Age of Wisdom, Age of Foolishness (15)
They’re back and this time it’s for real!!!
Regular readers of the funny papers will be familiar with the following cover page from, the day in September 2013, when President Putin and Janet Yellen joined the Committee to Save the World.
“Now and Then”
Janet Yellen was emerging to replace the hapless Larry Summers; as his star suddenly fell before it had reached its apogee at the Federal Reserve. We remember it well, because we were certain that the global macro conditions had been engineered with Summer’s candidacy in mind; based on the skills he showed back in the Asian and Russian Debt Crises. Since the consequence of said Russian Debt Crisis appeared, in the form of President Putin, we were even more convinced that it was business as usual for Summers. That time, President Putin was brokering peace in Syria; which allowed America to “Pivot” from the Middle East towards China.
Today the militarist Prime Minister Abe is pivoting towards the Winter Olympics in Sochi; where this time President Putin is trying to avert war in the Pacific as a consequence of the “Pivot” he enabled back in September 2013[i].
Czar meets Shogun
But more will be said about the War in the Pacific later.
Czar meets Pharaoh
President Putin gave America’s “Pivot”, away from the Middle East, a further push recently when he backed General Sisi to become Egypt’s new President[ii].
The Caucasian Boston Bombers
For readers who find the fog of war amorphous, we suggest that they take a few steps back to see the bigger picture. By strange coincidence, the “Boston Bombers” were natives of the Caucasus.
The Caucasian Sochi Bomber
The Caucasus has recently threatened President Putin’s Sochi spectacle with suicide bombers. The Caucasus is where the most militant of the Jihadists, whom are now fighting in Syria, are to be found. It would seem that Al Qaeda has “Pivoted” from Afghanistan to the Levant. America and Russia therefore have a common enemy from the Caucasus, so “Team America” gets President Putin’s support. There is also the issue of the new source of demand for Russia’s booming arms industry; but this is a story that we would not want to get into.
As America Pivots, this leaves a vacuum which will be filled by the old European Mandates doing their own “Pivot” back “East of Suez”; and possibly also South of the Mediterranean. Britain’s William Hague evokes Castlereagh and Palmerston in protecting “British Interest” “East of Suez”.
The British Martyr of Martyr’s Avenue
Britain this week also announced the “martyrdom” of its first suicide bomber in Syria[iii]. By coincidence the subject lived on a street called Martyr’s Avenue in Little Britain. He died, on some corner of a foreign field that is forever England, fighting in a cohort of Jihadists from the Caucasus of all places. It’s a small world and an even smaller one for Jihadists. “British Interest” now has a precedent beyond just humanitarian interest in Syria.
President Hollande has shown himself to be adept at “Pivoting” into former colonies. Whilst his latest trip to America ostensibly addresses issues of bilateral trade, it is hard not to see the coincidence with “Team America’s” latest mission[iv]. Unfortunately, there is no “Team Europe”; and perhaps this is the real issue.
Minneapolis Fed Czar Kocherlakota, recently had a “Versailles Moment”[v]; in which he rhetorically questioned why there is no “Team Europe”. Presumably President Hollande discussed this question on his latest visit; and going forward pressure will be applied to Germany to become more of a European “team player”.
Versailles 2014 Moment?
What does all this “Pivoting” really mean?
It is all about Liberal Democracy versus Dictatorship. The Developed Nations have evolved into Liberal Democracies. Emerging Nations, perhaps with the exception of India, are in the Dictatorship phase. As was observed of the British, they are ungovernable in peacetime and magnificent in wartime. Much the same can be said of the current State of the Union, with the current level of partisanship. It is therefore a curse of Liberal Democracy to be politically unstable. The current fragile coalition in Britain illustrates this perfectly; as does Disraeli’s observation that “Britain does not like coalitions”. President Hollande knows all about political instability; as his countrymen rail against Teutonic austerity. Economically weak and politically unstable Developed Nations therefore face Emerging Nations which are led by Dictators. To restore parity, the Developed Nations must induce instability in the Emerging Nations, which threatens the Dictators enough for them to become cooperative. Overt destabilization is an act of war. This may make the Developed Nations easier to govern, however it does little for the global economy. The solution is therefore for unelected “teams” in Developed Nations to do the destabilizing of the Emerging Nations; after which the elected politicians in the Developed Nations can reach out to their Emerging peers. Liberal Democracy breeds conspiracies and conspiracy theories. Germany and Japan are idiosyncratic Developed Nations; in so far as they have tended to drift away from Liberal Democracy model towards Dictatorship in times of economic instability. In Japan today, this drift can be clearly seen. In Germany, Chancellor Merkel is affectionately known as “Muti”; which is a cipher for “benign dictator”. German strategy ostensibly resembles a sock-puppet which is using the greater Dictatorship of the unelected EU to act as its proxy. “Team America” therefore has another mission which is to recruit for “Team Europe”.
