Age of Wisdom, Age of Foolishness (41)
The global brand of dictatorship is making a strong comeback in the democratic world. In the emerging markets, some say that it has never been out of fashion.
“Draghi and Jensie”
In Age of Wisdom, Age of Foolishness (40) “Candide” it was suggested that Mario Draghi had aligned himself with Jens Weidmann’s crusade to bring German productivity reforms to the Eurozone. Draghi’s lambasting of Italy at his last presser[i], for creating a recession through political inertia which translated into economic reform inertia, seems to have been timed to engineer political change to the democratic process in Italy.
“Mattie and Angie”
As a consequence of the dictatorship of Mussolini, Italy evolved the necessary checks and balances between the upper and lower houses in its parliament. These checks and balances have been singled out for criticism, because they allegedly create a degenerate political system; which is unstable and leads to perpetual elections and weak governments.
Weak governments have been associated with failure to bring economic reform. Matteo Renzi’s historic victory, on the day following Draghi’s lambasting, is therefore no coincidence. Renzi was able to seize power from Italy’s Senate, in the name of economic reform[ii]; so that the balance of power created by the democratic checks and balances has been tipped in his favour. Italy therefore finds itself in the position of undermining its own democratic process, in order to conform to a German directive.
This new form of Italian dictatorship ostensibly concentrates power in the hands of an elected Prime Minister; however it can be seen that this elected official is in fact an agent of devolved power to an external policy maker. It is interesting to note that this external policy maker is however not the European Union, but is in fact Germany. The European Union increasingly resembles a sock puppet which conceals the hand of Germany.
Astute observers will observe Europe heading back down the road to dictatorship; just at the same time that it takes a more robust position in foreign policy. The hardening of the position in foreign policy corresponds to the strategy to stand up to Russia; which therefore forces Europe to go on the search for new sources of hydrocarbons.
Historians will understand that Germany’s industrial engine, that now drives the continent, is a great consumer of energy, foreign labour (forced or otherwise) and raw material inputs; the search for which has therefore necessitated military adventures in the past. These military adventures have always been preceded by the concentration of power in the hands of a Kaiser or a Chancellor. This concentration of power has also always involved the abuse of the democratic process; with the aid of imagery and alleged foreign threats. The same formula is being applied today, even though the process has become more subtle and amorphous.
Age of Wisdom, Age of Foolishness (40) “Candide” also suggested that Germany’s superpower status was starting to emerge. Recent events in Italy evince that this emergence is already at an advanced stage. One would therefore expect that America will increase its espionage activities against Germany, rather than reduce them in the face of criticism from this emerging superpower.
“Putie and Xie-Xie”
Statist Strongmen Putin-Xi See History’s Capitalism Clash
“Dilma and Modi”
The shift towards dictatorship in the democratic nations may be understood as a rational response to the threat from the emerging dictatorships in the BRIC nations; which was spectacularly announced at the recent Fortaleza Summit.
The political gridlock in Washington, combined with the rise of the dictators in the emerging world, has also caused President Obama to become more dictatorial in style[iii].
His emerging dictatorship resonates closely with the observations of his predecessor; who began his Presidency with the words:
“If this were a dictatorship it would be a heck of a lot easier …. just so long as I am the dictator.”
Nine months later, geopolitical events effectively created the conditions for dictatorship; in order to prosecute a war against an invisible global enemy who was everywhere and nowhere simultaneously. The precedent for any President is very clear.
President Obama must however be careful how far he goes with this; because it provides collateral for those who currently wish to impeach/sue him for being undemocratic. His dictatorial style is seemingly unassailable when it is in reaction to egregious cruelty or threats to American interest. The current geopolitical headlines therefore lend themselves to the President’s emerging dictatorial style. Geopolitical crises are catalysts and opportunities for change, which a robust democracy normally prevents from occurring. These crises must be skilfully managed and represented, in order to allow the changes desired to be executed.
