Wuhan Lab Hack Reveals Unreported COVID-19 Cases, Evidence Records Were Deleted
Nearly three weeks ago, a cache of approximately 25,000 email addresses and records of organizations involved with COVID-19 were leaked, including the Wuhan Institute of Virology (WIV), the WHO, the US National Institute of Health, and the Gates Foundation.
Today, The Weekend Australian reports that a dataset obtained from the WIV using the hacked credentials suggests that cases in China have been under-reported.
The dataset, seen by The Weekend Australian, contains empty records for the period February 2-18, indicating records were not kept for that period or that data was deleted. The Australian reported on April 23 that data from the Wuhan Institute of Virology had been hacked. –The Weekend Australian
“I’ve had credible sources tell me that people have used the credentials that were leaked on Twitter and Facebook to access the lab,” said Robert Potter, CEO and founder of online security firm Internet 2.0 – who added that he has “high confidence” in the records, and that it was “highly unlikely that the data had been fabricated.”
“They appear to showcase tracking from what I think is probably a research project within the Wuhan lab working on coronavirus data.
“It’s not data of individual cases, it’s tracking buildings where there are confirmed or suspected (cases) or recoveries or people have died from coronavirus in those buildings. The metadata tab translated to English shows areas (that) correspond to apartment blocks a lot of the time.
But I would also say that the data doesn’t appear to cover every case in China, but it covers different cases to what have been publicly reported.”
The dataset includes an ID, collection time, number of deaths and recoveries, and geolocation information for buildings with infected people.
He said the records included cities that hadn’t appeared among publicly revealed cases. He found more cases from the northern city of Harbin than reported. There were cases in Inner Mongolia and Shanxi Province not found in public data. He had done comparisons with recently released information in China.
He said there were two possibilities for the blank records in early February, one being that data was uploaded in late February or data had been deleted because there “appears to be logs for those days … but they have no entries”.
So it appears that there could be data from before that period that may have been deleted.
There seems to be a high sensitivity around data from that period: –The Weekend Australian
We’ve long known that the data coming out of China is bogus. In March, Chinese investigative outlet Caixin revealed that when mortuaries opened back up this week, photos revealed a far greater number of urns than reported deaths. In one, a truck loaded with 2,500 urns can be seen arriving to the Hankou Mortuary. According to the report, the driver said he had delivered the same amount the previous day.
In another photo, seven 500-urn stacks can be seen inside the mortuary, adding up to 3,500 deaths.
This adds up to more than double the amount of reported deaths in the region – for which grievingfamily members waited in line for as long as five hours to collect, according to Shanghaiist.
And according to Radio Free Asia (funded by the US State Department, so take with a grain of salt), there were around 46,800 deaths in Wuhan, vs. the 4,633 reported.
Reminder to all of the journalists that took China at face value when they claimed they had no more cases https://t.co/mlS0t9HvRo
Larry McDonald, publisher of the investment research service The Bear Traps Report, warns that this crisis is far from over. He spots growing tensions in the credit markets and thinks that large public borrowers like Italy and New York State are in need of massive bailouts.
Stocks have staged an impressive comeback. Since the lows of March, the S&P 500 has gained almost 30%. Despite that, Larry McDonald would not be surprised if new turmoil soon arose.
«In March 2008 for instance, after the failure of Bear Stearns, the Fed acted aggressively and we had a big relief rally. But then came Lehman,» says the renowned investment strategist.
Mr. McDonald knows what he’s talking about. As a former vice-president of distressed debt trading at Lehman Brothers he witnessed the meltdown of the global financial system first hand. Today, he runs the The Bear Traps Report, an independent investment research service for institutional investors.
In this in-depth interview with The Market/NZZ, Mr. McDonald warns of rising defaults in the credit markets and points out that large public borrowers such as Italy and New York State are going to need bailouts of historic proportions. However, he spots opportunities in the metals and mining sector.
Mr. McDonald, despite a grim economic picture, investors are getting confident that the worst of the pandemic is behind us. What’s your take on the financial markets?
Equity markets have priced in a lot of love from the Federal Reserve. The Fed has done a lot to ease financial conditions, and the amount of liquidity is amazing. Since late February, they’ve done more in terms of balance sheet expansion than nearly two years of action in 2008 to 2010. They’ve clearly pumped up asset prices. Moreover, we have cities re-opening across the United States and some good news on Covid-19 treatments. So the bar is very high in terms of expectations, but underneath the surface trouble is brewing once again.
Why do you think so?
