Epoch of Belief, Epoch of Incredulity (5) - "Surprise Surprise"

Written by Adam Whitehead, KeySignals.com

Epoch of Belief, Epoch of Incredulity (4) “Disabling Acts” ended with a note of caution in relation to China; and it is here where we shall begin, specifically in Shanghai. Shanghai is where the economic and political leadership of the nation is to be found.

Shanghai therefore took the lead and embraced the “New Normal” last week; which in practice means that slower economic growth is now allegedly the norm for the whole nation. This should not ordinarily cause any alarm, since Premier Li has already signalled that the “New Normal” is the status quo at Davos. What is alarming is the way that Shanghai chose to embrace the “New Normal”. It did so by abandoning any growth target for 2015 – [i].

By implication therefore, anything could happen. What is more likely to happen is something nasty, based on the news-flow which followed the abandonment of the growth target in Shanghai. The Shanghai branch of the national banking regulator then asked its members to perform more assiduous stress tests, on their property exposure, especially on exposure which falls outside the Shanghai region – [ii].

This suggests that a wave of defaults is about to occur across the nation, outside of Shanghai, in the real estate sector. Shanghai’s immense economy and political clout would have been able to engineer a bailout within its jurisdiction; however it now seems that Shanghai may be the victim of defaults outside of its legal and financial reach.

The plot then thickened, when a local government financing vehicle (LGFV) in Dongtai announced that it would not guarantee the principal and interest on notes sold by a manufacturer that is local government controlled – [iii]. Mild panic should have set in, when further news was announced; that separately the six local governments of Hebei, Yunnan, Guizhou, Hunan and Shandong are currently being sued for non-payment by China Pacific Construction Group – [iv]. The Shadow Banking sector, euphemistically referred to as “Wealth Management”, is now reported to be in full retreat from the property investing and lending – [v].

Margin financed equity traders have clearly ignored the deteriorating fundamentals, or perhaps are betting on QE as the solution, since margin levels on the Shanghai Stock Exchange have moved back above the volume at which the authorities tried to curb this activity recently – [vi].

One ignorant foreigner might be forgiven for thinking that the speculators were being used as “useful idiots” to get stock prices back up to levels at which the Shanghai elite can quietly dump their shares; and cut their exposure to the economy as a whole before things go pear-shaped.

Another ignorant foreigner may also be forgiven for thinking that someone in Shanghai is front-running expected QE. The internals of the equity market suggest that manipulation is occurring. The breadth of the rally is narrow and getting narrower by the day; with the number of stocks reaching 52 – ;week highs having fallen by 75%. Also last week, despite the rally, turnover was down by 47% – [vii].

If turnover is down by 47%, but margin levels are at all-time highs, this suggests a very large concentration of risk in a few hands. Such a statistic goes hand in glove with the term market manipulation. Perhaps both putative ignorant foreign observers are correct to some degree. As the nexus of power, Shanghai appears to be moving to protect itself with great alacrity.

In judging which ignorant foreigner is more correct, it is worth noting that the whole behaviour of the PBOC, in relation to the Yuan, has changed. Up until now, it has been assumed that the PBOC is managing a gradual appreciation of the Yuan against the US Dollar. The recent activity of the PBOC now suggests that it is in fact trying to manage a depreciation of the Yuan against the US Dollar – [viii].

This currency management however does not involve intervention to lower the Yuan; instead it involves intervention to prop up the falling Yuan. Capital flight has therefore become an acute problem. This capital not only seems to be flying to avoid corruption charges, but genuinely to avoid an economic collapse. Said collapse is what Premier Li is selling as the “New Normal”. Clearly Chinese investors and businessmen are not enamoured of the “New Normal”, so why should global investors and business men be?

Later in the week, a leak from Chinese sources appeared in the New York Times signalling that the whisper number on the new Chinese GDP target is 7% – [ix]. No wonder there is some front running going on in Shanghai. The stock exchange regulator then announced that it will be re-investigating the margin position situation – [x].