President Obama must also keep a close eye on Hillary Clinton. In her boldest move yet to secure the Democratic nomination to run for President, Clinton used the current global crises to distance herself from the Obama administration[iv]. According to her:
“Great nations need organizing principles, and ‘don’t do stupid stuff’ is not an organizing principle,”
She then went on to opine that what is alleged to be Obama Doctrine, is in fact a “political message” and not a “world view”.
“Really Stupid Stuff.”
“It ain’t me, It ain’t me, I ain’t no fortunate son”.
Age of Wisdom, Age of Foolishness (31) “The Longest Day”
The real “stupid stuff” to which she refers, wasn’t just Obama’s misguided photo-opportunity with the deserter Bargdahl’s parents[v].
There was further evidence of the really “stupid stuff” last weekend, when Obama took the initiative of arming the Kurds against ISIS[vi]. These are the same Kurds, whose cargo of Crude he just impounded off the coast of Texas[vii]; seemingly because he wishes them to remain part of Iraq. This hope seemed to be signalled by the condition, of political inclusivity in a new government, for his continued air-strike support; which he levelled at the Maliki administration. The weapons being sent to the Kurds could easily be fired against the troops from the Maliki government however; who have recently been put out onto the streets in greater force[viii]. Maliki is responding to what he sees as an American attempt at regime change; which will replace him with Haidar Al-Abadi[ix]. Thus by trying to use the democratic process to engineer change, the Obama administration is starting a civil war, knowingly or otherwise.
The interesting bit, about the latest attempt at regime change, is that it is creating a schism within the Shi’ite majority ethnic group itself[x]; since both Maliki and Al-Abadi are Shi’ites. The Obama administration is ostensibly tweaking the politics to allow a Shi’ite majority that includes ethnic minorities; which on the face of it looks like a classic case of democracy. A more strategic observer would opine that the Shi’ite faction has been divided. Given the schismatic backdrop across the whole country, this therefore looks like a classic case of divide and conquer.
The American weapons in Kurdish hands could also be used to defend the new oil producing state of Kurdistan, which was first recognised by Israel[xii]. If his strategy is to unify Iraq, then Obama’s tactics evince no coherent tactical execution plan; other than to escalate factional armed conflict which will lead to the ultimate collapse of the state. One can thus only conclude that the real strategy is to dismember Iraq; but to do so in a deliberately confused manner which cannot be clearly understood for obvious political reasons.
Clinton must also be involved in the really “stupid stuff”; because the ISIS rebels were allegedly being armed with Qadhaffi’s confiscated weapons[xiii], before the operation went disastrously wrong in Benghazi, when she was Secretary of State. Clinton finds herself at risk of impeachment over the really “stupid stuff” in Benghazi; so hypocrisy may get added to the list of impeachable charges against her.
Hillary Clinton’s prescient “world view” was announced to the AJC[xiv] some time ago; and clearly seems to resonate with the might is right doctrine, which is now asserting itself on the ground. Iran in comparison to the “silly” Americans is acting with great skill and dexterity. The Iranian Supreme National Council announced its support for Al-Abadi[xv]; which ostensibly aligns Iranian and American interest. In practice, this means that Iran cannot be blamed for the sectarian strife which is causing the breakup of Iraq. The bottom line however, is that Iraq still remains under political control of a nominally Shi’ite Prime Minister. One should therefore say (and no doubt many will soon start to say) that America has in fact aligned its policy with Iran’s.
Age of Wisdom, Age of Foolishness (39) “OECDean’s ’14” observed what was termed “Mission Creep”; as the Eurozone moves towards deeper military engagement in Iraq, in order to secure alternative supplies of Crude Oil as sanctions against Russian blowback. France had embarrassed itself by not showing greater solidarity with its Dutch brothers and sisters, after their loss in the Malaysian Airlines tragedy over Ukraine, by consummating a warship sale to Russia. France therefore needed to make up for its loss of political capital; and did so by being the first Eurozone nation to provide military support to the beleaguered Kurds in Iraq[xvi]. France has therefore shown solidarity with its Eurozone brothers and sisters by defending their energy security. The weapons supplied by France, could so easily be used to defend an emerging autonomous oil producing nation of Kurdistan. As the Eurozone creeps towards military intervention in Iraq, so Kurdistan creeps towards nationhood.