Everyone knows the Fed has expanded their balance sheet by nearly $3 trillion in recent months, but few realize the colossal distortions that are forming in markets. On February 20th, our 21 Lehman systemic risk indicators to gauge the health of financial markets were at the highest levels in years. And then, the market obviously rolled over. Now, our indicators are rising again because there are rising defaults in the leveraged loan space, and there is a lot of credit weakness lurking underneath. Additionally, stock buybacks are shrinking. Over the last decade, we’ve done around $5 trillion of repurchases. But that’s no longer going to be viable. Buybacks are going to go from $600 to $800 billion a year to something like $300 billion. So we’re seeing a sugar high in the markets, but there’s a good chance that we are going to get a big leg down in the next couple of months and test the lows of March.
What could wreak new havoc on the financial markets?
Credit spreads have tightened a lot, especially in the «buy what the Fed is buying» trades, such as investment grade and some fallen angels. But here’s the problem: Whenever we had these situations in the past, there was always another shoe to drop. In March 2008 for instance, after the failure of Bear Stearns, the Fed acted aggressively and we had a big relief rally. But then came Lehman. When you have this type of economic dislocation like today, you are going to have a major default cycle even though the Fed has provided lots of liquidity.
As a former senior distressed debt trader at Lehman Brothers you had a front-row seat at the financial crisis. How do today’s events compare to 2008?
In this recent panic, it got a little worse. During the Lehman crisis, you could still go to a Broadway show or to a ball game. But this is such an incredible economic hit across the board. The banks’ credit default swaps have been much tighter than in 2008, but in Europe there are so many of these zombie banks out there. There’s a whole bunch of institutions that have such massive losses on their loan books that the central banks have to take some of these assets off their balance sheet. But the question is at what price. You can’t move things off at par when they are 50 cents on the dollar.
What kind of loans are you referring to?
One of the big issues are EETCs, enhanced equipment trust certificates. Some of these loans are backed by airplanes and banks finance these things. The way airlines are going to come back is going to be like the restaurants: Let’s say you have a fleet of 4000 planes. So you bring back 1000 planes for the first month, then 2000, and finally you will get to 4000, probably in a year and a half or two years. This is why Boeing is in trouble because that pushes Boeing’s entire sales-production cycle out multiple years. But the worst part is that there are loans on all these planes. That means you are going to have a whole bunch of planes sitting in the desert for many months and even years with loaned capital against it. So interest has to be paid. It’s like a big apartment building with no tenants. This is setting up for a real problem.
In February and March, we witnessed market turmoil of historic proportions. Yet, there has not been a «Lehman Moment» so far. Who could become the Lehman Brothers of 2020?
We haven’t identified a real corporate short yet. But the big one in this cycle is Italy. Italy has shut its economy down for too long, and they have too much debt. Tax revenues are going to be severely impacted, and Italy’s GDP is going to drop massively. The country is insolvent, and the Italian banks are insolvent, too.
Still, central banks are moving heaven and earth to try to avoid another financial crisis.
What central banks are doing is just fueling populism. In America, many people of the middle-class are unemployed, some are getting checks and some aren’t. But then, you have stocks racing back towards their all-time highs after multiple years of buybacks and companies propping up their stocks. It’s similar in Europe where central banks fueled inequality. In Italy, people were already going down this road of populism with Matteo Salvini. So if Europe doesn’t issue Euro bonds, then Italy is going to leave. But if they issue Eurobonds, the Dutch are going to leave. There’s not a lot of wiggle room.
What about financial hotspots in the US?
There are massive defaults in CMBS, corporate mortgage backed securities. And then, the big ones are New York City and New York state. They’re both insolvent, which means the federal government has to bail them out. We think New York City, New York State and Illinois need about a $500 billion bailout.
What does this mean for investors?
Sell the sugar high. Since 2015, the only investment thesis which has consistently worked while providing the best risk-adjusted returns is buying capitulation panics like in September 2015, February 2016, December 2018, and March 2020, and then selling or lightening into strength.
Even in an environment like today, where central banks are moving full steam ahead with their massive stimulus programs?
We think equity markets have priced in a lot, and the real economy has lagged. In February, when the Fed was still expanding its balance sheet at a very aggressive pace, every single analyst on the Street told you: «Don’t fight the Fed.» Over and over again, we were lectured to not bet against the central banks. And, sure enough we got hit with Covid-19. So if you invested with this mantra, you have been destroyed. Now, here we are again: The Fed is extremely accommodative, and they’re using a tool box that is probably ten times more creative than the 2008 tool box. So we’re back again to «don’t fight the Fed». The problem is that this type of thinking gets too many people offsides, and it creates really poor risk reward in the market.