The PBOC now has a serious dilemma on its hands. “Strategic Sellers” are using the bubble in equities, created by the monetary stimulus, as the liquidity event that enables them to profitably close out their positions and move money abroad. This capital flight is therefore undermining any attempts at economic stimulus. On the other hand however, the PBOC needs to cut interest rates to stimulate the economy to prevent the capital from leaving to find better investment opportunities abroad. The PBOC is being played by “Strategic Sellers” of equities and the Yuan.

A crisis has begun. If and when the capital flight issue becomes more threatening than the lack of growth, the PBOC will be forced to tighten and abandon all hopes of even hitting the “New Normal” 7% growth target. With capital flight, growth will be sub-7%; and with higher interest rates it will definitely be sub-7%. China is becoming one of those famous one way bets that the Titans of the hedge fund community make their reputations from calling.

The FT last week seized the initiative, by suggesting that China is “overborrowed and overbuilt” – [xi]; which implies that it is overbought. The FT infers that since the boom in GDP has been created by an overbuilding bubble, that in fact China’s GDP in no way converges on and crosses above American GDP. On a per capita basis, China is even more of a relative pauper.

The phenomenon of Chinese capital flight therefore suggests a change in ownership of the country’s wealth, rather similar to what occurred in Russia, whereby the Oligarchs leave and national security apparatchiks assume control. Judging by the latest arrivals, to what used to be known as “Londongrad” and the newbies at Britain’s elite public schools, “Londong” will soon become the capital’s latest eponym.

Epoch of Belief, Epoch of Incredulity (4) “Disabling Acts” also touched upon the European monetary “Final Solution” in the form of Gold. In another one of those strange coincidences, which seem to haunt this weekly newsletter, it came as a great surprise to observe the coincidence of this inappropriately worded theme with the 50th anniversary of the Holocaust. It is an even stranger coincidence that this anniversary should coincide with recent events in Paris and the advance of the Far Right across the continent.

It had been speculated that Germany was preparing, for a breakdown in the Eurozone and international financial system, by getting its gold reserves in position for the new global financial architecture. The Netherlands gave more credibility to this thesis last week, when it announced that it had accelerated its gold purchases last year – [xii]. Since reporting of gold positions and trades by countries is notoriously cloaked in secrecy, this was a startling revelation. Holland not only has its national currency on standby, as was reported in Age of Wisdom, Age of Foolishness (55) “Yes Virginia” – [xiii] , but now it also signals that it is building up its gold reserves. The behaviour of Holland in relation to the Euro, gold and its own currency is certainly not coincidence.

Many readers have taken issue with the portrayal of Germany as a global aggressor again. These readers should be reminded that Germany is now the world’s third largest arms exporter according to the Stockholm International Peace Research Institute (SIPRI); and recently flexed its muscles by halting arms exports to Saudi Arabia, because in its opinion the country is “unstable” – [xiv]. The readership should also note that the German global rearmament directive came under Merkel in 2012 – [xv].

The Greek election results, further underlined the method in the madness of Holland and Germany. The leaders of the new Greek coalition are about as friendly towards each other as Achilles and Hector – [xvi]. Both however share a common hatred of German enforced austerity; that makes for one of the most curious coalitions to be found in this emerging world of coalition governments of the developed nations. In order to conform to their coalition status, whilst fatally wounding each other in order to win the next election, both must therefore outdo each other in standing up to the Troika.

Since it is a coalition, both sides can blame each other for the ensuing chaos which will cause the “Grexit”. Alternatively, either man may take credit for the “Grexit” if it is viewed positively by the Greek people. As Ledru-Rollin remarked, “There go the people; and I am their leader, so I must follow them“. Greece is now having a Ledru-Rollin moment. Also since it is a coalition, each can blame the other for yielding to the Troika; and then can commit to unwinding any deal allegedly made by the other.

The Greek government is therefore not a rational actor; and therefore is not something that the Troika can negotiate with in good faith. The appointment of a Marxist blogger, as the Finance Minister, underlines this point. The Greek coalition is therefore in a transition phase, to something far more unstable and anarchic. Immediately on forming the alliance Tsipras, who leads the Syriza contingent, signalled that Greeks can’t/won’t pay their debts to the Troika – [xvii].