Age of Wisdom, Age of Foolishness (37) “The Third Mandate”[xvii] suggested that “economic warfare is therefore underway”; between the BRICS and the established world economic order dominated by the developed nations. This view was recently supported by the behaviour of the European Union. Last week the European Union Chamber of Commerce opined that European companies are being deliberately targeted for abuse and exploitation by Chinese investigators[xviii].
“But in this country it is necessary, now and then, to put one admiral to death in order to inspire the others to fight.” (Candide)
(Age of Wisdom, Age of Foolishness (40) “Candide”)
Clinton’s “world view” seems to resonate strongly with that of Dick Cheney. In Age of Wisdom, Age of Foolishness (40) “Candide” Cheney’s “world view” was observed lamenting the cowardice in American foreign policy, with the following references:
“The “Buck” for all this insurrection however stops at the White House; at least according to Dick Cheney’s version of the story.”
‘America appears to have gone soft; and lost its stomach for a fight. President Obama is the epitome of this alleged cowardice and defeatism; or so the story goes. American cowardice has emboldened its would-be challengers to become more aggressive and overt in their threats. The American “Warmongers” are now coming back; to “cultivate the garden” to grow the way it used to; and to take out the poisonous weeds.’
Source: Business Insider
Last week, Cheney began to articulate this “world view” more specifically; in an interview on AM 970 The Answer’s “The Cats Roundtable“[xix]. He is now moving to erase the memory of the perceived Bush failure in Iraq, which led to the Presidency of Obama. Current foreign policy failure is being framed as Obama’s failure; which is creating an unstable world and risks for America. This risk is being compounded by Obama’s military cuts. Following this logic, America therefore needs to build up its military capabilities to meet these threats. The mendacity in this argument, which dissociates the current crisis in Iraq from Bush with the strapline “They can’t blame George Bush anymore”, is very seductive; but still has yet to be adopted by the majority.
A consensus however is emerging. This consensus is that Obama has simultaneously created foreign policy threats and weakened American military capability to deal with them. This is the real “stupid stuff” which Clinton is alluding to. The next US Presidential election will therefore be dominated by foreign policy and not the economy. The US Presidential election playing field has therefore not just been levelled between the GOP and Democrats; it has been tilted in favour of the former.
The economic war between the BRICS and the developed nations was outlined in Age of Wisdom, Age of Foolishness (40) “Candide”. This conflict was qualified with the observation from Age of Wisdom, Age of Foolishness (38) “Rosebud” that:
“This fight must however occur in the nations who are undecided over which rival trade bloc to join, in order to help them make up their minds or lose everything for choosing the wrong side.”
Africa was seen as a classic example of the “undecided”. It was very interesting to see that Australia has also slipped into the “undecided” category, by nature of its abundance of raw materials and close proximity to Asia.
The Reserve Bank of Australia has recently been running the numbers; on where its economic interests lie going forward[xx]. This analysis is based on value added rather than aggregate growth numbers. Aggregate growth numbers will always put China ahead, by nature of its massive population. Economic value added is however more important; and in this respect the RBA has concluded that America and Europe are way ahead of the Chinese. The analysis finds that America is 100 per cent more important to Australia than China. This has got important implications for Australian policy makers.
Currently their economic policy is predicated on Chinese growth. In an economic war, in which China’s debt bubble driven growth is popped, Australia will fare very badly. Furthermore, since quality rather than quantity is more important as the value added analysis suggests, Australia is also at risk from the alleged economic slowdown in the America and Europe coming from the Ukraine and Middle East crises, in addition to their economic war with the BRICS. Australia’s predicament highlights the real dangers which policy makers are currently trying to quantify and respond to. The country thinks that it has diversified its risk and covered the bases. The truth is that the risks from all the sources of Australian growth are strongly correlated. The RBA is however making the case for Australia to bet on the developed nations, rather than China. The RBA clearly sees itself in the developed nations club. Australian politicians, who think otherwise, may soon find an economic crisis which throws them out of office occurs.
