Age of Wisdom, Age of Foolishness (23)
In Age of Wisdom, Age of Foolishness “Jeux Sans Frontieres”, the green shoots of a new scion of the family genus Bush were seen emerging from the portrait exhibition of the 43rd President of the United States.
Real world leaders paint by numbers
“41st…. 43rd …. 45th….
A “Quantum of Bush” aka “Putin’s Dog”
Number 43 also cryptically reminded his audience of the subject of “Putin’s Dog”, with the gravitas which is supposed to imply the same arcane wisdom and authority as the subject of Schroedinger’s Cat[i]. It was suspected that these green shoots hoped to grow into US President Number 45 in the year 2016. This suspicion was recently confirmed, when Governor Jeb Bush announced that he would make a decision by year end on whether to run in 2016[ii]. His decision will no doubt be heavily influenced by the unravelling of the Obama Administration’s foreign (and domestic!!!) policy on the Cold War chessboard, which allegedly does not exist any-more.
The lengthening shadow
This picture just seems to be going from bad to worse, ever since the shadowy broad brush strokes were applied to Obama’s canvass (and the shadow was cast across Mrs Merkel’s face) by Prime Minister Netanyahu, when he jetted in to AIPAC on the eve of the Crimean annexation[iii]. Prior to this visit, the geopolitical landscape looked so bright to “Team Obama”. What is more worrisome for “Team Obama, is that cartoons of these comedic policy failures have now been scribbled in the public domain by Seymour Hersh[iv]. Clearly Edward Snowden is not the only rat in the leaky ship of American national security infrastructure. “Reliable sources” have confirmed that the broken “Red Line” of chemical weapons in Syria was a false flag waved by Turkey; and that the American embassy in Libya was a conduit for weapons seized from Gadhafi and re-routed to the Syrian rebels. Not only have “Team Obama’s” clandestine operations been exposed, but so have their allies; making future clandestine cooperation impossible.
President Obama by now, must no doubt be thinking that he should have been more conciliatory towards Israel and Russia in the first place. Now it appears that both leaders have decided to punish him by exposing the details of these foreign policy failures to the press. “Team Bush” also seems to have uncannily timed its entrance with alacrity, to coincide with these policy failures; as also has “Team Clinton”. Obama must be looking around the table and wondering if he was deliberately walked into a trap.
“A ‘Change’ we can believe in”
In Age of Wisdom, Age of Foolishness “Jeux Sans Frontieres”, we also suggested that it would be Bush v Clinton in 2016. The good natured banter between “W” and “Slick Willy”, at the recent NCAA Championship Final, suggested that partisanship is over and will be replaced by civilised dynastic rivalry in 2016[v]; in what might be termed as a “lay–up”. Confirmation of this civilised form of bipartisanship came when Hillary Clinton then announced that she was considering whether to run in 2016[vi]. No doubt Bill is waiting for his revenge on Obama for denying Hillary her birth-right[vii]; and Hillary will be waiting for revenge on Samantha Power for calling her a Monster[viii]. Bush v Clinton is currently the fantasy politics game-players’ game of choice, which looks set to become reality in 2016. Just to provide authenticity, Rand Paul has taken up the gauntlet from his father; and begun to berate Dick Cheney for driving the Iraq War in order to enrich himself and Halliburton[ix]. A rational observer would ask why Rand Paul would chose now of all times to use this rhetoric. The only rational conclusion is that he sees “Team Bush” warming up on the court.
Americans have had a “Change” that they could not understand and ultimately don’t believe in; now it is time for political business as usual with household names that they can believe in. If either dynasty wins, “Team America” will be the outright winner. A divided Superpower is not an entity that can face its geopolitical foes and defeat them all. The recent hand-wringing at the Senate Foreign Relations Committee, signalled just how worried “Team America” is by its foreign policy failures in the new “multi-polar” world[x].
Both sides of the Isle must share the blame. The Republicans pushed the economy over the brink and enriched the emerging nations, which are now challenging America, with debt financed consumption of their exports. The Obama Administration has “Pivoted” to face China and failed to secure American interest in Europe and the Middle East, so that it is now in no-man’s land.
