Age of Wisdom, Age of Foolishness (18)
The Elephant in the European Living Room
Last week the United Nations was the stage for numerous politically correct speeches, from urbane Western diplomats, ostracizing President Putin in an attempt to place him “beyond the Pale” of 21st Century civilised politics. President Putin’s actions were placed in a frame of the most egregious acts by dictators of the 20th Century. Secretary Kerry went even further back in time to use the anachronism of the 19th Century[i]. All this rhetoric and seizure of the moral high ground completely ignored the reality on the ground in Ukraine; which has been ossified in social, political and economic terms in the anachronism that Putin has been accused of misrepresenting. Ukraine is in fact literally “beyond the Pale”.
The Pale of Settlement was created by Catherine the Great in 1791, as a region into which Russian Jews who did not convert to Orthodox Christianity could be expelled. It was a region which was used to accommodate Russian Orthodox Christianity’s version of the Spanish Inquisition. It is of some significance that, today in Catholic Spain, there are political moves to allow the return of Sephardic Jews who escaped or were banished by the Inquisition[ii].
The consequences of anti-Semitism continue to resonate in the 21st Century however Central Europeans prefer to remain silent on the issue. This settlement runs from the Baltic to the Black Sea. It is a region synonymous with oppression and anti-Semitism. Throughout its history, the indigenous peoples of this region have shown themselves to be the most enthusiastic anti-Semites on any occasion that foreign invaders give them a free hand; the most famous occupation having been that of Nazi Germany during the Second World War.
The State of Israel was founded and populated by many people who were fortunate to escape annihilation and oppression in the Pale of Settlement. For those who understand realpolitik, rather than the recent urbane sound bites from the United Nations, the Pale of Settlement cast a long shadow over the recent events.
“This way to the Pale of Settlement”
The penumbra of this shadow was to be seen falling across the face of Angela Merkel, as she met with Benjamin Netanyahu to celebrate fifty years of cordial diplomatic relations between Germany and the State of Israel. The “Twitteratti” amused themselves with this image; and failed to understand its historical context and contemporary significance.
In this year, in which the West remembers the centenary anniversary of World War One the nation, which was created by fiat out of the Balfour Declaration during the Versailles Conference, celebrates fifty years of diplomatic relations with the defeated nation of the same conflict. History is rhyming, to use Mark Twain’s analogy. Germany has however turned the tables, economically speaking, since then; and now stands as the economic victor in a conquered Europe. What a difference a century makes; and what a difference a half-century makes also.
Observers in the public domain can be forgiven for not seeing what was coming next; however the policy makers who are busy celebrating and rewriting history have no excuse. In fact there is a strong case to be made for accusing them of knowing exactly what was going on and remaining silent. As Edmund Burke said, all that is needed for tyranny to flourish is the silence of men of conscience.
The silence on this occasion was covered by the loud sounds of indignation being made at the UN. Russian troops were stood to on Wednesday February 26th[iii]. According to Time Magazine, the troop manoeuvres were to begin “on the Friday” (February 28th) and to last four days, and involve ships of the “Baltic and Northern Fleets” and the air force. The Baltic and Northern Fleets appear to have been a long way from home. If it was they who occupied Crimea and lined up on the Ukrainian border, their “Shock and Awe” sets a new Winter Olympic record for speed.
Since there were no displays of insignia in the Crimea, we will never know if it was them. Satellite observation would have clearly shown the intentions and capabilities of all these troops; and also from where they were operating. Western defence agencies have been doing this since the Cold War began. Having been alerted, it is incongruent for Western leaders not to have referred to these manoeuvres until it was too late to stop them invading Ukraine; if they had any sincere intention of stopping what was about to take place. They seem to have simply observed and used the information post facto.
David Cameron took a swing at explaining this military surprise, when he said that President Putin had informed him that these were normal drills. Mr Cameron was less forthcoming about when he was first made aware that these military exercises actually were for real by his own observers. Allegedly he only became aware of this, as the rest of the World did when the men in balaclavas, with no insignia, arrived in the Crimea. At the time, the rumour was that they were mercenaries; however no military sources from the West were willing to shed further light on the matter.