Evidence of the unfolding conflict between China and its observers, most notably the IMF, can be seen in the battle to create consensus on the Chinese economy and desired policy going forward. The IMF has made it clear[xxi] that it believes that China is in unsustainable debt- bubble financed territory. The BIS recently joined the IMF position[xxii]. China however continues to publish data which suit its own book. The latest official growth[xxiii] and credit[xxiv] data suggest that the Chinese economy is slowing and therefore needs a monetary stimulus. The IMF and BIS say that credit has already expanded into the danger zone. Consensus is being built by the IMF which is showing that China is on the edge of another bursting bubble. So far however, speculators are willing to pump some more hot money into Chinese assets.
“It is better to live your own destiny imperfectly than to live an imitation of somebody else’s life with perfection.”
( Anonymous, The Bhagavad Gita)
(Age of Wisdom, Age of Foolishness (40) “Candide”)
Age of Wisdom, Age of Foolishness (40) “Candide” explained how India had just torpedoed the WTO breakthrough deal at Bali[xxv]. India was observed returning to the domestic status quo, which former PM Singh had failed to reform, where various domestic interest groups hide their franchise behind trade barriers and subsidies. There are signs that the cost of return to this status quo, in the form of Stagflation, is already being paid. The latest GDP data signalled stagnation, which was accompanied by a simultaneous rise in inflation[xxvi]. As noted in Age of Wisdom, Age of Foolishness (40) “Candide” RBI Governor Rajan[xxvii] is already blaming the developed nations’ central banks for the next crisis, which is just starting to show up in the data.
Age of Wisdom, Age of Foolishness (40) “Candide” suggested that:
“The upcoming debate at Jackson Hole, over whether to Taper or land the Helicopter, is now being prepared for.”
Consistent with this theme, various statistical references began to appear last week; which support the case for the Helicopter, as consensus is created in the public domain.
European consensus has two underlying German themes. Firstly, Europe is allegedly now being dragged into recession by a slowing German economy[xxviii]. Secondly, the European economy has just been given another blow by the headwind emanating from the fallout from sanctions against Russia[xxix]. The latest ZEW survey signalled that all is doom and gloom in the minds of German investors[xxx].
The situation in France is so bad that the Government has just abandoned all its 2014 deficit targets[xxxi]. The Russian situation is emerging as a convenient excuse for those nations, who were pushing for slackening fiscal austerity constraints, to abandon all commitments to fiscal discipline. In addition to abandonment, any future transgression can also be blamed upon Russia.
The German response to the unfolding economic contraction is also critical to the country gaining more ground on its neighbours; and leading from the front. Despite the calls for fiscal stimulus from its neighbours, Germany is pressing ahead with its balanced budget strategy. Germany clearly wishes to set the example for the Eurozone to follow. Germany’s behaviour also suggests that it wishes to go into the next economic slowdown with a balanced budget, rather than a deficit[xxxii]. Germany will therefore not have the same magnitude of debt crisis which its more indebted neighbours are already burdened with since the Credit Crunch of 2008. Germany therefore will have room for a future fiscal stimulus, which will not punish its finances and credit rating. Germany is therefore poised to weather the next storm and bounce back even stronger. It will then use this model of economic discipline as the example, which it will then try and apply to its neighbours.
Source: Business Insider
This consensus stands directly against the undeniable fact that Russia is such a small part of the global economy, that it cannot possibly take the mighty German economy down all on its own[xxxiii]. The consensus seems to support Montaigne’s view that people believe in most what they least understand. This consensus also supports our contrarian view that the Russian inspired sell-off is creating value to be bought; especially as this negative sentiment will lead to easier monetary policy. If the emerging consensus ever starts to discount Russia’s response to Germany’s emergence as a superpower, the sell-off would be entirely justified however; and would correspond to something much more dangerous.
