Epoch of Belief, Epoch of Incredulity (22) SPECTREs

Written by Adam Whitehead, KeySignals.com

Jean-Claude Juncker recently revealed a sinister “Anglo Saxon” plot to destroy the European Project and conquer the world – [i].

This shadowy plan was heralded and scripted by the “Soul Brothers” Cameron and Obama back in 2012. Since this amorphous beginning, it has taken on a more robustly defined stature over time, culminating in the alleged overt move according to Juncker.

The Grexit (or Not Grexit) event is the alleged catalyst that will trigger this tectonic geopolitical shift. After the Grexit will come the alleged Brexit, following the UK referendum, which will then deliver the “Anglo Saxon” fatal wound to the European Project. The climate of paranoia was given a further twist last week, when an email from the Bank of England referring to “Project Bookend” found its way into the press – [ii]. The timing of this email, to arrive as David Cameron arrived in Europe to confront his European partners, can have left no one in any doubt that it was no coincidence. The “Project” refers to the Bank’s plans for the Brexit scenario. What is most interesting is that far from denying all knowledge of the “Project”, the Bank confirmed its existence and hence the likelihood of the Brexit as an event.

Epoch of Belief, Epoch of Incredulity (20) “Keep Your Friends Close and Your Economists Closer“ – [iii] explained how the Germans had U-turned on the plan for a “political” solution for Greece sans IMF interference. The rapacious behaviour of the Greeks in trying to exploit the divisions between the EU and the “Anglo Saxons”, in order to get all their debts cancelled, has fundamentally undermined Angela Merkel’s hopes of selling the deal and her electability in 2017 to the German people.

Sensing German weakness, President Obama seized the initiative by opining specifically on the gravity of the situation in Greece, a subject that he has avoided commenting on thus far. As readers will see later, the Grexit and associated volatility may be the catalyst to engineer the kind of global expansionary fiscal and monetary policy that Obama would like to ultimately see.

Clearly Christine Lagarde remains an “Anglo Saxon” collaborateure, because she also chimed in on the increased probability of the Grexit outcome – [iv] following the American lead.

The Germans have therefore adopted a more equivocal posture, along the traditional lines of Yalta/Tehran 1945 rather than Eurozone 2015, in relation to geopolitics. This equivocation has become so tangible that even the German press have noticed. Schaeuble wishes to have the Grexit option on the table as the stick to make the Greeks negotiate in good faith; Merkel however still favours a European solution which basically involves saving Greece at any price – [v]. Schaeuble is therefore covering the economic base, whilst Merkel still tries to cover a political base that incorporates the EU.

All of Greece’s creditors now agree that the Tsipras’s red line, of protecting his welfare state, is in fact a common red line for them – [vi]. Going forward, Tsipras will now have to tear down the socialist fabric of his economy in order to reach a deal with his creditors. Pierre Moscovici however wasted no time in inserting a special EU option post settlement with all creditors; by informing Tsipras that once he has destroyed his welfare state, that the EU will be delighted to finance what remains of Greece – [vii]. Schaeuble also now suddenly wishes Germany to partner with Britain in reforming the EU and its governance – [viii]. Once again, Schaeuble is wearing the economic hat and Merkel the political one. Britain is therefore positioned once again as America’s proxy in Europe.

The problem for Britain is that centripetal anti-immigration attitudes, fuelled by Scots nationalism and cheap EU migrant labour, threaten to override the geopolitical imperative from Washington. Merkel on the other hand just signed up to an agreement with France, to bind the two nations and the European Project more closely together without the need for any treaty changes – [ix]; and thus eviscerated Cameron’s attempts at any kind of renegotiation.

Cameron must have been feeling like Margaret Thatcher, herself a recipient of many a Franco-German one-two combination. Merkel’s offer to strike a deal with Cameron, combined with Hollande’s opining that the EU is better with Britain as an EU member – [x], therefore lacked any sincerity – [xi].

Even unelectable and unrepresentative New Labour, through which Tony Bliar was once so adept at squaring the Anglo-European circle of mistrust, has bowed to English democratic opinion and signed up for an in/out EU referendum – [xii]. Cameron therefore faces the impossible tasks of trying to save both the British and European Unions simultaneously, which would seem to be mutually exclusive events at this point in time.

Facing these insurmountable odds, Cameron has therefore wisely signalled that he intends to take early retirement, from active field service, to go and defend the family manor north of the border from the vindictive Scottish marauders – [xiii]; and let agents Osborne and Johnson fight for control of the old boys club that makes policy.

The skills of the double agent Boris Johnson, himself an American immigrant and fugitive from the IRS, can allegedly span the chasm between the English nationalists and the global neoconservatives.