Optimists still hoped that this was a negotiating tactic and an attempt to appear to follow public opinion. Tsipras had previously signalled compliance with the Troika on the eve of the elections, so the Troika will now hold him to his word. As was stated in Epoch of Belief, Epoch of Incredulity (4) “Disabling Acts” the result of the Greek election is meaningless, because events have now taken a course all of their own. Schaeuble has reiterated the position that Greek debt will not be cut; and will therefore be rolled out further into the future.

As was also stated, this is academic because Greece cannot and will not ever pay. Greece is effectively out of the Eurozone to all technical intents and purposes. It cannot be allowed to stay in, if its debts are cut, because this would set a precedent for all other nations intending to negotiate cuts in their own debts. The ECB cannot allow any further write-downs, because it will then incur serious losses which threaten its own solvency. As Merkel originally signalled, Greece can leave.

Confirmation, that Greece is no longer a rational actor, came when Tsipras then challenged the EU’s latest initiative to impose more sanctions on Russia over the civil war that is erupting in Ukraine – [xviii]. This veiled threat to “Balkanise”, what remains of Greek political connections to Europe, is a clear signal of an irrational actor. This challenge to EU foreign policy is a line that, if followed by other would-be blackmailers from Southern Europe, will lead to a rapid breakup of the Eurozone and the EU itself.

Should Russia also take the bait and support this kind of brinksmanship, it will no doubt find itself on the receiving end of such crippling sanctions as to render its support for the challengers meaningless. The posturing of Greece has however opened up the political fault-lines within Europe, to such a degree that Northern Europeans will now be seriously making contingencies to form their own hard currency economic and political zone around the German centre of gravity.

There will therefore be European fiscal and political union after all; however it will be a strictly Northern European affair. What is left of Southern Europe will be a wasteland, with various parallel soft currencies which buy nothing in their northern neighbours. France looks set to be pulled apart for trying to play on both sides of the widening divide. Britain will be well out of it by then, once the promised EU Referendum is held, against this deteriorating European backdrop.

The EU response to Greece was initially conciliatory and measured; until Tsipras took the Slavic Balkanisation default option, after which EU attitudes hardened. Wolfgang Schaeuble signalled that Germany was only willing to go as far as extending Greek debts, without cutting their size – [ixx], which was a position already signalled by Olli Rehn before the election was held – [xx].

The Alternative for Deutschland (AfD) Party however, was in no mood to be conciliatory and immediately called for the “Grexit” – [xxi]. The “Grexit” rhetoric from Germany, then began to increase as Tsipras began his crude negotiating style in relation to Russia. Schaeuble hinted directly that the “Grexit” was an option; and opined that he was “relaxed” – [xxii] about it.

The ZEW Institute called for Eurozone bank stress testing of the “Grexit” scenario, in preparation for the event, whilst also opining that “Europe should clearly signal that it is not susceptible to blackmail” – [xxiii]. It was joined by the German Economic Research Institute (IW), which advocates the termination of financial support for Greece if it refuses to comply with Troika demands – [xxiv].

Epoch of Belief, Epoch of Incredulity (4) “Disabling Acts” observed that Mario Draghi had effectively become Germany’s sock puppet; in so far as he now has to become the advocate of economic reform, after having his plans for American style QE thoroughly stomped by Germany. Draghi confirmed his servility last week, when his focus turned from QE towards economic reform, in his latest speech – [xxv].

Draghi is now a passenger, having been given his conditional QE the week previously. He has been given all that he is going to get and must now make it work. He has been effectively side-lined and silenced, on the subject of QE, until the authorised QE programme runs out in 2016. Should he speak about QE, he will have to say that it is sufficient; otherwise he will further perjure himself and undermine his job security.

All he can now advocate is economic reform; therefore Germany has him exactly where it wants him. In the advent of a crisis, he may once again be able to start nudging for American style QE; but he is likely to swiftly encounter the German constitutional legal process if he goes down this road.

Hungary, a country that is swiftly moving from the Eurozone sphere of influence back into the Warsaw Pact, signalled what potentially lies ahead as a blue-print for Eurozone breakup.Hungarian real estate speculators, who had availed themselves of Swiss Franc mortgages when the currency was cheap and interest rates were negative so that they were effectively being paid to borrow, have just been blown up by the Swiss National Bank’s move to de-peg the Swiss Franc from the Euro.