The sublime conclusion is that “Team Obama” has failed; and that it is now time for the safe hands of either “Team Bush” or “Team Clinton” to move the chess-pieces on the Cold War chessboard that allegedly does not exist. Presumably the inaugural speech that one of them will make, is to inform that the Cold War is back on. It will be impossible to defeat all foes simultaneously, so “Team America” must prioritise its targets going forward; and defeat them individually.
For our readers who don’t believe the thesis that the geopolitical tectonic plates are shifting, we suggest they ask themselves why the Congress is still dragging its heels on ratifying the G20 agreed increase in funding and change in voting structure of the IMF[xi]. This pact was agreed by G20 in 2010 and it is now 2014. The global economy is stalling out just as America “Tapers”, yet America sees no urgency to bolster the IMF’s role as first responder in the next crisis. A rational individual would conclude that America has no interest in supporting the IMF in closing the gap between the emerging challengers and America’s leading status.
Thus far, at the time that this article has gone to print, “IMF Spring” should be noted as a point in time at which global consensus is evaporating just as economic growth is also evaporating. The churlish sniping between the head of the Indian Central Bank and Bernanke, over Fed QE policy, is a classic illustration of this collapse in global consensus[xii]. The emerging nations have defaulted back to their original blame of QE and now lack of further QE, as being deliberate American unilateral actions with total disregard for global responsibilities.
Since America is now into the race for whom will be in the White House in 2016, this global fracturing can only become exacerbated. There may also be those on the right of the American political spectrum who believe that this fracturing is also in America’s strategic interest ultimately. Angela Merkel has the opportunity to provide the huge carrot of a US-EU Free Trade Deal in upcoming negotiations, to remind America of the benefits of global cooperation[xiii]. Such a deal would potentially unlock American Shale Oil and Gas exports to energy poor Europe; and weaken Russia in the process.
“Team Obama’s” fear of military action has been seized upon as a strategic weakness, by those who love nothing better than a good fight that involves copious amounts of military spending. President Putin has therefore wasted little time in starting the next annexation of Ukrainian territory[xiv].
Prime Minister Netanyahu carved out some more territory for settlement by rejecting all further “high level” dialogue with the Palestinians[xv]; and shutting off all budget transfers that underpin the elected democratic Palestinian political infrastructure[xvi]. Logic now suggests that Iran will fund the budget that has been cut by Israel, thus drawing the front lines established between Israel and Iran in Syria right up into Israel itself. Said Iranian finance will no doubt find its way into the hands of the unelected Palestinian infrastructure which has been linked to terrorist organizations.
From here it is a small leap of the imagination to see how things then deteriorate into direct conflict between Iran and Israel at the heart of a wider issue of the War on Terror. President Putin then went on to engage in an “Oil for Goods” trade negotiation with Iran[xvii], in retaliation for being dumped out of G8; which seems reminiscent of the infamous “Oil for Food” deals with the embargoed Saddam Hussein. Suddenly the Middle East (and the War on Terror) becomes part of a new Cold War which allegedly does not exist any-more according to President Obama. The President’s observation seems to be getting very wide of the mark. The world is right back to where it was before he was elected; so ostensibly he has achieved nothing.
The eye in the sky seems to working this time
By divine providence the clouds over Central Europe miraculously parted for the satellites, which had allegedly failed to see Russian troop deployments during the first Crimean incursion, to reveal the build-up of Russian forces along the Ukrainian border[xviii]. A full scale civil war and Russian intervention can therefore be confidently expected and hopefully discounted by financial markets without too much volatility this time. Even Iran stuck the boot in, in a way that plays straight into the hands of both Israel and Russia, by nominating a former American Embassy hostage taker as its UN Ambassador[xix].
Just to kick the President when he is down, China boldly announced that it is “uncontainable”[xx]. All these players seem to have a national interest in dialling back to the Cold War; so they can therefore help each other by helping themselves. A Hollywood scriptwriter could not have done better in creating this new Cold War plot. All of the players are ostensibly following their own narrow national political agendas; however each national agenda complements that of the other player. One could be forgiven for thinking that all of them got together and decided to take President Obama down.
Success “had” many fathers (and a mother!!!)
“Team Obama’s” best response was to make Catherine Sebelius the sacrificial lamb to the slaughter[xxi]. As his foreign policy falls apart, the President is trying to salvage his domestic policy centre-piece of Obamacare” before he becomes a total laughing stock. The tactical objective is to focus Americans’ attention away from international policy failures to matters closer to home.