The ability of NATO to overlook 15,000 soldiers and all their equipment until the last minute, having been tipped off three days previously that they were in operation doesn’t sound right. The result was an implausible story; in which regime change was occurring in Kiev whilst Russia held coincidental war games on its borders over a weekend. Presumably, part of the war games also involved President Putin seeking Duma authorization to use force in Ukraine; which he also did on the Saturday[iv].
So far no NATO generals have lost their stars or retired prematurely, nor has there been any criticism by the press for NATO missing the ball; which would normally be expected under such circumstances. Missing an invasion of a country on one’s border would seem to be the height of military failure. Perhaps there have been some personnel changes further down the chain of command. If Russia is able to operate with such ease, it says very little about the state of NATO vigilance. Even a token investigation would provide a modicum of credibility to the whole caper. It can all be filed in the bin labelled “Fog of War”.
Let’s give the Western leaders a break; and assume that, even if they did know about the real objectives of the manoeuvres, that Putin fooled them at the last minute; and followed through in Crimea. The angry responses at the UN are then based on embarrassment at having been taken in. Even if this were the case however, it shows naïve political judgement; which seems to resonate very strongly with what John McCain has been saying. The truth will never come out, but the official explanation of what happened is full of holes.
For those readers who like to join the dots, we will then follow the next dot made by Mr Netanyahu in Washington[v]. One suspects that this meeting had been in President Obama’s diary for some time. It is also clear that an item on this meeting’s agenda would be specifically in reference to the American rapprochement with a potentially nuclear Iran.
As America “Pivots” away from the Middle East towards China, Israel feels abandoned. The only way to engage President Obama directly, who has remained aloof whilst “Pivoting”, is by putting his “Pivot” at risk.
Iran’s “Dimona Moment”
Obama now finds himself in the curious anti-JFK position and Netanyahu finds himself in anti-Ben Gurion position. JFK had a similar crisis with David Ben Gurion about Israel’s nuclear weapons development at Dimona; in addition to an invasion of Cuba and a stand-off with Russia. America’s “Pivot” towards the Arab Oil Nations was then put at risk.
Crimean “Bay of Pigs” plus “Ukrainian Missile Crisis”
Ironically today, Russia is doing the invading; and the nuclear threat is to Israel and not from it. There is also however the issue of Ukrainian nuclear missiles, which once were on Europe’s doorstep, now threatening to be back on Russia’s doorstep if the Svoboda Party is to be beleived[vi]. And then there is the controversy surrounding the “shooters”. Dealey Plaza is now Maidan Square.
Maidan Square’s “Grassy Knoll”
In relation to JFK, this topic has become a legend. In relation to the Ukraine, the new legend is being written, entitled “Who Killed the Heavenly Hundred”[vii]. The loss of life is appalling; but the insidious planned execution of this carnage, to create a round number that can be used in this kind of emotive alliteration, shows a level of profane evil beyond civilised comprehension. The invisible fingers on the trigger also think in terms of the century that is currently being celebrated on the Western Front. Human beings (and clearly snipers) attach emotional significance to the number one hundred. Amongst these hundred martyrs, there were also eleven Ukrainian policemen; so the legend can be interpreted in either way depending upon one’s ethnic perspective. As with the Kennedy assassination this also provides scope for plausible denial.
When President Obama was emphasizing that this new crisis is not some “Cold War Chess” game, he was being disingenuous. The term for his predicament is “Check Mate” or “Shah Mat” as the Iranians say. When translated from Farsi, this means “the King is Dead”.