“Low Hanging Fruit Ready to Be Picked.”
Age of Wisdom, Age of Foolishness (18) “Beyond the Pale”
European policy makers are however having much more success picking the low hanging fruit, in the Eastern Eurozone countries, to create the consensus that contagion from Russian is now spreading from East to West[xxxiv].
The more interesting European dynamic came from Spain last week; when Prime Minister Rajoy started to prepare early, for the next elections, by devolving fiscal control to the regions[xxxv]. The reaction from the EU and Germany to this move will be very interesting to watch. Thus far, the party line emanating from Brussels and Berlin is that fiscal austerity should be tightened. It would seem however, that Rajoy has reached the limit of his political life; in terms of how much more austerity he can engineer. If the EU and Germany allow him some fiscal latitude, it will confirm that the point has been reached at which the Eurozone risks political disintegration if more austerity is applied. Spanish inflation is also falling at its fastest rate since 2009; suggesting that the economy is accelerating back into contraction[xxxvi]. A tipping point has therefore been reached in Spain.
Age of Wisdom, Age of Foolishness (25) “Pride and Extreme Prejudice”.
The obituary of Abenomics was written in Age of Wisdom, Age of Foolishness (25) “Pride and Extreme Prejudice”[xxxvii] .The Sales Tax hike created the inflation and contraction in consumption, which was not overcome by a rebound in exports from a weaker Yen. Abenomics is Stagflation by another name. The latest GDP release[xxxviii] confirmed that Abenomics has failed. The response has however been perverse. Rather than punish Japanese risk assets, speculators have assumed that Abenomics has failed because it has not gone far enough. Behavioural finance principles suggest that when faced with failure, an individual will gamble for even higher stakes. Abe appears set to become even more aggressive on the erosion of the Yen. Japan is just crossing the point of no return, at which it finally loses control of its economy and capital markets simultaneously. He may be initially rewarded, as speculators buy the rumour; however the next time they sell the facts it’s game over.
“They Think It’s All Over….”
“It’s a game of two halves.”
Age of Wisdom, Age of Foolishness (40) “Candide”
British consensus follows on from Danny Blanchflower’s suggestion that there is enough slack in the economy to prevent the need for tightening[xxxix]. This has been seized upon by economists, the majority of whom agree with Blanchflower’s analysis[xl]. This support was then underlined by the release of inflation data; which shows that the price war between the supermarkets is keeping a lid on inflation[xli].
More worryingly, Blanchflower’s thesis was supported by the recent release of the IPRR think tank report; which suggests that the recovery in employment is actually a secular shift towards self-employment as companies cut costs through lay-offs and outsourcing[xlii].
Company balance sheets and cash flows may show strength; but this is born at an aggregate real economic cost by the labour-force who ultimately pay the taxes and does the consuming. This suggestion is supported by the latest data from the Office for National Statistics (ONS). The latest data from the ONS actually shows both wages and unemployment falling[xliii]. The UK is apparently enjoying a productivity miracle.
The real enjoyment is however reserved for the Bank of England; since it now therefore has time and justification to land the Helicopter. The Bank responded with alacrity, by cutting its inflation and employment forecasts[xliv], in preparation for Carney to switch gears and kill the consensus for early rate hikes. As we saw in the American economy, private corporate health is the actual signal of real economic weakness. It is therefore no wonder that both the US and the UK central banks are seriously trying to permanently increase the money supply to sustain the consumer.
Cameron, Osborne and Carney will try and talk up the productivity miracle; but only a fool would buy it. The real story is that there has been no economic recovery. Carney will now have to land the Helicopter skilfully; whilst Osborne and Cameron hope that it lands in time to buy them some votes from an electorate whose real incomes are falling.