Attention may however focus on the hypocrisy of the Administration’s optics on gender equality. “Team Obama” prides itself on how it handles gender equality; however when it comes to pay, this seems to be far from true. One could argue that the Administration employs more women to keep its wage bill (and hence the Federal Deficit) down!!!
It is starting to look as though being the President who liquidated “OBL” will not be enough of a laurel to relax on in posterity; especially as Hillary Clinton may claim this trophy scalp in 2016. As Napoleon said (and Sebelius has just found out), success has many fathers but failure is an orphan. The success of the “OBL” liquidation had many fathers (and a mother!!!) in the Situation Room.
Human nature and memory is such that the recent events will frame how Obama’s Presidency is remembered. It is not looking good.
The “Pivot” has become unhinged by Ukraine and the Middle East; and now America finds itself “Pivoting” into an “uncontainable” adversary. As the 2016 Presidential election approaches, the situation will have become so fragmented and volatile that the average American voter will be longing for the simplicity of the good ol’ “Neocon” days, when the good guys wore white hats. Hillary Clinton’s “Smart Power”, having been shown to be a shambles during her handling of the Libyan debacle, will thus face off against the simplicity and continuity of “Team Bush”. A betting man would have to give “Team Bush” the edge over “Team Clinton” at this point in time. Rupert Murdoch, a good ol’ “Neocon” and a businessman who’s fortune has suffered during the “Change” period, wasted little time in mobilising his media resources for “Team Bush”[xxii].
It’s amazing what words can do
On the subject of political capital, Mario Draghi seems to be running out of it. Back in July 2013 he promised to do whatever it takes; and at the last ECB meeting he talked about “unanimous consensus” to do something unconventional. Christine Lagarde’s patience is running out and so is that of investors. It is time for Draghi to do something rather than say something. All that he has done so far is to unwind the OMT, which has actually tightened credit. Markets have however rallied with his words, so that there is a large fundamental valuation disconnect between expectations priced in and current policy actions. Commentators are of the opinion that the ECB will buy Asset Backed Securities (ABS) because sovereign deficit monetisation is “verboten”; and the banks have encouraged this view since they wish to roll back tighter BIS capital adequacy rules.
In an amusing U-Turn, the toxic weapons of mass destruction, which allegedly took down the European banking system are now being hailed as its saviours[xxiii]. The banks would also like to stuff these dodgy assets onto the ECB balance sheet at ridiculously tight credit spreads. The ECB has been joined in this defeatist U-Turn by Mark Carney at the Bank of England[xxiv]. Carney has been criticised in this series of reports for being sans policy and hence sans credibility. To give him credit he now seems to have found a policy to apply, even if it belongs to the ECB. Having created a bubble in real estate, through blindly serving his recruiter George Osborne’s election gamble with the “Help-to-Buy” scheme, Carney understands that the toxic mortgage backed securities which he is helping to create will ultimately need to find an inflated home of their own. He intends to house them on the Bank’s balance sheet.
On our Odyssey, which began at the monument of Exter’s Inverted Pyramid[xxv], we will now list Frankfurt as the latest port of call. Clearly Mario Draghi’s “M.O.” also operates on the principle of Exter’s Inverted Pyramid, despite what the Bundesbank likes to think and say to the contrary. The ECB is now in the process of buying the middle layer (“Corporate & Muni Bonds, Securitised Debt and Listed Stocks”) of the Pyramid associated with ABS. We also strongly suspect that the “Plunge Protection Team” at the ECB has been buying the Listed Stocks component, by way of equity index futures on the opening and closing times of the European markets.
Draghi’s cheap talk has now placed the ECB in the situation in which it must take credit risk and also accept moral hazard if it purchases ABS. His bluff will get called at the IMF meeting in Washington. Not even the Fed has dared to go to the ECB’s moral hazard extreme (yet). Christine Lagarde is polishing her spoon, to eat her classic dish of Gallic revenge cold, when Draghi is served up. His mistake was to politely ridicule the IMF during his last press conference for its bias in advice for the ECB over the Fed. Lagarde did not rise to the insult at the time; and instead politely warned of the upcoming risks in European Banking Union involving an undercapitalised resolution authority[xxvi]. The IMF elaborated that the European risk would have a systemic impact on the global financial system. The size and scale of this impact is just starting to unfold.