The last time President Putin made a cameo appearance we noted:
Terminal Velocity “Helicopter Flight Simulator …. Flight Shtimulator” suggested that Jackson Hole had signalled a hardening in US economic policy; to prioritize domestic conditions at the expense of the Global Economy especially in Emerging Markets. President Obama’s recent failure at G20, to create a global consensus on Syria, was further evidence of the breakdown in global cooperation that could lead to American unilateralism. But perhaps the recent Putin “rescue” will forestall that (unilateralism).[vi]
Fast forward to today and sure enough the “hardened” US economic policy, which has been “Tapered”, fractured global cooperation and destroyed Emerging Markets. Enter “Team America”, to save the World before it takes the American recovery down the tubes with it. The sucking sound was made very audible recently at Davos and visible in the markets, during this mountain meeting of the minds, before the cavalry could be heard charging to the rescue after the last ECB meeting and US Employment Report two weeks ago.
Instead of Larry Summers, the figure of Stanley Fischer is scheduled to come off the bench, to play “Safety” whilst the Fed pays lip-service to the “Taper”, before the real job of more monetary stimulus is unleashed. As we reported, Fischer was applying for the job back in June 2013[vii]; with a mission statement on his resume about how the “Taper” was actually a good thing for Emerging Markets and rebalancing the global economy.
“Team America” was doing a little more than cheerleading last week. On the eve of battle, the brains of the outfit Jan Hatzius had a “premonition” that the Fed should be focusing more on boosting wages than on unemployment[viii]. In the event of a major policy change and equity market rally, Hatzius will get the credit for being the genius who called it right. He will then replace the retiring legend, who invented the “BRICs” acronym, Jim O’Neill in the Goldman panoply. A cynic observed how O’Neill’s exit has come at a time when the “BRICs” have hit a brick wall. It’s time for Goldman to reinvent itself, with a new meme. Those who read more than just the headlines may have noted that, prior to Hatzius’s call, Fed Governors Evans and Lockhart[ix] had suggested dropping the Evans Rule and focusing on inflation. We would suggest that at least they deserve to be called assists, to the Hatzius touchdown. The more cynical observer would suggest that they actually did the scoring and Hatzius is simply converting; and taking credit for reading the discarded fish and chip wrappers of yesterday’s newspapers.
After Hatzius jumped out of the plane, it was the turn of his captain Lloyd Blankfein. Blankfein made the “Big Long” call on China; and embellished the tale with the explanation that this was another forty year operation[x]. The reader may remember that Goldman similarly made a “Commodities Super-Cycle” call when the Credit Bubble was inflating.
Mr Blankfein then opined that Asia today is not like it was in 1998, as his parachute descended into the Pacific warzone behind enemy lines[xi]. Looking at the data, he is correct. Many Emerging Nations have far better foreign reserve positions than they did in 1997. They are also clustered in the safe fiscal debt zone. The Developed Nations of the Anglo-Saxon world and Europe ex-Germany are the countries that are at risk. The real basket case is however Japan. Without global growth however, all of these countries are in the same kind of trouble that Japan is in. Always the more cautious member of “Team America”, Jamie Dimon waited to see if the other two Gold parachutes had opened. Dimon has become paranoid about “jumpers” recently[xii]. He also knows that Goldman have a habit of saying one thing and doing the opposite; so he needed to be sure that the “Big Long” call was not being used as a “Big Short” opportunity. Once he saw the two Gold canopies flare, he was happy to allow his warriors to scream their battle-cry that China had bottomed; and was in for a twenty percent rally within weeks[xiii]. Later in the day, Janet Yellen jumped, in her inaugural address. By then, the battle in the markets was over and victory was a formality. Sure enough, the signals from Evans, Lockhart and Hatzius were coded in her message. But even more impressive was her magnanimous victory speech; sprinkled with coded policy signals.
“It’s one of the most important issues and one of the most disturbing trends facing the nation,” …….“Rising inequality is partly a matter of a weak job market that we are trying to address.”…… “the recovery in the labor market is far from complete,”
On the “Taper”:
“It’s important for us to take our time to assess”…. “measured steps”
On reversing the “Taper”:
“notable change in the outlook”
“would be looking at a broad range of data on the labor market, including unemployment, job creation and many other indicators of labor market performance,”
On scrapping the Evans Rule:
“It’s important for us to take our time to assess (unemployment)” [our emphasis]
On Fed Independence:
“Almost every aspect of our financial affairs”…….. “What I don’t agree with and would strongly oppose is interfering with the independence of monetary policy by bringing political pressures to bear.”
“I am committed to achieving both parts of our dual mandate: helping the economy return to full employment and returning inflation to 2 percent while ensuring that it does not run persistently above or below that level.”