The committee to save the world ii september 16th, 2013
“Now and Then”
As we have noted, since September 2013, President Putin does not get any credit for being part of the “Committee to Save the World”; which makes him the great enabler of the “Pivot”[viii]. He can therefore help to bring the dead “Pivot” back to life again. Thus far, President Putin has received no payback. Even his Sochi spectacle was “dissed” by the politically correct in the West. If his payback was not agreed up front, he then presumably decided to take it in the form of Crimea; however the choreography and lack of bloodshed suggests it had all been carefully agreed in advance. One of the interesting pretexts that Putin used, was the prevalence of Neo Nazis in the Ukrainian opposition on the streets and in the new Government. In fact, one member of the Svoboda Party was listed as calling upon the Chechen separatist Dokku Umarov to ally with the new Ukrainian Government[ix].
The Russian Ambassador to the United Nations drew attention to the Far Right threat to Ukrainian democracy and to the resurgence of anti-Semitism. These malign forces had allegedly been unleashed by the direct involvement of European Union politicians. Germany, as the prime motivator of this involvement, was therefore unleashing the same old malevolent forces again. As a consequence, President Putin was therefore intervening; and putting President Obama’s “Pivot” on pause. Putin’s bizarre interview, during which he announced that there would be no invasion “yet” and characterizing American policy as an “experiment” on “rats”, emphasized the same anti-Semitic themes[x].
There may be method in his madness however. Neighbouring Hungary has become an openly anti-Semitic country; and further west the Far Right dominoes keep falling all the way into what is termed “Core Europe”. The upcoming European elections will show just how far this Far Right tide has risen across Europe. EU leaders must be careful to avoid playing down this trend, which is clearly evinced by the democratic voting process.
Assuming that he was as badly prepped as the general public, President Obama was therefore confronted by two surprise threats to his “Pivot” from beyond the Pale of Settlement; through the agency of Benjamin Netanyahu and President Putin. To confound matters, the events in Ukraine occurred over a weekend; when the leaders of the Free World were having their days off.
“Forewarned is Forearmed”
It is hard to accept this surprise as, on the evening of Saturday March 1st, Haaretz led with the headline “Ukraine crisis changes the script for Netanyahu visit and AIPAC conference”[xi]; well before the meeting. It also suggests a highly developed sense of prescience in Israel about how Ukraine would unfold. But most of all it prepared President Obama’s team; assuming that they were unprepared in the first place.
Putin was inserted as an alleged distraction from the Middle East issue. As we have seen and as the article explained, Putin is actually an integral part of the Middle East issue. The article was subtitled as being a tough sale for Netanyahu with Putin and Ukraine as the competition for American attention. In reality, Netanyahu and Obama have to put Putin near the top of the agenda when discussing the Middle East. The seizure of the Crimea, on the Black Sea, just makes Russia an even more strategic regional player. Putin is therefore not only Netanyahu and Obama’s problem; he is also part of their solution.
A cynic would therefore say that his timely intervention in the Ukraine, on the eve of Obama’s meeting with Netanyahu, was a convenient coincidence. Presumably if Israel can pacify Putin, Obama will have to make some major concession. Obama must then weigh the size of the concession against the value of being allowed to “Pivot”. The article was juicy; and well prefaced with a humorous disclaimer that Bill Clinton had been toppled, by “Monica Gate” at AIPAC, for failing to stand firm with Israel. The elements of threat and plausible denial were sufficient.
John McCain wasted little time capitalizing on the situation; and informed that “we are all Ukrainians now”. Even Sarah Palin, not one noted for foreign policy acumen, was finally vindicated in her Russia call[xii].
Hillary Clinton, with an eye on 2016 and AIPAC, drew direct comparisons between Hitler and Putin[xiii]. Clinton is the first Western politician to implicitly accept the context of the Pale of Settlement; and the importance of Israel in resolving the Ukrainian issue. She showed her fundamental understanding of the issue; and also her intentions and capabilities to solve it in a Presidential manner. Further context was provided by Clinton’s venue for her remarks; which was a 2016 fund raising event in Long Beach California.
Shaking hands with a thirsty “Bear”
By coincidence Benjamin Netanyahu was also in California, ostensibly offering Israeli technology and support to the drought stricken American Bear[xiv].
The “Bear” necessities of foreign relations
On his return to Israel it will be interesting to see if he shakes the hand of the Russian Bear.