Then again, stocks have staged a strong comeback since the lows of March. April was the best month for the Dow since 1987.
Today, the S&P 500 is trading at 21 or 22 times this year’s earnings, and 24 times last year’s earnings. Now, same crowd that was telling us «don’t fight the Fed» in February, is pushing two new theses.
Number one is the «look through». This is just classic: After the S&P 500 has gone from 2200 to 2900, analysts are coming out with reports saying that you can look through two years of bad earnings: We have a 30% hit to earnings, but in two years from now, we will be back at $170 earnings a share for the S&P 500 and work our way to $200. According to this logic, stocks are «cheap». The theory is that the Fed is going to do so much stimulus that you can look through a 30% hit to earnings.
And what’s the second thesis?
Number two is the Fed model which compares the stock market’s earnings yield to the yield on long-term government bonds. The theory there is that even if you cut the earnings for the S&P 500 by 30%, you still got a superior yield of 150 to 160 basis points compared to less than 120 on 30-year Treasuries. Therefore, stocks are cheap. This all looks great on the chalkboard, but when the next shoes start to drop, it’s going to get ugly. In a crisis, there’s never just one shoe, there’s always three or four. The last time it was Bear, Lehman, AIG, Wachovia, Fannie and Freddie. Yet, the same fools that were telling us that stocks are cheap in February because of the Fed model are back at it again. But in March, you didn’t hear a thing from them, not a peep. They were hiding under their desks.
Where do you spot investment opportunities against this backdrop?
It’s very rare that you walk into a set up with a risk-reward profile as attractive as in the materials sector. We believe this is the trade of a lifetime: Investors are focused on deflation risk, but the side effects of all that fiscal and monetary spending globally are underappreciated. Everybody knows the Covid-19 tragedy poses a significant deflation risk. But in our view, the «unexpected» we must be positioned for is trillions in fiscal stimulus oozing into the economy after this virus has been snuffed out. Also keep in mind that many mines shut down. So you are going to have an increase in demand for commodities with less supply. That means there is a very high probability of a big move in commodities late this year. That’s why we’re long the XME Metals & Mining ETF and the XLE Energy Select Sector ETF.
What makes you so sure this bet will pay off?
It’s a fascinating setup because the supply destruction is unprecedented. If you are a company in the copper, steel or iron ore space, and you’ve gone through the 2016 debacle, you’re a survivor because that was the worst commodities sell-off in decades. So all these companies have massively deleveraged. Now, they are a little expensive, because their stocks have been up 20 to 30% in the last few weeks, but there will be temporary pullbacks, and then you buy the dips.
Then again, demand for commodities seems to be quite weak. The IMF is predicting the worst economic downturn since the Great Depression.
We’re going to get massive infrastructures bills, both in the United States and in Europe. Covid-19 destroyed so many service-sector jobs. When we come back to restaurants, the number of waiters and waitresses is going to be cut in half because you are going to have half the tables for years. Since the pandemic has destroyed the service sector, you are going to have hundreds of thousands of people who need to get a job, and they go to migrate into infrastructure jobs. The US is the perfect example. We have such horrific infrastructure. More than 47,000 bridges are in crucial need of repairs. So you are going to have this tremendous demand for commodities.
Are you long commodity producing countries, too?
Yes, we’re long equities in Chile and Brazil. They are screaming buys.
How important is inflation for this bet to pay off?
We are going to have inflation in about six to nine months. There are massive deflationary forces at work now, but supply chain efficiencies have been destroyed because of Covid-19. In the US, we had to send private citizens to China to buy masks because we don’t produce enough. The US doesn’t produce anything anymore. So even though it costs more, there is going to be a massive incentive to bring production back, and this ruins the whole supply chain efficiency. But we don’t even need inflation for commodities to outperform. The consensus is so skewed to further deflation that even the slightest change in expectations will lead to meaningful outperformance from commodity-sensitive risk assets relative to the S&P 500.
What role does the dollar have in your commodity play?
We are highly focused on the US dollar. The Fed has rolled out the big guns to prevent a disorderly dollar move higher. Of course, there is only so much they can control with every central bank around the world in easing mode. With that said, the Fed has done a lot of key work in dislodging the dollar funding markets. Part of the squeeze for dollars at the onset of the crisis had not only to do with emerging markets and dollar-denominated debt, but Asian financial players who fund and hedge their US risk books with dollars. These things are balance sheets intensive, so as dollar funding disappeared from global markets, many big players in the FX swap market were left desperate for dollars and no way of getting them. However, going forward, the Fed has tamed the FX swap market which should ease the dollar pressures.