On Asset Bubbles:
“Our ability to detect bubbles is not perfect, but looking at a range of traditional valuation measures doesn’t suggest that asset prices broadly speaking are in bubble territory,” (There may however be one casualty dead cat, whose chute doesn’t open, which does not bounce and turn into a bull.)
On Global Risks created by the “Taper”:
“our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.”
“Investors appear to have been differentiating among” emerging market economies “based on their economic vulnerabilities,” (Brazil, India, Indonesia, South Africa, and Turkey are) “among the economies that appear to have been the most affected”
“the degree of vulnerability across economies appears to be materially lower compared with past episodes,” (Does anyone hear Lloyd Blankfein?)
On Income Inequality (i.e. trigger for the Helicopter Mission):
“It’s one of the most important issues and one of the most disturbing trends facing the nation,” …….“Rising inequality is partly a matter of a weak job market that we are trying to address.”
On Internal Dissent:
“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” ……….“as we formulated our current policy strategy and I strongly support that strategy.”
Everything was there; and the delivery was near perfect.
Compared to the arcane mumbo-jumbo that Greenspan used to serve up, or the nervous but scholarly monologues of Bernanke, Yellen delivered a masterful performance. The grandstanders of the Senate and Congress, including Ron and Rand Paul, will now think twice before taking her on. Even her dissenters, from within the FOMC, must have realised that they have already been defeated before the skirmishing commences. The Stars and Bars are still flying down in the heart of the Confederacy however; as Jeffrey Lacker tries to link the nebulous issue of Too Big to Fail directly to QE, via the emotive words of moral hazard, in the absence of either strong inflation or strong growth data[xiv]. Dissention has not yet become “Secession” however. There were signs that a white flag may be flying over the Alamo. Richard Fisher, far from being the militant dissenter, is now showing signs of accommodation for the new Chairman, as he becomes a voting FOMC member. His speech, on the day Yellen was testifying, singled out the Congress as the enemy. Allegedly, the dysfunctional Congress is forcing the Fed to do the things which are anathema to Fisher. As the ore observant reader will see later, Mr Fisher is a veteran of another “Team America” which is ready for action again.
By close of business New York time, “Team America” had saved the day and possibly the World. The operation had been planned meticulously and executed with precision, timing and audacity. For the journalists, embedded at the Pentagon, Acting Deputy Secretary of Defence Christine Fox summed up the mission in her briefing. The mission was “about ensuring that stability and growing prosperity that the Asia Pacific has enjoyed for more than 60 years”[xv]. America does not intend to lose its “decisive advantage” or to allow Chinese military parity. “If either of those possibilities came to pass, the United States would lose influence, regional rivalries and security dilemmas would increase, as would the possibility, however remote, of a conflict due to a miscalculation”.
Trading volume and investment banking fees have been a bit soft at the beginning of the year; so the houses of Morgan and Goldman needed some traction. Not only have they now earned their stripes with the Obama Administration, but they have also earned their stripes in Asia especially China. As part of “Team America”, they have an insider’s view of policy coordination, as America “Pivots” and Asia restructures. This “Pivot” and restructuring should take care of this year’s bonus pool; and forty more if Mr Blankfein is on the money. Yellen and the team obviously know their Sun Tzu. The ground is now secure for the Commander in Chief to visit the scene of victory in April. Ostensibly it’s all about regional cooperation. One suspects that the realpolitik involved America threatening the nuclear option that it would go on tightening monetary policy, in a giant game of bluff with China. It seems that both sides have done their fair share of blinking, so now it’s time to shake hands until the next conflict point.
This now brings us to someone who should know his Sun Tzu off by heart; but appears to have misread it completely.
Abeshima’s Three Arrows
Much has been made of the “three arrows” of Abenomics. In a Japanese context, “three arrows” have great spiritual importance and meaning, hidden from most occidentals, in relation to its most famous ultranationalist poet Mishima. When we initially heard Abe use the word arrow, it rang a bell. Very little is really understood of the sublime arrows which make up Abe’s strategy. The first was the weak Yen, which has failed to boost the economy; because it has boosted growth-sapping inflation instead. The second arrow was nuclear energy itself. This arrow appears to be on target, since the new pro-nuclear mayor of Tokyo was elected[xvi]. However given revelations that the radioactive leakage from Fukushima, which is far worse than officially reported, is now lying off the western seaboard of America like the Imperial Navy[xvii] this arrow may prove to be another Pearl Harbour. This information has been suppressed by Abe’s subtle introduction of a new secrecy law; which has censored all information about Fukushima because it is classified as a national security issue. The fact that it is also an issue of national security for an America ally has been conveniently ignored therefore. The final arrow relates to Pearl Harbour itself. Mr Abe is a stealth militarist. As his economic policies have floundered, he has found it more necessary to opine nationalist rhetoric. His latest outburst has inflamed China and also South Korea[xviii]. This toxic speech, in addition to the toxic waste floating towards America, has resulted in a stiff rebuke for Abe. His military aggression has been directly criticised by the brass at the Pentagon through the agency of General Herbert “Hawk” Carlisle[xix].