“Batteries not included”
When she was Secretary of State, Clinton gave Foreign Minister Lavrov a “strategic reset button”. Presumably it didn’t have any batteries back then; but she will now be purchasing some, with the proceeds of the fundraising and couriering them to Mr Lavrov.
More importantly, the IAEA’s Yukiya Amano, who is acting as the UN watchdog in Iran, reported on March 3rd that,
“[I’m] not in a position … to conclude that all nuclear material in Iran is in peaceful activities[xv].”
The “Pivot” is being circumscribed by events on the ground in Central/Eastern Europe and the Middle East.
President Obama’s foreign policy “appears” to be in tatters. This appearance is misleading however; and can be swiftly corrected by the trading of some territory in other countries. The President’s omission of the keyword “Red Line” in relation to Ukraine, suggests some new border lines will be drawn on the map after an authentic, objective process of observation and evaluation has been done on the ground. The Pale of Settlement itself was created by the placing of wooden posts in the ground, following a line on a map; so this process at least works on paper.
In practice human nature, despite all the enlightened speech from politicians to the contrary, means that it does not work. The Middle East is noted for meaningless borders, “Green Lines” and “Red Lines”, which do not work in practice. The current events in Ukraine are proof that it has never worked, as long as human beings have what is referred to as race memory.
President Putin’s ordering of Russian forces on the Ukrainian border back to base, was a timetabled formality received with euphoria by the markets. Observers should however closely look at what his forces have pulled back from. The Ukrainian Government immediately responded to his initial challenge by mobilising. One of the more interesting mobilizations was the placing of Oligarchs as Governors in some of the Eastern provinces of Ukraine, where the ethnic Russian minority is the majority[xvi]. Ostensibly this was sound policy.
Closer investigation of the Oligarchs chosen, suggests inflammatory escalation potential. A number of the Oligarchs chosen have Israeli citizenship. Nationalist Ukrainian sentiment will therefore be inflamed; and it is entirely likely that the ethnic Russians in Ukraine will react the same way. Race memory and business as usual in the Pale of Settlement will therefore continue to degrade the situation, until external interests resolve matters. The cartoon in the Moscow Times, which illustrated the new status quo, left no doubt in the reader’s mind. The Moscow Times was however careful to omit the Israeli flag from the Oligarch whale.
Ukraine is allegedly going down the same chaotic route as Russia in the Yeltsin era; the outcome of which was anarchy followed by Putin’s autocracy. As it is unlikely that Germany will throw good money after bad, Ukraine will inevitably have to take its chances with the IMF. President Obama wasted little time calling on the IMF to make more resources available to Ukraine[xvii]. As predicted in the “guides for the perplexed”, from the State Department[xviii] and the IMF[xix] in “ ‘Putin’ the F Back in the CFR”, Ukraine is an “experiment” (ergo Putin’s “lab rat” simile) for fledgling American foreign policy.
“For those who are perplexed therefore, by events unfolding in the news and the markets, the guides for the perplexed have been written by the State Department and the IMF. Democracy is to be bolstered; and where it is threatened by income inequality this must be rebalanced. All actions, by policy makers and central bankers in both Developed and Emerging Nations, will be dovetailed along these two broad policy guidelines.”
This policy now seeks to support the advancement of Democracy rather than the backing of regimes. In our vernacular “A friend of Democracy is my friend and an enemy of Democracy is my enemy”, replaces the vernacular of George W Bush which opined that “you are either with us or against us”. The “us” was clearly the U.S. back then; however now it has been replaced by Democracy. Clearly Mr Putin has failed to make the translation. This is hardly surprising, as it was also observed that
“It should also put President Putin on watch, that cooperation with America does not extend to allowing the democratic cause in Russia to be diminished”.
“Not Your Grandfather’s Yalta Conference”
It was also observed that the Ukraine crisis would be used as a lever on Germany to play the “Team Europe” role required by “Team America”. Ukraine will thus become a bone of contention between Germany and America; and once it has passed the point of no return Russia will lay claim to ethnic Russian rump of Eastern Ukraine. This then becomes the point at which Russia declares its intentions and capabilities to fight; and the EU folds and settles for some new lines to be drawn across the Pale of Settlement.