Nevertheless, the DXY dollar index is up 3% since the beginning of the year.
We think the dollar is the next policy tool for the Fed. They don’t want the dollar wrecking ball undoing many of the successes other programs have had in easing financial conditions. But the rest of the world is in so much pain, that the dollar has not weakened. And, the problem with Covid-19 is that it’s exponentially more damaging for emerging markets because they don’t have the fiscal and monetary engine the US has. So there is tremendous pressure behind the scenes for the Fed and the Treasury to get the dollar lower to save the global economy. In other words: Why would you use $15 trillion of fiscal and monetary stimulus in the US, Europe and Japan combined, and then have emerging markets defaults blow it all up? The only way out is to weaken the dollar. If the dollar strengthens from here, you are going to have a colossal default cycle.
So what will the Fed do next?
The Fed will communicate to the market that just because things are getting better, it doesn’t mean that they will take their foot off the pedal. In fact, what the Fed is really going to be saying is: «Don’t worry about tightening for a long, long while». The point is: I expect a big forward guidance change to be accompanied by some sort of yield curve control implementation, as Fed Governor Lael Brainard argued for in a speech in February. And that’s very good for silver. The trade of the year will be silver. Every time the Fed used forward guidance aggressively, silver exploded.
Connecticut Senator Claims COVID-19 Pandemic Has Killed “70 Million Americans”
To the Intern running Connecticut Sen. Chris Murphy’s twitter account on Mother’s Day: We’re sorry, but 70 million??
In what many assume is a hilarious twitter typo, the Connecticut Senator and Senate Foreign Relations Committee member accused President Trump in a tweet of trying to take away people’s health insurance while a brutal pandemic kills 70 million Americans. In reality, nearly 80k deaths have been linked to the virus across the US, with an overwhelming majority involving elderly patients and patients with co-morbidities.
The typo elicited a stream of hilarious replies.
We imagine Murphy’s staff will delete the tweet and issue a correction in the near future, if they haven’t already.
Murphy isn’t the first Democrat to exaggerate the pandemic’s death toll as the party embraces a position calling for lockdowns to be extended until more progress has been made on a vaccine or cure, even as initial data suggests that reopenings – at least in the West -are progressing mostly without incident, though there have been a few alarming reports.
We live through very unique times, not only because of the shock of the coronavirus that recently hit the world unexpectedly, but also because of large complex structural issues that have been building for decades.
A popular mantra says the stock market is not the economy and the economy is not the stock market referring to the often seen disconnect between market prices and events taking place in the economy.
The most recent example has been Wall Street rallying with each disastrous jobs report hitting the news wires. Even this last Friday markets rallied again unperturbed by the latest unemployment report showing the most severe collapse in employment in our recent history.
Depression like figures, yet the Nasdaq is green on the year, the S&P 500 largely off the lows with many again predicting new highs to come.
Why?
Because of unprecedented liquidity flooding markets as a result of monetary intervention making the disconnect between Wall Street and Main Street even wider.
We can pretend the stock market is not the economy, but there is no stock market without an economy yet we are witnessing an unprecedented disconnect between the two that has been building for years.
Can this disconnect be sustained? Are investors too optimistic about the current rally? What are the implications going forward?
These are complex issues everyone is confronted with and there are no easy answers. What an intellectually challenging and energizing time to be alive!
I am grappling with these issues as much as you are, we all are. And for that reason the idea for an ongoing webinar arose, to find a format to discuss these issues in more depth and make the debate more accessible and personal.
Hence I couldn’t be more pleased and honored to have found two people I greatly respect who are extremely well versed in markets and the macro market debate who share my passion for the issues at hand to join me for the debate: Guy Adami and Dan Nathan, both of CNBC Fast Money Fame.
As Guy Adami says all three of us have been trying to tell the truth in different ways for years. And that’s not an easy task for the truth is often unpopular or goes against the grain of a system that benefits from the truth being ignored.
So I invite you to join the three of us in this unscripted Zoom debate of what is hopefully the beginning of us discussing the issues we are all grappling with and we think matter to markets and you.
We hope you like it as much as we enjoyed recording it and please let us know what issues and topics are of interest to you for future episodes:
* * *
For a review of market technicals and chart discussion please see market videos. For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.
“We Sent Them Samples Of A Goat, A Papaya & A Pheasant”: Tanzanian President Catches WHO In Epic Lie
As the number of confirmed coronavirus cases explodes across Africa, the creeping involvement of the WHO has made some leaders suspicious of the NGO. Tanzanian President John Magufuli was growing suspicious of the organization, so he reportedly decided to investigate whether the organization was as trustworthy and reliable as it claimed to be.