In a classic act of tit-for-tat Socialism, the Hungarian government has converted all these Swiss Franc loans back into the Forint – [xxvi]. The foreign lenders who provided the Swiss Franc mortgages have been wiped out. Alexis Tsipras is probably already drafting the bill, to convert all of Greece’s debts into Drachma’s in the event of the “Grexit”. He is probably also drafting another bill to adopt the Ruble as the national currency, or at least to peg the new Drachma to it.

The implied threat, of bank nationalization – [xxvii] in Greece, has already wiped out most of the shareholder value in the domestic commercial banks; so moving their liability bases to Drachma’s will have little further negative impact. In fact, the smart Greek money is now borrowing from Greek banks in Euros and moving its money abroad, in anticipation of this arbitrage opportunity.

French Prime Minister Macron continued to build on his public notoriety, after his French “Apartheid” speech, by accusing German’s of having a fetish – [xxviii] for austerity that will destroy Europe. Macron will only succeed in raising the probability of the “Frexit”, rather than a change in German attitude.

Mario Draghi’s attempts to stimulate Greek borrowing with QE, is actually creating a massive arbitrage trade; to borrow in a currency that will either weaken or cease to exist, whilst converting this currency into what are perceived to be stronger currency assets abroad. Mario Draghi may have unwittingly created one of the great trades of all time. It therefore comes as no surprise to hear George Soros opine that ECB QE will lead to asset bubbles and massive inequality – [xxix].

He also signalled that a “substantial” FX move – [xxx] will occur; which suggests that he has set himself up to be on the right side of this “substantial” move, as he did with Sterling back in the day. The negative fallout impact will be felt by the European banks and more importantly the ECB. As Merkel and Schaeuble have said, the “Grexit” is manageable. The spread of contagion to the Spanish, Italian and French banks is however not manageable.

There were signs, in the European sovereign bond markets, last week that this contagion is now starting – [ixxx]. In addition, Catalonia managed to publish a very subjective economic report – [xxxii]; which concludes that its credit rating would rise from junk to the A+ level of Italy and Korea, if it were to secede from Spain.

Clearly Catalonia now sees a Eurozone breakup as inevitable; and is therefore positioning itself to apply for membership of the hard currency Northern European rump of the Eurozone that survives. A spokesman for the Spanish government responded by connecting the Catalan and Greek issues together; and then ruling both of them out from an EU perspective – [xxxiii].

Interestingly however, there has been no spokesman from the EU speaking on either issue or connecting both issues, although both are clearly connected. The responses are coming across national boundaries, rather than Europe speaking with one voice for all countries. The nationalist nature of the responses therefore signals that the Eurozone is well on the way to breaking up.

In the hope that the voters would not notice how swiftly the UK economy slowed down in Q4/2014 – [xxxiv], David Cameron hit the ground running with new proposals for tax cuts – [xxxv]. Since he also promised to cut welfare benefits even further, his tax cuts will be funded – [xxxvi]. The pecuniary incentive, to vote Conservative, is looming large as the country heads into the last 100 days before the election. Presumably this is why Cameron is disinclined to appear in televised debates – [xxxvii], which risk showing his pecuniary side a little too prominently.

Polite English “swing” voters will not mind seeing it though; as long as they only see it behind the curtains on a ballot paper, rather than on the Telly. On the ballot paper, they will have no pangs of guilt for voting with their pockets. According to Cameron’s calculations, the voters with pockets will be seduced by his offer; and those with no pockets will either vote Labour or not at all.

The quiet death of Abenomics became slightly more audible last week. Akira Amari, the Economy Minister, announced that there is no way for Japan to achieve the 2% inflation target within two years – [xxxviii]; so all pressure on the BOJ to deliver the goods with QE has now evaporated. Nomura also put another nail in Abe’s coffin, when it opined that Abenomics will end terribly – [xxxix].

In its worst case scenario, the economy contracts in the first half of 2016, Abe delays a sales tax rise for a second time; and the Bank of Japan boosts asset purchases to suppress interest rates, causing the Yen to tumble.

The Chief Credit Strategist and author of the report Toshihiro Uomoto, has now raised the probability, of this Armageddon scenario, from 10% to 20%. This probability may still seem low, however more attention should be paid to the direction of the vector, rather than to outright percentages.

