic spectator for the opposition SPD, made a great song and dance about the division between Merkel and Schaeuble. In so doing, he joins Alexis Tsipras in the Useful Idiots' corner - [xiii]. Occupiers of this corner also seem to be Bild Zeitung readers, as the German daily reported that the German parliament is now resigned to accepting the inevitable Grexit. Seasoned observers are however not taken in by this the Good Stasi/Bad Stasi act aka the carrot and stick approach.

Controversy in the Eurozone has extended to the ECB itself. Last week litigious hedge funds, seeking some lost P&L after the recent bond rout, insinuated that Mario Draghi had deliberately misled them in camera about his intentions and capabilities to frontload QE - [xiv]. To think that they paid up for an insider tip and then got hosed, insults their sense of fair play. Draghi certainly won't get a sinecure job with a hedge fund, like the more venal Ben Bernanke did, in the form of a pension contribution for at arm's length services provided during office when he retires.

This situation is one which Draghi's bete noire Jens Weidmann would love to exploit. Weidmann is also due to give his own take on events in a similar private access seminar venue - [xv]; so he has opted for full disclosure beforehand so as not to get misconstrued and subsequently sued. Weidmann's full disclosure suggests his enjoyment watching the latest pains, of the pre-Taper Tantrum in the fixed income market, being exacerbated by Draghi's frontloading and hedge fund front-running.

The Taper Tantrum, it must be said also heightens the risk associated with the current Troika negotiations with Greece; so he is knowingly playing with fire. He seems not to care, because as usual his agenda is to have the appropriate interest rate term structure, for a German economy which is on the cusp of overheating. If this one German size does not fit all other Eurozone members, then it is just tough.

It must also be noted that Draghi has an ally in Angela Merkel; which may temper the bloodlust of Weidmann. Last week she pointedly supported the ECB and its leader when she opined that they have done a great job in fighting the threat of deflation - [xvi].

Strong G-7 denials, confirmed that the level of the US Dollar was on everyone's minds; especially in light of the imminent Fed tightening and related tantrums. Allegedly the strong US Dollar and related Fed tightening were presented, to G-7 by President Obama - [xvii], as the opportunities for nations facing capital outflows to stimulate their economies to counteract these destabilizing forces. Surely he must understand that, if they stimulate with lower interest rates, the situation will only get worse. Perhaps that's the whole point; because at such a point Yellen would be forced to curtail the Fed tightening.

Clearly Japan is worried about another leg down in the Yen. Last week it fell to Takatoshi Ito to try his hand at talking the Yen up for the BOJ - [xviii]. Even the release of significantly stronger Q1 GDP data didn't really hold the Yen up - [xix]. Governor Kuroda was then obliged to verbally intervene, through an address to lawmakers - [xx]. This was good enough to shake out the weak over-leveraged hands of the Yen shorts; but looked unconvincing to the pundits (Yen Bears) without any market intervention to buy Yen from the BOJ.

There is however something more significant here that needs to be noted. Kuroda has shown himself to be tenacious and patient; as his dogged following of the long road of QQE by the BOJ to date demonstrates. He is therefore a man of his word; and his words should be taken at face value. If he says that the Yen has stopped weakening, then this should be taken seriously. Just to underline the tenacity of his method, his go to mouthpiece Yutaka Harada once again tried to verbally intervene to support the Yen last week - [xxi]. There is no doubt that Kuroda intends to keep supporting the Yen until he is taken seriously by the FX market.

The Basel Committee is not taking any risks over the Taper Tantrum either; and is making new rules for increased capital for financial institutions to hold on balance sheets against interest rate risk. Epoch of Belief, Epoch of Insecurity (23) "Keep the Faith" heard Prince John Williams singing - [xxii] that macroprudential policy would be applied to the US Economy during and after the Fed tightening - [xxiii]. The Basel Committee's new rules are a new verse in this global repertoire.

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