He played what the local press described as “a trick” on the organization: He sent the WHO samples of a goat, a papaya and a quail for testing.
All three samples reportedly tested positive. When the president heard the news, he reportedly confronted the WHO, then kicked the organization out of the country. Though, to be sure, the WHO has yet to comment on the situation.
That would suggest one of two conclusions: either the strain of SARS-CoV-2 running amok in Tanzania is much, much more infectious than scientists understand, or the WHO has been reporting incorrect results either on purpose (as an attempt to bolster its credibility in the face of President Trump’s attacks) or via error (yet another indication that the WHO truly is “badly brokem” – as Vox described it back in 2015).
Most rational people would probably accept the latter scenario as the most accurate one.
Of course, Magufuli has garnered plenty of controversy himself over the past few weeks. He recently requested stockpiles of an ‘herbal tea’ that has been falsely branded as a COVID-19 cure, and has launched investigations impacting domestic labs and even frontline medical workers as he’s claimed the number of positive tests in his country is too high. The reality is that Tanzania doesn’t have much of a outbreak: It has recorded only 503 cases and 21 deaths. Though its mortality rate of 4% would suggest that the true number of cases likely numbers in the thousands.
Following the results, Magufuli fired the head of Tanzania’s national lab, sparking a political firestorm. Of course, though Magufuli has been criticized for trying to play down the impact of the virus, the government has so far refused to answer questions about where its test kits were manufactured, as Al Jazeera points out. On Thursday, the head of the Africa Center for Disease Control and Prevention rejected claims of faulty tests by Tanzania’s president.
The unreliability of COVID-19 tests manufactured in China has been a major problem for the US, and for Europe, as countries and states have been forced to discard PPE purchased in China – often after purchasing it at inflated prices – because only one-third of the masks actually work, and many of the tests have been found to produce positive and negative results more or less at random.
But we’d love to hear Bill Gates regale us with “data-based arguments” about why the WHO is indispensable to the international effort to combat the coronavirus.
Over the past few years, the various sectors of commercial real estate have split into different trajectories, with some property types, such as industrial and office, rising to new highs, and with retail properties dropping further and further. Then came the issues surrounding Covid-19 and the lockdowns.
The trajectories suddenly turned into the same direction: down for all, but to different degrees, some sectors barely ticking down and other sectors dropping more sharply. And retail properties plunged.
Here is a first taste of the dynamics in Europe, where the lockdowns started earlier than in the US – in Italy, local lockdowns started on February 21, nearly a month before the first local lockdown in the US, the San Francisco Bay Area.
Retail properties have long been suffering from the structural shift of where retail spending takes place, the shift from brick-and-mortar stores to ecommerce. This shift had been relentlessly progressing over the years. But in March and April, it exploded higher as brick-and-mortar stores were shut down and ecommerce operations boomed.
Tenants of retail properties are now having trouble paying rent, or are unwilling to pay rent, as their stores are closed. Some of them will go out of business altogether; others will attempt to stay in business but renegotiate their leases. This whole dynamic has accelerated, as many future years of more or less gradual change are now being distilled into a few months. It has thrown the retail property sector into turmoil.
According to the Green Street Pan-European Commercial Property Price Index, which tracks prices of retail properties in the 25 most liquid real estate markets in Europe, all three sub-indices dropped in April, from March. But prices of retail properties plunged during the month:
Retail properties: -15.1%
Office properties: -6.6%
Industrial properties -0.7%,
“Wide bid-ask spread points to lower values” going forward, the report by Green Street Advisors notes.
The indices for office and industrial properties came off their all-time highs in March. But the all-time high of the retail index was the plateau period of mid-2015 to early 2016. Since then, the retail property index has plunged 29% (chart via Green Street Advisors, click to enlarge):
The report notes:
“The commercial real estate transaction market has largely come to a standstill as buyers and sellers adjust their underwriting expectations and try to agree on a fair price,” the Green Street report notes.
“During periods of wide bid-ask spreads, asset values often move closer to the bid than the ask. There is little to no investor demand in the retail sector and waning investor demand for sub-prime office buildings today.
“However, high-quality office and most industrial assets are still likely to trade at punchy capital values per square meter.”
The overall Green Street Pan-European CPPI, which is an average of the retail, office, industrial sectors, dropped 7.5% in April from March and is down 3.4% over the past 12 months:
Each index was set at 100 for the month of its pre-Global-Financial-Crisis peak in 2007. According to Green Street, prices are tracked in local currency. The indices capture the prices at which commercial real estate transactions are currently being negotiated and contracted, which makes the index very timely.