Abenomics is deteriorating at an accelerating pace. As the latest inflation data showed that, once adjusted for the sales tax impact, inflation only rose at an egregiously low 0.5% – [xl] per annum, a new explanation of Japanese systemic deflation arose. It is now clear that the BOJ’s QE is not working. Mario Draghi should take note, since Jens Weidmann is bound to.

It would seem that Japan’s real export is Deflation, rather than Inflation as the long Dollar-Yen and long Japanese Equities pundits are saying. Certainly, the experience of Japan’s trade competitors, such as South Korea – [xli], would attest to this new Defaltion paradigm. In order to remain competitive, with Japanese exporters, South Korean manufacturers must cut the prices of what they are selling. In addition, to remain viable they must cut input costs and employee compensation. It therefore transpires that neither Japanese nor South Korean inflation has been boosted by the BOJ’s QE.

Within Japan itself, a demographic dynamic is in place; under which wage inflation remains subdued – [xlii]. Labour force participation is rising, because elderly Japanese cannot makes ends meet as a result of their savings not matching their extended life expectancy. Rises in sales taxes to balance the country’s budget deficit, therefore increase the cost of living thus forcing retirees back into the labour force.

The government’s attempt to balance its books is therefore inflicting a massive burden on the aging population. Employers can exploit the aging Japanese workers with temporary employment contracts, that undercut those of the existing full-time workforce. This phenomenon is clearly occurring in Britain too; although since the demographics are slightly more youthful the problem is not as acute.

Since Japan has an aging demographic structure, this exploitation becomes systemic; since there are more elderly Japanese to be exploited than younger Japanese to be paid fairly. QE from the BOJ has had zero impact on the demographic problem at the heart of the inflation issue; so it therefore ends up in the stock market where the aging Japanese punt on equities in order to supplement their meagre earnings at the hands of the corporate exploiters.

QE will only create inflation, if the Japanese stock markets reaches the bubble level at which the elderly can retire from the workforce; so that those left in employment have wage pricing power. QE therefore represents the ultimate bubble risk; because once the equity market reaches the level at which the elderly can cash out, they will hit the bid and drive equity prices down to levels at which they have to go back to work again.

Currently the legislators want to transfer this equity market risk to the Japanese pension funds, by forcing them to hold more equities in their portfolios. Japanese pension funds will thus face massive redemptions from retiring pensioners, which forces them to sell stocks which they now own more of, into a falling market as the equity bubble reaches the cash out level for the retirees.

The pension legislation change is the biggest key signal that the whole economic system is fundamentally broken; and cannot deliver either to the young or the old. Massive volatility in the Yen and the equity market will thus play out; as markets discount whether this systemic failure is either good or bad for these asset classes.

There is no sustainable trend therefore, only massive mood swings as speculators fall in and then out of love with the theme of the day in relation to how all this plays out. Ultimately, speculators will lose enthusiasm for this game and go for the asset class which is the known store of value in volatile times i.e. Gold in Yen terms.

Long before this occurs however, it is more likely that Japan’s aging voters decide that Abenomics is over; and good old living within one’s means is back in style. At this point, Japan will be back in austerity mode; and the Yen will rally accordingly as debt is cut and growth financed by debt is abandoned.

Apple stole the headlines last week, with its blowout earnings report, reflecting lower gasoline prices which have created higher consumer enthusiasm and purchasing power. Behind this thin single stock veneer of technology earnings, there were however signals that the whole sector is running into a brick wall.

IBM’s CEO hotly denied reports that allegedly more than 100,000 staff, which is about 25% of the workforce, will be laid off globally – [xliii]. Interestingly, the denial was only over the size of the layoffs and not the fact that there will be layoffs. The company confirmed a $600 million charge for what is called “workforce rebalancing”. When put together, what the two companies show clearly illustrates the brave American consumer, with optimism and cheap gasoline facing the global headwinds. They illustrate that Americans are still largely ignorant about the global economy, until crises occur that are beamed at them through the media.