The EU committed 15 billion Dollars in aid, significantly more than was offered by the US, so there are signs that “Team Europe” is stirring[xx]. This aid is conditional upon Ukraine surrendering to the IMF. Further evidence of the arrival of “Team Europe” came from Yves Mersch, who signalled that the ECB is looking for national development banks in the Eurozone to stimulate credit growth[xxi].
A Holistic Chinese Peoples’ Congress
Further global evidence of race memory came from what is being called “China’s 911 Moment”. On the eve of the National Congress (and coincident with events in Ukraine and Crimea) Muslim Separatists carried out an act of carnage on civilians in a railway station[xxii]. China now has the same lowest common denominator as both America and China in relation to the threat of Islamic terrorism. Ostensibly, all three nations are now on the same page in relation to terror; which provides the common ground for diplomacy and concord.
China has however not declared a knee-jerk “War on Terror”; but rather a “War on Pollution”[xxiii] to use Premier Li Keqiang’s words (although defence spending will rise 12% this year[xxiv]). China has taken the holistic view that its current credit bubble is creating the overcapacity and pollution in smokestack industries, which are wasting economic resources and polluting the environment. China will therefore transform itself from a hydrocarbon intensive to renewable energy based economy. The economic slowdown from the hydrocarbon contraction will be met by stimulus from the renewable transformation. In this way, economic growth in 2014 will be sustained at the same 7.5% as last year[xxv].
To avoid the same problem of overcapacity in the renewable sector, National Champions have been chosen through forced consolidation; and credit will be rationed at market derived rates of interest. When Goldman[xxvi] and JP Morgan[xxvii] made the big call, to get long China two weeks ago, one suspects that they had this kind of economic transformation in mind. Had it not been for the events in Ukraine, the headlines (and Chinese equity price action) would have been more reflective of this transformation story. These headlines must now wait in the queue at the news agencies until President Putin becomes tomorrow’s fish and chip wrapper.
At the Congress, Chinese Finance Minister Lou Jiwei flagged a low print of 7.2% GDP as being an acceptable result of the authorities clamping down on the debt bubble, without destabilising the economy[xxviii]. The markets are now primed to accept further economic contraction as being normal rather than a crash symptom. Just to draw a line under any future crisis, the Congress brought in deposit insurance whilst liberalizing interest rates[xxix]. Funds will now flow out of risky Shadow Banking products into regulated and insured bank deposits which pay a higher rate of interest set by the market. This liberalization of interest rates is expected to shave more points off growth, down to 7.2%, but the market has been prepared for this impact; and has been told why in advance by Finance Minister Lou. The Congress was an understated Big Bang, which JP Morgan and Goldman already detonated, that contained plenty of stimulating yang to balance the contractionary yin. China no longer goes for the headline grabbing events, which have become associated with corruption and income inequality. Everything now emphasizes balance and stability.
For our readers who were avidly following the Oscars the best script category, won by the “Second Coming”[xxx], has been heralded with poetry by W.B. Yeats. The script by Bill Gross waxes lyrical about the “gyre” of the “falcons” in his team and “falconers” at global central banks.
Terminal Velocity 2013
Gross’s self-panegyric and concentric guide to relative value looks suspiciously like a “concentric” version of Exter’s Inverted Pyramid (with the absence of Gold), which was used to illustrate the first “Terminal Velocity” report on March 9th 2013. Gross makes the point that the riskier asset classes can still run as long as the Fed can convince the markets that the low price of credit in the bulls-eye is correct for the economic conditions. His latest biopic is timed to coincide with his unilateral seizure of the PIMCO Unconstrained Bond Fund[xxxi]. This territorial seizure, by the autocratic “Bond King”, is intended to capitalize on the tactical “risk-on” scenario that Gross perceives this year. A successful campaign will restore his omniscient reputation and performance; and put the final nail into the departed Mohammed El Erian’s coffin[xxxii].