Much like the retail sector of commercial real estate, the office sector also faces new structural challenges going forward as work-from-home strategies have been successfully rolled out during the pandemic, and companies and service providers now see that it is a functional and manageable alternative with high productivity for many jobs.
This too is playing out worldwide.
And this – much like the acceleration of ecommerce – is one of many structural shifts coming out of this crisis.
Billionaire Cooperman’s 11 Reasons To Be Skeptical Of Soaring Stocks Amid COVID Chaos
In an email this week, billionaire hedge fund manager Leon Cooperman detailed at least 11 reasons why he is concerned about the long-term implications of the coronavirus outbreak.
The Omega Advisors founder highlighted a number of negative consequences including stricter regulations, higher taxes, and slimmer corporate profits…
The unprecedented recent government stimulus and protections may have permanently increased the role government plays in the market, potentially increasing its regulatory oversight.
The U.S. is shifting to the left on the political spectrum, a trend that will likely result in higher taxes.
Low interest rates are a sign of an unhealthy economy, not a bullish stock market indicator.
U.S. debt is growing much faster then the economy, so a higher percentage of our national income will need to be devoted to debt servicing.
U.S. demand will likely be slow to recover given Americans will need some form of vaccination and/or proof of immunity to gain access to sporting events, concerts and other gatherings.
Businesses will need to shoulder substantial compliance costs to ensure worker safety.
Companies will need to issue a substantial amount of equity to replace lost capital.
Stock buybacks, and the support they provided to EPS, are mostly over.
U.S. profit margins were at a historic high in January, and they have historically reverted to their long-term mean over time.
Credit is cheaper than stocks, with high-yield bonds (excluding the energy sector) yielding 7.25%, or about 14 times earnings.
If Warren Buffett, the “greatest investor in my generation” can’t find stocks to buy on the dip, “who am I to be bold?”
In fact, “The Buffett Indicator” is signaling stocks are are their most expensive in history…
Cooperman said he sees a fair value for the S&P 500 at around 17x earnings based on current interest rates.
“I apply that to normalized earnings of $150 and it gives me fair value of 2,550 presently (versus yesterday’s close of 2,843),” Cooperman said.
That is a landmark ruling that challenges the independence of the ECB and the authority of the Court of Justice of the European Union (CJEU).
In announcing the ruling, German Chief Justice Andreas Voßkuhle said the CJEU had approved a practice that “was obviously not covered” by the ECB’s mandate. Voßkuhle spent months crafting the 77-page decision, announcing the ruling just a day before his official retirement on Wednesday. “
Dismissing a 2018 CJEU decision to allow the bond purchases, the German court ordered the ECB to provide Germany with adequate justification for the program within the next three months. Should it fail to do so, the Bundesbank, Germany’s central bank, would no longer be permitted to participate in the program.
The ruling raises complex and potentially troubling issues for the EU as a whole. The German constitutional court has accused the ECB and the CJEU, the court of Justice of the European Union, of abusing their power, and of acting beyond their assigned competences. That concept is known in German constitutional law as acting ultra vires. In the German legal interpretation of European integration, all sovereignty still rests with the member states. The EU is clearly not a federal state, but a deferred power. Member states have transferred certain rights to the EU. The German court said it accepts that it is bound by CJEU rulings, but only those that occur within the EU’s agreed competences. All bets are off it the CJEU goes ultra vires. And, crucially, the German court decides if and when that happens.
This is the most serious challenge to the EU’s legal framework we have yet come across. In the UK, the courts operated under the assumption that conflicts between EU and UK law would always be settled on the basis that EU law is supreme.
The ruling is unusually explicit about the breach of competences on the part of the CJEU. It criticised the CJEU’s positive ruling on the asset purchases as implausible, and objectively arbitrary. It accused the EU court of an evident neglect to investigate the wider consequences of the ECB’s programme. The word evident crops up many times in the ruling. It is a legally more loaded word than it appears at first sight. Moreover, the ruling accuses the CJEU of a breach of EU treaty law.
The German court’s interpretation will have important consequences if other national courts follow suit, which we think is very likely. Poland’s deputy justice minister already declared that member states have regained their position as the masters of the EU treaties. We expect the ruling to strengthen the determination by the Polish government to press ahead with judicial reform, and to resist interference by the EU into what they consider domestic legal affairs.
Surprise 7-1 Ruling
Perhaps the biggest surprise was the 7-1 ruling.
Price to Pay
In the ECB’s view, the negative effect of lower interest rates was the price to pay for keeping the euro intact.