Beware of “PIIGS” bearing primary surplus gifts
“Bulls Make Money, Bears Make Money and ‘PIIGS’ Get Slaughtered”
The problem for the ECB has been compounded by the fact that it has been played by the weaker nations[xxvii]. Rather than press ahead with economic reforms, the weaker nations have cut current expenses by firing government employees, in order to create primary budget surpluses which allow them to continue to roll over their existing debts at a low rate of interest underwritten by the ECB. Weaker nations have therefore geared their economies to Zombie status, with no real growth at the current level of ECB manipulated interest rates.
Greece is the “classical” case in point. It recently announced that it will hit all its Troika mandated debt targets[xxviii], however the evidence suggests that this has been done by firing the most vulnerable state employees and preserving the privileges of those who remain[xxix]. Bureaucracy in Athens has interfaced with bureaucracy from Brussels, to create a system that resembles something written by Kafka. There is no pressure for true economic reform; and these weaker countries (including France[xxx]) now wish to kick the austerity can further down the road. Eurosclerosis has been enabled by the ECB.
Weak nations can subsist at the current level of interest rates, without creating the conditions for economic growth through economic reform. There is no incentive to grow, because it pays to remain static. It was noteworthy to see how the ECB’s Peter Praet tried to gloss over the subject, when he said that the European output gap would remain wide until 2017[xxxi]. Basically he admitted that there has been no economic reform, only job cutting to meet Debt/GDP targets, which could have led to converging economic trajectories.
If the ECB now plunges into the ABS market, there will be even less economic reform undertaken in the private sector; further compounding the moral hazard and economic risk for the ECB. The markets have however priced in a rosy European future, which implies economic reforms and continued ECB suppression of risk adjusted interest rates. Because equity markets are supposed to signal future growth, the European longs seem to think that this growth is a foregone conclusion.
There is, however, no structural basis for this growth as things currently stand. Even the poster children for fiscal discipline are learning that loss of growth is its cost. Finland now faces a credit downgrade from its AAA status, because lacklustre growth (through austerity) is reducing fiscal revenues[xxxii]. It will be interesting to see if the Finn’s have the regressive knee-jerk reaction; and do more fiscal austerity in order to maintain their AAA status. European assets are priced for a perfection that does not exist. The ECB has admitted that this imperfection will last until 2017, why therefore is the perfection priced in today? If and when the “Taper” starts to put pressure on European interest rates to rise, the imperfection will be exposed.
America’s private financial institutions are way ahead of the ECB in the Pyramid Scheme however. The banks have been able to roll back the Volcker Rule for another two years, in relation to Collateralised Loan Obligations (CLO’s)[xxxiii], in a situation that looks alarmingly similar to what the European banks are doing with ABS. The inference is that the Fed will start buying CLO’s in future rounds of QE. The size of the toxic debt bubble in “Cov-Lite” Loans is now back to where it was before the crash of 2008. No wonder Jeremy Stein was so keen to deflate this bubble; and no wonder Janet Yellen gave him no choice, other than to resign, when she ruled that the bubble needed to be bigger.
RealtyTrac recently noted foreclosures rising 4 per cent month-on-month in March[xxxiv]. Trulia has noted the sharp rise in asking prices for homes in March, which are running at up 1.2 per cent monthly and 2.9% quarter-on-quarter[xxxv]. Sellers are complacently raising asking prices, just as the new wave of foreclosures starts to rise. Clearly the price rises will not hold, because the banks are rushing to hit the bids on foreclosures. In the past banks held back inventory to get prices higher, now they are hitting the bids.
On the housing credit side, mortgage originations have fallen to their lowest level in fourteen years[xxxvi]. The banks can see that there are no buyers, from their origination business, so they are trying to swiftly reduce existing exposure.
America is lining up a big fiscal stimulus through wealth redistribution via the tax code; clearly there is pressure on Europe to do the same. The wealth transfer in Europe would have to come from Germany; which is a matter that is currently “Verboten”. Europe must therefore endure some form of crisis to shake the Germans into action. Clearly Ukraine was a warning shot, but the next shots will need to come from closer to home within the Eurozone.