Agent Osborne is however no outsider, in the Washington corridors of power, as he is a “panellist” – [xiv] of the Atlantic Partnership – [xv] and a Bilderberg attendee – [xvi]. Who better to span the trans-Atlantic void?

The Queen’s Speech – [xvii] therefore read more like Cameron’s valedictorian speech, identifying the work to be done by his unfortunate successor.

The recent conclave of central bankers in Sintra revealed that the political clash, between the “Anglo Saxons” and the Europeans, is mirrored in the clash between the two great schools of economic thought behind their competing economic systems. Larry Summers, speaking on behalf of the Saltwater School, opined that current global central bank policy of targeting inflation has singularly failed to deliver a platform for stable economic growth – [xviii]. Summers is therefore suggesting that central bankers and politicians should be dropping austerity in favour of some good old Keynesian fiscal policies, which are then allowed to create inflation.

James Bullard, whom readers will now understand acts like a weathervane that indicates the change in policymaking thought at the Fed, started to blow in the wind again last week; thus confirming the signal from Summers. His St. Louis Fed published a thoughtful piece of Fedspeak – [xix], that basically concluded that zero interest rates do not create a stable platform for growth; and also that Fed guidance is good in theory but does not work in practice. He therefore called for Nominal GDP Targeting to be tried as the new old tool from the Fed’s toolkit – [xx].

Nominal GDP Targeting simply explained occurs when, in the absence of real economic growth, the policy maker creates inflation which is then supposed to represent the growth that they cannot stimulate. This new tool from Bullard looks suspiciously like the kind of thing that Larry Summers has in mind. It also sounds just a tad like Abenomics; which means that once again it will be better for stock markets than the real economy.

Unsurprisingly, Bullard didn’t (or couldn’t explain) where the inflation will come from. The obvious place to look will be a big fall in the value of the Dollar; rather like the slide in the Yen. It therefore looks like the shallow period of rising Fed interest rates, predicted by Stanley Fischer, will soon be followed by a new attempt to undermine the strength of the US Dollar. Faced with the rising interest rates, then followed by Dollar debasement, who would be a holder of US Treasuries therefore. Bullard’s may well be prophetic in suggesting that the “zero-bound” is over; and that rising interest rates will reflect the success of the Fed in creating inflation (or nominal GDP growth in his words). The more one thinks about it, the more it sounds like Abenomics.

Janet Yellen gave the third signal, which confirms that things are changing at the Fed, when she surprisingly announced that she will break with Fed tradition and avoid Jackson Hole this year – [xxi]. Jackson Hole is traditionally where the markets are prepared for new central policy initiatives. One can therefore assume that there is no new policy move imminent; and that the Fed must first go through the motions of appearing to tighten before embarking on a new phase of US Dollar debasement.

Two and two still makes four, even in a place like Jackson Hole where frankly nothing adds up; so assuming that President Obama gets what he wants, in terms of Greece providing the catalyst to launch a new Saltwater economic project in Europe and America, events are all falling into place and context.

Speaking for the Freshwater School, Wolfgang Schaeuble hinted that the debate between the two schools of thought will become a full G-7 finance ministerial topic after the Dresden meeting – [xxii]. On the eve of the meeting, he staked out Germany’s position; of a zealous belief in economic reform and fiscal austerity to deliver the platform for growth – [xxiii]. This view is the antithesis of what Summers opined on the subject and what Obama is alluding towards.

Clearly the Greeks would like to see the end of austerity; and it is also very likely that Southern Europe and France will support this view. The results of the recent Spanish elections signal that Podemos has the potential to become another Syriza – [xxiv]. Matteo Renzi used the Spanish election result as an opportunity to opine that austerity needs reconsidering – [xxv].

Even the election result, from the traditionally pro-European Poles, is a wake-up call for EU policy makers who think that austerity has been generally accepted – [xxvi]. Epoch of Belief, Epoch of Incredulity (20) “Keep Your Friends Close and Your Economists Closer“ – [xxvii] suggested that the credit markets were on the verge of a new wave of credit creation. If what Summers is suggesting comes to pass, then the spike in interest rates and steepening yield curves will become vindicated by the overt inflation policies from a combination of central banks and policy makers. Mario Draghi’s distinctly Saltwater style, in the heart of the Freshwater ECB, signals that there is potential for things to get salty in Europe too. Owning bonds then becomes even less interesting going forward.