The message from the Pentagon seemed prescient; when shortly thereafter Taiwan and China opened a new chapter in their history, with the first formal meeting in sixty five years[xx]. It was telling that they chose Nanking, a site of World War II infamy, as the place to open the new page.
As “Team America” saves the Pacific and earn fees in the process, it cannot tolerate a loose-cannon blowing holes in the deck by reminiscing about the days of Formosa. In any case, this loose-cannon was last year’s “Big Long” P&L; and is very possibly this year’s “Big Short”. Abe’s position as Prime Minister is now untenable on the global political stage. On the Asian economic stage he is becoming bad for business. On the domestic political and economic stage he is hostage to the upcoming wage round. His economic policy is failing and his foreign policy is in tatters.
The fate of Mishima’s three arrows now awaits him, metaphorically speaking of course.
A key individual tasked with sustaining the “Pivot”, maintaining the support of conquered Asian nations whilst maintaining commitments to Japan, is Caroline Kennedy. She walks a fine diplomatic line. Last week she was in Yokohama to deflect the arrows fired by Abe’s most fanatic supporters; who would like to end what they see as American occupation of Okinawa[xxi]. On the left flank, Secretary Kerry is on deck in China, to make sure that the jack-in-a-box of North Korea does not destabilize the delicate balance[xxii]. Abe insists that it is because of such concerns that Japan must rearm and defend itself. The clock is now running down on Abe before America’s Commander in Chief visits in April. If he fails to survive the wage round, one can imagine his loss of face in front of Obama causing more serious remedial action.
“Bulls Make Money, Bears Make Money and Pigs Get Slaughtered”- a medieval mystery play with a moral.
Another dead cat may also start to smell, over at the California Studios of PIMCO, in the near future. Having ostracized the “pigs in stocks” recently, Bill Gross may find that pigs can fly after all[xxiii]. He may also be amazed to see them turn into bulls. “Team America’s” Yellen hinted that, whilst interest rates won’t rise immediately after the “Taper” ends, she may land the “Helicopter” so that the team don’t have to HALO jump next time. The “Helicopter” and its inflationary price lift will have a downdraft on bond prices; and hence the fortunes of the one-club golfers in the Bond Clubhouse at PIMCO.
No doubt Mr Blankfein and Mr Dimon are looking covetously at PIMCO’s assets under management and licking their lips. Allianz may then have to swiftly parachute back in El Erian to save their day. Mr Gross’s inflammatory Sinophobic reference, to “bacon” of dubious origin, may soon be shown to be a costly slip of the tongue by the Sinophiles of “Team America”.
Mark from Del Monte becomes Evil Dr Mobius
Another anachronism on “Team America’s” rendition-list appears to be Mark Mobius. He used to be affectionately known as “Mark from Del Monte”; the man who loved his white suits and always said “Yes” to investing in Emerging Markets. Before “Team America” jumped in, “Mark from Del Monte” had become the evil Dr Mobius; and said “No” to the low hanging fruit on Emerging Markets branches[xxiv].
Having been totally wrong-footed by “Team America”, he very swiftly tried to correct himself by opining that Emerging Markets were near the bottom after all[xxv]. Unfortunately this swift adjustment of view has destroyed his credibility, with investors and policy makers, in Asia and possibly further afield. He resembles a straw man, who is neither connected to the real players nor professional in his investing process. “How could he have missed this one coming?” The HALO jumping “Team America” hasn’t lost time informing Emerging Markets investors and businesses that his halo has slipped; and that there is no “I” in team.
The New Old “Team America”
There are also signals from River House, at Fifty-First and Park on Manhattan Island, that the old “Team America” is now circling these new intended victims. This location is the “Tracy Island” of Pete Peterson’s Blackstone Group and spiritual home to Kissinger Associates. Old “Team America” was active in the “acquisition” of Bear Stearns back in the crisis; when former Kissinger Associates employee Tim Geithner appointed the Blackstone (at arm’s length) affiliate Blackrock to advise the Fed on the fate of Bear at the height of the crisis[xxvi]. Bear was acquired by new “Team America Hall of Famer” Jamie Dimon ultimately, with a Treasury backstop and promise of indefinite cheap Fed liquidity. Blackrock is looking for new assets to acquire and likes the Emerging Markets[xxvii]; the (at arm’s length) “Old Team” is backing Hillary in 2016 and sharpening its spikes.