Age of Wisdom, Age of Foolishness (37) “The Third Mandate”
Stanley Fischer is playing a pivotal role, in creating American consensus, because he hopes to have his “Third Mandate”[xlv] adopted. This will give the Fed the opportunity to dig itself out of the hole created by QE; through being given a mandate to regulate asset prices rather than growth and inflation. Fischer’s latest comments[xlvi] were aimed at building consensus; that the falling labour force participation rate, in addition to weakening housing and geopolitical headwinds are creating a scenario which vitiates against the Taper followed by the Tightening. In fact his analysis suggests that easy policy, followed by easier policy is now desirable.
Consensus is also emerging that America is enjoying another productivity miracle of sorts[xlvii]. The recovering economy and skill shortages are finally causing employers to tap the vast reserve of unskilled labour in the classification known as Long-term Unemployed. Unfortunately however this demand for skilled labour is being met with a supply of labour, which, although unskilled, is willing to work for much less than its skilled competition. The alleged rebound in worker compensation, which caused the inflation inspired sell-off in the US equity markets, is therefore baseless. Employers are willing to hire unskilled workers and tolerate their ineptitude, because they are cheap. A faux productivity miracle is therefore being created.
Output is constrained, because those who produce it lack skills to produce it in volume; but since these unskilled workers are so cheap to employ, the cost per unit of output suggests a productivity increase. What all this means therefore is that when the Fed Doves are done with worrying speculators about geopolitical headwinds; they can then start opining that the productivity miracle means that another wave of monetary easing will not be inflationary. Markets sell-off sharply to discount the headwinds and then rally back and then some more on the scenario of a permanent increase in the money supply, which is not inflationary because of the productivity miracle. The lay up for Jackson Hole is therefore going well.
“Garbage In, Cherries Picked Out.”
Age of Wisdom, Age of Foolishness (39) “OECDean’s ’14”
The New York Fed is doing its best to create the market consensus that Fischer and Yellen need at Jackson Hole. Age of Wisdom, Age of Foolishness (39) “OECDean’s ’14” observed how the New York Fed was making the perceived inflation threat disappear, with the creation of the new Underlying Inflation Gauge (UIG).
The July Survey of Consumer Expectations (SCE)[xlviii] helped to build the new consensus. The survey was sufficiently mixed to put another question mark over the Hawk consensus, that the Taper will soon be followed by the Tightening. Whilst those surveyed believed that it was easier to find a job, they also found that the compensation in the new job would be lower. Inflation expectations remained flat over the medium and long-term. In addition, whilst income expectations declined, access to credit expectations improved. There is very little in the SCE that supports the Hawks; and in fact the scenario envisioned supports the case for continued loose monetary policy for longer.
“Playing Soon at Jackson Hole.”
Age of Wisdom, Age of Foolishness (40) “Candide” explained how the Hawks at the Fed would find themselves on the wrong side of history, for advocating tighter monetary policy at a time when America faced geostrategic challenges globally and a broken recovery domestically.
The most interesting consensus building, as we approach Jackson Hole, is that the world is drowning in Oil again[xlix]. American Shale has shielded the global economy from the current geopolitical crises in Russia and the Middle East. It has also created a huge cushion for America to pursue its own interests single-mindedly; whilst it is unburdened by the issue of energy security in the short term. The consensus is now moving from American Shale being the saviour; to it being the source of Deflation risk as the geopolitical headwinds sap demand for Crude Oil.
Source: Business Insider
Supply is seen to be running well ahead of demand[l], even though this supply is constrained by the headwinds blowing from the Middle East and Russia. The Hawks at the Fed will therefore find themselves drowning in Oil, as this Deflation risk gets amplified en route to Jackson Hole. There is also another interesting dimension to the emerging Oil story. Age of Wisdom, Age of Foolishness (40) “Candide” opined that:
“The interesting take away from all this, is that Russia is set to be the big loser. President Putin is clearly portrayed as the bad guy, even though there are three other BRIC leaders who are his confederates.”[our emphasis]
In a world drowning in Oil Russia will be the BRIC, at the bottom of the pool, who nobody wants to dive in to save.