That price to pay keeps rising and rising.
This Eurozone Crisis Will Be Even Worse Than Last Time
The economic fallout of Covid-19 hits all members of the currency bloc. But no mechanism exists that allows the governments of the eurozone to respond jointly to such a shock. The result is that the policy reactions to the pandemic are so far overwhelmingly national – accentuating differences rather than bringing Europe together in a time of crisis. Even in the face of a symmetric shock, the eurozone responds asymmetrically.
Germany reacted forcefully to Covid-19. Berlin abandoned its cherished debt-brake – which sharply constrains its government borrowing – and legislated a €750bn rescue package for the German economy. Italy, the country with the highest number of infections and deaths from the virus, does not have the same fiscal leeway. Its response to Covid-19 amounts to a mere €28bn – about 4% of the size of the German package.
This substantial disparity in the policy response is exacerbated by differences in initial conditions. In 2019, Italian output was still 4% lower than in 2007 while German GDP was 16% higher. Owing to the ongoing GDP collapse, the Italian public debt ratio will soon approach 150% of GDP – even without a new support package. Yet despite their comparatively tepid response, Italian policymakers already have to nervously watch the interest rate differential between Italian and German government bonds. The spread widened substantially in recent weeks.
The writing is on the wall: without solidarity from its fellow eurozone members, Italy will not be able to respond to the crisis in the same way that other countries can. It is at risk of an economic depression on top of a humanitarian catastrophe.
Negative Interest Rates
In March of 2015, ECB president Mario Draghi forced more reserves into the system, via a Quantitative Easing QE program.
The ECB also forced interest rates negative then required the banks to pay the ECB interest on those reserves.
In contrast, the Fed paid interest on excess reserves. In the process, the Fed slowly recapitalized US banks over time.
The ECB’s negative interest rate policy further damaged European banks that were in terrible shape to begin with.
Why?
Before he served as ECB president, Draghi was president of the Italian central bank from 2005 through 2011.
What better way to get Eurobonds and debt commingling than cripple the entire European banking system with negative rates and massive QE programs?
If the European banking system went down, including Deutsche Bank, wouldn’t Germany be forced to go along with banking changes?
My counter-argument is on grounds of Occam’s Razor which suggests when stupidity is one of the possible answers it is highly likely to to be the correct one.
Actually, Occam’s Razor says simpler explanations are more likely to be correct, but what is simpler than stupidity?
Surprise, Surprise
The EU is not used to surprises. But the German court ruling makes three in a row.
Brexit Vote
Brexit Vote Success
German Court Ruling
I am surprised too.
Why?
Because in every case to date, the German Constitutional Court looked the other way, There have been numerous ECB-related challenges which the German court threw to the CJEU with obvious consequences.
And there was no indication that the German court would suddenly reverse course.
So I am not only surprised by the ruling, I am shocked that it was 7-1.
Even Those Who Filed the Suit Were Surprised
“I was surprised by how clear the ruling was,” said Peter Gauweiler, a 70-year-old Eurosceptic lawyer who has been waging a legal war against the EU and ECB for almost three decades.
Debt Mutualization
What Germany fears now and has from the outset is “debt mutualization” in which Germany would bailout Greece, Spain, Portugal, and Italy.
That is why Germany insisted the Maastricht Treaty, which founded the Eurozone, prohibit debt mutualization.
But time and time again, politicians and the ECB found ways to chip away at the treaty.
And they still do even in the wake of the German court ruling.
Pablo Iglesias, Spain’s Deputy PM. says a “certain [level of] debt mutualisation is a [necessary] condition of the [continued] existence of the EU”.
He also wants Portugal and Italy to join the a pan-EU minimum income guarantee cause to “establish European standards of dignity and to protect consumption”.
“Everyone now understands you need an activist state,” says Iglesias.
What “Everyone” Understands
Given the 7-1 ruling might I suggest there is a major flaw in the Iglesias’ understanding of the word “everyone”.
Germany Pays One Way or Another
I understand where Germany is coming from. And I expected this outcome all along.
But one way or another, creditor states pay through the nose. Either Germany agrees to debt mutualization or Target-2 liabilities go up in smoke.
Target is a measure of capital flight and purchases of goods by debtor nations that cannot possibly be paid for.
Italy and Spain owe nearly a trillion euros to Germany. That’s an amount that can never be paid back.
But everyone pretends the debt is good because the ECB guarantees the debt. And those guarantees represent a fundamental flaw in the Eurozone that allowed this debt to pile up in the first place.