Stanley Fischer, Draghi’s former mentor at MIT, reached out a conciliatory hand from the Saltwater School; in an attempt to avert the volatility that the debate will create. Fischer signalled that the Fed is more likely to move earlier on interest rates – [xxviii], because this will lead to a much shallower trajectory of rising rates; which will also end quickly and more smoothly than a belated larger incremental rate increase programme. He then went full-on global with his signal; and opined that the pace and increments of future rate increases will be reduced if the negative impact on the global economy becomes manifest – [xxix].

Having circumscribed the rate hike cycle, Fischer has provided a neat introduction to the next easing cycle. Fischer is therefore trying his best to avoid another Taper Tantrum. Mindful of the potential for such a tantrum, the ECB also weighed in, by U-turning on Draghi’s previous commitment to front-load QE – [xxx]. Such front-loading, plus Fed rate increases and the potential for the Grexit will be devastating for the Euro. More importantly such a train of events would be even more devastating for European interest rates; which would have to build in even larger premiums to discount these outcomes.

The Saltwater team at the FOMC and within the ECB are doing their best to support each-others’ divergent monetary policies; and by so doing to avert another volatile Taper Tantrum period. Given the tighter correlation of asset classes and currencies, they are going to fail miserably. Every cloud has a silver lining however; so the volatility they create will be a good excuse to bring forward the economic certainty of a global fiscal and monetary expansion.

Having closely observed the tiny country of Greece creating havoc between the “Anglo Saxons” and the Europeans, China decided it was time to exploit this chaos by expanding into the void of the Pacific. The heavily orchestrated media-led cries of the inevitability of war with America led to policy makers rising to the occasion; and announcing that Chinese defensive littoral doctrine has now been literally replaced by expansionary deep water doctrine – [xxxi]. Defence Secretary Carter swiftly countered that the Chinese must stop building offshore islands in the South China Sea – [xxxii].

Back on dry land, the China Securities Regulatory Commission was proud to report that the sea of Yuan is displacing the sea of Dollar liquidity flowing east along the Silk Road – [xxxiii]. Currency markets responded in the traditional way and bought Dollars, although this probably had more to do with what was happening in Europe than what was perceived to be about to happen in the Pacific theatre.

The gravity of the situation has not been lost on Lee Kuan Yew however – [xxxiv]. As an exponent of skilfully arbitraging the two superpowers with great financial success, he is clearly worried about the threat to Singapore’s franchise from a war between them. Over the coming days, his city state will hold a summit aimed at defusing the tension and seeking to maintain a profitable role as an interface and gatekeeper between these two superpowers. Epoch of Belief, Epoch of Incredulity (21) “Useful Idiots” observed the major U-turn on the “new normal” in China. This was further confirmed last week when it was revealed that on May 15th the State Council ordered the banks to keep funding local government projects approved before 2014 – [xxxv]. Presumably a plethora of projects written post-2014 will now have their dates changed; and will then be added to the plethora of projects pre-2014 that have been idled.

Better still, a plethora of new projects recently conceived will be drafted and have their date reset as pre-2014 in order to qualify for funding. Excess capacity in China just took a massive quantum leap forward as the bubble moved by the same quantum towards bursting.

– [xxxv] http://www.bloomberg.com/news/articles/2015-05-28/china-s-local-government-debt-fiscal-reform-reversed

– [xxxiv] http://www.bloomberg.com/news/articles/2015-05-29/u-s-china-competition-in-asia-brings-risk-singapore-s-lee-says

– [xxxiii] http://www.bloomberg.com/news/articles/2015-05-28/china-regulator-sees-2-5-trillion-silk-road-trade-boosting-yuan

– [xxxii] http://www.ndtv.com/world-news/pentagon-chief-ashton-carter-urges-end-to-island-building-in-south-china-sea-766558

– [xxxi] http://qz.com/411861/china-says-it-will-expand-its-navy-after-state-media-warns-of-inevitable-war-with-the-us/

– [xxx] http://www.bloomberg.com/news/articles/2015-05-25/ecb-slows-bond-purchases-after-indicating-pace-would-accelerate

– [xxix] http://www.bloomberg.com/news/articles/2015-05-26/fischer-says-fed-could-slow-rate-rises-if-global-growth-falters

– [xxviii] http://www.bloomberg.com/news/articles/2015-05-25/rajoy-s-losses-show-danger-of-eu-austerity-renzi-says

– [xxvii] https://econintersect.com/pages/contributors/contributor.php?post=201505253225

– [xxvi] http://www.bloombergview.com/articles/2015-05-27/spain-and-poland-send-a-message-to-europe

– [xxv] http://www.bloomberg.com/news/articles/2015-05-25/rajoy-s-losses-show-danger-of-eu-austerity-renzi-says

– [xxiv] http://www.bloomberg.com/news/articles/2015-05-24/podemos-may-win-madrid-barcelona-city-halls-exit-polls