In Age of Wisdom, Age of Foolishness “Jeux Sans Frontieres”, it was observed that the global central banks are doing power trades, which are destroying the behaviour and performance of the big global-macro names. This destruction was evident in the performance numbers to date from the big names[xxxvii]. When the funds get with the programme and start taking on the same positions that the central banks are pushing, the mother of all systemic risks will have been created; in which the central banks will no longer be able to exit any form of QE for fear of triggering the “Big One”. The behaviour of the “Plunge Protection Teams” at the ECB and PBOC of late in supporting their equity markets, suggests that the threshold of this zone has been crossed. The situation has become worrying enough for Goldman to reverse its buy call of two weeks ago on China. Now instead of a 20 per cent rally, Goldman suggests reducing exposure to the Chinese debt market[xxxviii]. Goldman’s prescience was confirmed when the chief of the central bank opined that the latest monetary stimulus will be incremental at the margin[xxxix].
The Developed Market central banks will therefore have no choice but to remain easy until the politicians have created consummate fiscal stimuli to take up the heavy lifting. The emerging multi polar fracture lines in the global polity, can be seen as the necessary requirement for selling these fiscal stimuli to the masses. The Fed is already beginning the process of tapering back the “Taper”. The latest FOMC minutes went to extreme lengths to signal that the market is reading too much into the projections for future interest rate rises[xl]. Kocherlakota wasted little time before opining the doom and gloom in relation to deflation and a weak labour market. Evans has also started to make noises about his greater fear of a premature exit from QE, during his speech on a panel at the IMF meeting in Washington focused on fiscal policy and transition to normality. One senses that the next U – Turn, after the Europeans, will come from the Americans.
- George W. Bush’s Story About Vladimir Putin’s Dog Explains So Much
- Jeb Bush to Decide on 2016 Run by Year’s End
- Beyond the Pale
- The Red Line and the Rat Line
- Bush, Clinton attend NCAA championship together
- Clinton Says She’s ‘Thinking About’ Presidential Run
- Let’s Be Friends
- ‘Hillary Clinton’s a monster’: Obama aide blurts out attack in Scotsman interview
- Rand Paul accuses Dick Cheney of pushing Iraq war for Halliburton
- Kerry, Congress Agree: Superpower Status Not What It Was
- G-20 Deeply Disappointed U.S. Preventing IMF-Resources Boost
- Banker showdown: Bernanke tells off India’s Rajan
- Merkel Backs U.S. Trade Deal Saying EU Ready to Shun Putin
- Ukraine Mounts Security Push as Russia Warns on Civil War
- Netanyahu brings stop to meetings with Palestinians
- Israel Sanctions Palestinian Government as Peace Talks Falter
- Iran and Russia working on oil-for-goods deal
- Satellite images reveal Russian military buildup on Ukraine’s border
- White House Tells Iran That Hostage Taker ‘Not Viable’
- China to U.S.: We ‘Can Never Be Contained’
- Obama Bids Health Secretary Goodbye as He Names Successor
- No. 22
- Toxic Debt Condemned in Crisis Heralded as Europe’s Savior
- ECB Unites With BOE in Call to Ease Asset-Backed Bond Rules
- Terminal Velocity 2013
- IMF warns Europe’s banking system poses threat to global financial stability
- “Bulls Make Money, Bears Make Money and ‘PIIGS’ Get Slaughtered”
- Greece to Hit 2014 Tax-Income Targets, Revenue Chief Says
- Protests Expose Fault Lines in Greece’s Surprise Recovery
- Hollande Deficit-Delay Campaign Begins as Sapin Visits Berlin
- ECB’s Peter Praet Says Euro-Zone Economies ‘Will See Economic Slack Until 2017’
- Finland’s Outlook Cut to Negative at S&P on Sub-Par Growth
- Banks Given Two More Years to Meet Volcker CLO Standards
- Q1 Foreclosure Activity Fueled by New Starts and Auctions
- Trulia: Asking House Prices up 10.0% year-over-year in March
- Despite Record Low Mortgage Originations, “Significant Opportunity to Grow”
- Hedge funds’ March performance worst in nine months – data
- Goldman Sees Chance to Cut Its China Junk Debt Holdings
- China Normal Growth Needs Only Minor Policy Changes: Zhou
- Federal Reserve Plays Down Own Forecasts for Interest Rate Rise