John Challenger of Challenger, Grey & Christmas has observed that mass layoffs at US Large Cap technology firms have been growing through 2014 – [xliv]. In July, Microsoft said it was slashing up to 18,000 jobs; and in May, Hewlett Packard said it was cutting up to 16,000. That was on top of the 27,000 job cuts HP announced in 2012, a number that was revised twice and ultimately reached 34,000.

Commentators are opining that these mass layoffs reflect the obsolescence of some technologies and their production lines. These commentators fail to note however, that this obsolescence is not being replaced with new technologies and increased hiring.

Courtesy of Statista (de.statista.com)

Age of Wisdom, Age of Foolishness (38) “Rosebud” – [xlv] observed the war of attrition, between Rupert Murdoch and digital content, being played out in the media sector. Google’s latest earnings report signalled that all is not well in the digital world, as growth and earnings are contracting. According to the perma-bulls, Google was the company that would just keep on growing as it reinvested cash, pouring in from search and advertising, into other growth opportunities.

As Rupert Murdoch can attest, Google was in fact investing in ventures which cannibalise existing bricks and mortar media; so in actual fact there is no net economic growth as a result. This cannibalization also drives prices lower, because Google’s model does not exploit pricing power; but rather uses pricing power as the source of capital to undercut competitors and new target business sectors.

The latest earnings report suggests that Google’s cash cow, from search and advertising revenues, is now yielding less liquidity. Google has therefore reached the point at which it may no longer be able to use its deep pockets to undercut rivals, because these deep pockets are not as full as they used to be.

The undoubtable fact is, that now Large Cap Technology can be added to the Energy Sector in terms of headwinds for the US economy. The Financial Sector is still far from robustly hiring, so private sector job creation in America is severely challenged.

The housing sector is recovering, but Americans are not chasing the home ownership dream any more – [xlvi]. The ability of the Housing Sector to move the economic needle is therefore marginal at best. The Federal Government is still in austerity mode, so it seems that the great jobs numbers that have been the norm are going to tail off dramatically. When Retail starts to feel these headwinds, all bets will be off.

Hispanic Spring took a bizarre twist in Argentina last week. The death of prosecutor Alberto Nisman, in suspicious circumstances, placed the smoking gun in the hands of President Cristina FernÃ¡ndez de Kirchner. The president deftly shifted the smoking gun to the domestic intelligence agency, by drafting a bill to have it dissolved – [xlvii]. The President is therefore now at war with disgruntled, unemployed and potentially dangerous domestic spies. In Venezuela, pro-Government marches are now being organised to counter the anti-Government ones – [xlviii]; with a little help from the boots and sticks of the police force charged with maintaining public order – [xlix].

Buffeted by all these global headwinds, there was therefore little that the FOMC could do other than to talk up the US economy and say the word “patient” – [l]. What is most interesting about last week’s FOMC announcement is that the markets have bought into it; and accepted that the tightening is still on this year, but has been pushed back a little. These same markets have however also bought Draghi’s QE and the Chinese “New Normal”, so buying a third piece of policy maker junk is entirely consistent.

It takes three data points to create a trend; so the market has blindly created a bullish trend. This trend however totally misses the details which point in the opposite direction. The FOMC was also unanimous and there was no dissent; which suggests that all members are really running scared of the global threats to the US economy. The FOMC is doing its best, to follow the Titanic meme in operation at the ECB the week before.

The iceberg came into view, shortly after the FOMC announcement, in the form of US Q4/2014 GDP – [li]. The report showed that the US economy slowed dramatically in Q4. The American consumer was ebullient, as a consequence of lower oil prices; but even though this represents 70% of the US economy it was not enough to outweigh the impact of the global headwinds on economic growth.

Whilst Bullard tried to anchor expectations – [lii], for a rate-hike back to June 2015 from somewhere in 2016, there is a growing unease in the minds of all except the American consumer that things are slowing down. This slow-down was evident even before Europe and China have begun to self-destruct.

Fed Governors Powell and George also gave key signals, about the state of the decaying global financial system, last week. Having been vigorously suspicious of Cryptocurrencies like Bitcoin, the Fed would now like to get them into the broad church of monetary policy which it seeks to influence and control – [liii]. Powell and George are now positioning the Fed to this node of control by stealth.