If Italy were to withdraw from the eurozone, its banks’ assets and liabilities would be redenominated in its new currency. Germany would not get paid back in in euros, but rather Lira or some new currency, assuming Germany got paid back at all.
The question is not whether Italy should pay its Target2 deficit, but how it possibly could. The Bank of Italy would almost certainly default on a bill for half a trillion euros.
As long as everyone can pretend these claims are good and no one will leave the Eurozone, then everything is fine.
But what if Italy or Spain jumps ship? And what are the other options?
Three Alternative Paths
Germany and the creditor nations forgive enough debt for Europe to grow
Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe
Breakup of the eurozone
Pick Your Poison
The German court signaled it has had enough of the current path towards more mutualization.
It is unreasonable to expect #2 to last forever.
The only door remaining is door #3.
Option 3 can be planned or chaos. Germany is arguably in the best shape to suffer the consequences so it would be wise for it to leave the Eurozone rather than have Spain or Italy default, setting off a cascade of defaults.
The court ruling comes in the midst of a pandemic, Brexit, the rise of the German Greens, a eurosceptic Italian government, and an EU judicial clash with Poland.
Yet, these can kicking episodes last far longer than anyone expects. The difference this time is the unexpected ruling by the German constitutional court.
The ECB cannot do more, nor can the CJEU, nor will there be coronabonds or eurobonds unless Germany agrees.
Undoubtedly, the path of least resistance is still door number 2: Germany will talk solidarity but act against it.
The result will be a continuation of high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe …. until the major unexpected happens, Italy or some other country decides it has finally had enough.
Tesla’s Head Of Europe Leaves After “Disputes” With Elon Musk
Tesla’s Head of Europe has left the company after “disputes” with CEO Elon Musk, according to several media reports.
Sascha Zahnd, formerly the company’s Vice-President Global Supply Chain, was rumored to have taken over the Head of Europe position shortly after the position became vacant last summer. His departure would mark a tenure at the role of slightly less than a year, though he had been with the company since 2016.
Germany’s Manager Magazin reported that his departure came as a result of “disputes” with Elon Musk. Color us shocked; we can’t imagine how anybody couldn’t get along with Elon Musk.
“Anyone who ascends in the Tesla realm is quickly out in the open. This applies especially to everyone who belongs to the closest management team of Tesla boss Elon Musk (48),” the publication said.
It continued: “Insiders report that Zahnd is leaving the company after less than a year in office. Tesla initially did not comment on the personnel on request. Insiders report disputes with Musk.”
Zahnd had been in charge of both sales and service in Europe and was also involved in the company’s ongoing Gigafactory project in Berlin.
Recall, it was less than a year ago that we reported on the company’s then head of European operations, Jan Oehmicke, leaving for a rival carmaker about a year after being lured away from BMW to work at Tesla.
The turnover at Tesla, a company gaining notoriety for having a revolving door of executives tasked with being Musk’s “yes men”, continues to be noticeable.
The EU has attempted to defend the fact that it allowed the communist Chinese government to censor a letter it wrote before it was published in a Chinese newspaper, erasing a sentence that stated the coronavirus originated in China.
The letter, co-written by the bloc’s 27 ambassadors, was published in China’s English-language newspaper China Daily on Tuesday. However, the EU agreed to allow censors to remove the sentence, which stated “But the outbreak of the coronavirus, in China, and its subsequent spread to the rest of the world over the past three months…”
“China has state-controlled media. There is censorship, that’s a fact,” EU foreign affairs spokesperson Virginie Battu-Henriksson told reporters in an attempt to justify bowing to the Chinese censors.
Henriksson suggested that the EU reluctantly agreed to the amendment because it was better than not being able to communicate with a Chinese audience on ‘key EU issues’, including climate change, human rights and the pandemic response.
It is the second time in the space of two weeks that the EU has rolled over for Chinese censorship, having previously softened criticism of the communist regime in a report documenting how governments have pushed “disinformation” about the coronavirus pandemic.
The European Union was set to issue the report until Chinese officials “quickly contacted the European Union’s representatives in Beijing to try to kill the report,” according to two diplomats.
The EU then “diluted the focus on China, a vital trading partner.”
German conservative politician Norbert Roettgen criticised the EU’s actions, stating “I am shocked not once but twice.”
“First the EU ambassadors generously adopt Chinese narratives and then the EU representative on top accepts Chinese censorship of the joint op-ed.” he added.
“This story beggars belief,” another EU diplomat told Politico, asking “What is the point in letting yourself be censored?”
The source urged that it was an “embarrassment” for the EU, adding: “The cost of taking a stand and defending what you believe in would have been very small.”