Alpha Males and Females come out to seek “Alpha”
Early March is obviously the season when the animal spirits of Spring return; and Alpha Males and Females from all nations (or rather “tough but thin skinned leaders” as Hillary Clinton likes to refer to them) come out of hibernation to seek “Alpha”.
It is interesting to revisit what we said about the last Rite of Spring in March 2013; and see if it still applies to the Alpha Female Janet Yellen.
A liberal would ask why Bernanke wishes to preserve the size of the capital markets above the size of the real economy. He has no choice; since this is what he inherited. Looking at Exter’s Pyramid, if he allowed the capital markets to shrink in size, then all the layers above Gold would vanish and we would be back to primitive times. There would be no credit, no growth, no assets, no savings and we would all be fighting each other to accumulate Gold. Worse still, once holders of paper assets saw that the Fed had abandoned them, they would take their money out and drive up the price of real assets in a period hyperinflation. The Fed and QE are a necessity to avoid both depression and hyperinflation in a modern civilization. Exter’s Pyramid is built to create economic growth without hyperinflation; its functioning is its own Dual Mandate.
The absence of the higher layers of Exter’s Pyramid is what is currently being experienced “beyond the Pale” in Ukraine. “Team America” is now trying to create and support the higher layers of the Pyramid in Ukraine; and then to roll this model out for the rest of the Emerging Democracies that need it. Given that US bank lending has been falling and consumer credit has been expanding gradually, Yellen still has no choice other than to maintain support at the base of the Pyramid; so that the credit markets can try and multiply this monetary base across different asset classes. Ultimately, this multiplier effect will begin to leak out of the American capital markets and real economy, into the global economy.
The noises emanating from the Treasury and from both political parties suggest that in fact this is not enough; and that the Tax Code will be used to redistribute consuming power from the “1%” to the “Middle Class”. Janet Yellen must enable this wealth transfer; by continuing to monetize the newly created financial assets which will be associated with the fiscal impact of the transfer. The place to be therefore is near the top of the inverted Pyramid going forward rather than at its base; or on the outer circles of PIMCO’s wheel of fortune. Bill Gross qualifies this by saying that this spin will only last for 2014, because ultimately inflation will require higher interest rates. Assuming that “Team America’s falconers” have only just embarked on the global dimension of the strategy (and that “Team Europe” hasn’t even started yet), it will be premature to exit global risk assets in 2014. Looking at the transformed flavour, of what Gross called questionable, “bacon” being cooked up by China this call looks even more premature.
The mother of all “falconers” was sworn in on March 5th. Her call to arms left none of the “falconers” and “falcons” in any doubt that she will have them all “gyrating” the way she wants in time. She said:
“Since 2010, when Chairman Bernanke stood where I stand today, we have made considerable progress. The economy is stronger and the financial system is sounder. We have come a long way, but we have farther to go. More work lies ahead to complete implementation of Congress’ plan for strengthening financial regulation, the Dodd-Frank Act. I promise to stay focused on moving that process forward as quickly and responsibly as possible and to verify that these reforms are meeting the goal of safeguarding the financial system.”
“I will also continue the work of helping repair the damage done by the financial crisis to the economy. Too many Americans still can’t find a job or are forced to work part-time. The goals set by Congress for the Federal Reserve are clear: maximum employment and stable prices. It is equally clear that the economy continues to operate considerably short of these objectives. I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.”
“I take up these challenges aided by the immensely skilled, talented, and dedicated men and women who comprise the Federal Reserve’s staff. Our staff constitute one of the Fed’s greatest strengths and I am proud to serve with individuals who exhibit the highest standards of professionalism and integrity. They work tirelessly, day in and day out, to serve the public interest. Their skill, creativity and perseverance enabled the Fed to do its part to meet the grave threats our nation faced in the financial crisis and then persevere in a disappointingly slow recovery. And their knowledge, analysis and judgment will be indispensable in fulfilling the mission of the Federal Reserve in the years ahead.”