At a recent conference, they embraced the notion of Cryptocurrencies, because they provide utility by creating anonymity in payments systems. This anonymity prevents hacking and thus strengthens the robustness, fidelity and speed of the payments system. QE and monetary policy of the future will now involve a Federal Reserve backed Cryptocurrency. Once announced, this will be rapidly embraced; probably with the demise of other existing Cryptocurrencies. The demise of existing global currencies would also be hastened by their failure to be fully convertible into the new Fed Cryptocurrency.

Much has been made of the economic thesis, that America is the only shining light in the aging economic universe. Christine Lagarde promoted this theme in Epoch of Belief, Epoch of Incredulity (3) “Enabling Acts” when she addressed the Council on Foreign Relations (CFR). Last week, there were signs that both she and the IMF are coming under pressure from the emerging nations who are losing ground to America.

These emerging nations are pushing, to try and speed up the reform of the IMF and its voting process – [liv], in order to dilute American influence and to promote their own pecuniary interests. Since it is the IMF that will be the wolf at the door, when these nations start to break the debt to GDP ratios, consistent with World Bank and IMF support, they would like to extract its fangs up front.

A toothless IMF, will thus be unable to prevent these emerging nations from following looser fiscal and monetary policies; which they think will allow them to avoid austerity and another debt crisis. From an American perspective however, there is no incentive to allow these nations to erode the current American economic hegemony.

Based on Obama’s recent State of the Union Address – [lv], it seems that America has little interest in relinquishing its sole superpower status. On the contrary, America intends to use its supremacy to enforce its political and economic agenda on the world; through the existing architecture and institutions which it created for global governance at the end of the Second World War. To underline America’s new expansionist agenda, the Pentagon put in for a massive 13% – [lvi] (inflation plus 12% !!!) increase in spending.

An 11% expansion in US military spending, in a global deflationary landscape, is a massive statement of intentions and capabilities. Such a budget response is likely to meet with bipartisan approval, not only on patriotic and economic grounds; but also because an election is coming and neither side of the House wishes to be seen as soft on national security.

Mrs Lagarde needs to be careful how she treads. She got the IMF job, when her French compatriot Strauss-Kahn was mysteriously caught with his pants down whilst trying to reform the IMF voting structure. It would be inadvisable to get in the way of an economic force that is accelerating at inflation plus 12% in real terms.

The Bilderbergers have chosen the Austrian Tyrol – [lvii] for their annual meeting later this year. As the country that was involved in the breakup of the European order in 1914 and the Balkanisation that ensued which was then followed by Hitler, the timing and location are perfect.

– [lvii] http://www.globalresearch.ca/bilderberg-2015-location-confirmed/5428343

– [lv] http://www.businessweek.com/articles/2015-01-21/full-transcript-of-obama-s-2015-state-of-the-union-address

– [lvi] http://www.bloomberg.com/news/articles/2015-01-29/pentagon-budget-to-replenish-war-supplies-from-lockheed-oshkosh

– [liv http://www.bloomberg.com/news/articles/2015-01-29/u-s-veto-power-at-imf-said-to-face-threat-in-rift-on-governance

– [liii] http://www.americanbanker.com/news/bank-technology/feds-payments-leaders-show-interest-in-cryptocurrency-privacy-tech-1072447-1.html

– [li]http://mam.econoday.com/byshoweventfull.asp?fid=467016&cust=mam&year=2015&lid=0&prev=/byweek.asp#top

– [lii] http://www.bloomberg.com/news/articles/2015-01-30/bullard-says-investors-wrong-not-to-expect-rate-rise-by-mid-year

– [l] http://www.bloomberg.com/news/articles/2015-01-28/fed-raises-assessment-of-economy-while-staying-patient-on-rates

– [xlvii] http://www.theguardian.com/world/2015/jan/27/argentina-government-domestic-intelligence-agency-alberto-nisman?CMP=EMCNEWEML6619I2

– [xlviii] http://www.bloomberg.com/news/2015-01-23/caracas-streets-set-for-competing-protests-as-economy-struggles.html

– [xlix] http://www.bloomberg.com/news/2015-01-24/venezuela-capital-sees-rival-street-marches-as-economy-struggles.html

– [xlvi] http://www.calculatedriskblog.com/2015/01/hvs-q4-2014-homeownership-and-vacancy.html