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Last week, Larry Summers took on the $100 bill.

Now, he’s taking aim at the man who, if it were up to him, would be on that banknote. In a new Op-Ed for The Washington Post, Summers calls Donald Trump “the greatest present threat to the prosperity and security of the United States.”

While we’re reasonably sure readers will disagree with Summers on any number of points, it’s worth reflecting on the following essay because whatever you think about Summers and whatever you think about Trump, some of what you’ll read below is worth serious consideration, if only for what it says about why Trump is the dominant force in American politics.

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From “Donald Trump Is A Serious Threat To American Democracy“

While comparisons between Donald Trump and Mussolini or Hitler are overwrought, Trump’s rise does illustrate how democratic processes can lose their way and turn dangerously toxic when there is intense economic frustration and widespread apprehension about the future. This is especially the case when some previously respected leaders scurry to make peace in a new order — yes Chris Christie, I mean you.

The possible election of Donald Trump as president is the greatest present threat to the prosperity and security of the United States. I have had a strong point of view on each of the last ten presidential elections, but never before had I feared that what I regarded as the wrong outcome would in the long sweep of history risk grave damage to the American project.

The problem is not with Trump’s policies, though they are wacky in the few areas where they are not indecipherable. It is that he is running as modern day man on a horseback—demagogically offering the power of his personality as a magic solution to all problems—and making clear that he is prepared to run roughshod over anything or anyone who stands in his way.

Trump has already flirted with the Ku Klux Klan and disparaged and demeaned the female half of our population. He vowed to kill the families of terrorists, use extreme forms of torture, and forbid Muslims from coming into our country.  Time and again, he has claimed he will crush those who stand in his way; his promised rewrite of libel laws, permitting the punishment of the New York Times and The Washington Post for articles he does not like, will allow him to make good on this threat.

Lyndon Johnson’s celebrated biographer, Robert Caro, has written that while “power doesn’t always corrupt…[it] always reveals.” What will a demagogue with a platform like Trump’s who ascends to the presidency do with control over the NSA, FBI and IRS?  What commitment will he manifest to the rule of law? Already Trump has proposed that protesters at his rallies “should have been roughed up.”

Nothing in the way he campaigned gave Richard Nixon a mandate for keeping an enemies list or engaging in dirty tricks.  If he is elected, Donald Trump may think he has such a mandate. What is the basis for doubting that it will be used?

To be sure there are precedents in American politics for Trump. Precedents like Joe McCarthy, George Wallace, and Huey Long. Just as Trump does, each mined the all too rich veins of prejudice, paranoia and excess populism that lie beneath American soil. Yet even at their highest points of popularity, none of these figures looked like plausible future presidents. One shudders to think what President Huey Long would have done during the Depression, what President Joe McCarthy would have done at the height of the Cold War, or what President George Wallace would have done at the end of the turbulent 1960s.

My Harvard colleague, Niall Ferguson, suggests that William Jennings Bryan is the right precursor for Trump. This comparison seems unfair to Bryan who was a progressive populist but not a thug, as evidenced by the fact that he ended up as secretary of state in the Wilson Administration. Trump’s election would threaten our democracy. I doubt that democracy would have been threatened if Bryan had beaten McKinley.

Robert Kagan and others have suggested that Trump is the culmination of trends under way for decades in the Republican Party. I am no friend of the Tea Party or of the way in which Congress has obstructed President Obama. But the suggestion that Trump is on the same continuum as George W. Bush or even the Republican congressional leadership seems to me to be quite unfair.

Even the possibility of Trump becoming president is dangerous. The economy is already growing at a sub-two percent rate in substantial part because of a lack of confidence in a weak world economy.  A growing sense that a protectionist demagogue could soon become president of the United States would surely introduce great uncertainty at home and abroad. The resulting increase in risk premiums might well be enough to tip a fragile U.S. economy into recession. And a concern that the U.S. was becoming protectionists and isolationist could easily undermine confidence in many emerging markets and set off a financial crisis.

The geopolitical consequences of Donald Trump’s rise may be even more serious. The rest of the world is incredulous and appalled by the possibility of a Trump presidency and has started quietly rethinking its approach to the United States accordingly.  The U.S. and China are struggling over influence in Asia.  It is hard to imagine something better for China than the U.S moving to adopt a policy of “truculent isolationism.” The Trans-Pacific Partnership, a central element in our rebalancing toward Asia, could collapse. Japan would have to take self-defense, rather than reliance on American security guarantees, more seriously. And others in Asia would inevitably tilt from a more erratic America towards a relatively steady China.

Donald Trump’s rise goes beyond his demagogic appeal. It is a reflection of the political psychology of frustration – people see him as responding to their fears about the modern world order, an outsider fighting for those who have been left behind. If we are to move past Trumpism, it will be essential to develop convincing responses to economic slowdown.

The United States has always been governed by the authority of ideas, rather than the idea of authority.  Nothing is more important than to be clear to all Americans that the tradition of vigorous political debate and compromise will continue. The sooner Donald Trump is relegated to the margins of our national life, the better off we and the world will be.

via Zero Hedge http://ift.tt/1Qqh79e Tyler Durden

A more wonkish conspiracy-theorizing onlooker might suspect that the increasing ubiquitousness of VIX tails is sending a message to markets of what to do next…

VIX Tails objective reached…

 

The Dow is up 350 off overnight lows – bouncing hard off the 50-day moving-average…

 

Note, the ramp in the major indices is VIX-driven, and JPY-driven… watch 114.00 for a stall…

 

This is not just another “short-squeeze”

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1QJ8baM Tyler Durden

Back in November, just as the world’s attention was focusing on China for long-overdue reasons including a slowing economy, debt at well over 300% of GDP, an artificially high exchange rate whose devaluation is causing market shockwaves around the globe, a reflating housing bubble, a burst stock market bubble and non-performing loans, as high as 20%, when we pointed out the one “most under-reported” risk virtually nobody was talking about: Chinese employment.

… one risk, perhaps the biggest one, which has so far flown deep under the radar, is also the biggest one – which may explain why so few have noticed it – namely social discontent, resulting from a breakdown in recent “agreeable” labor conditions, wage cuts and rising unemployment, leading to labor strikes and in some cases, violence.

We then pointed out a disturbing indicator: the number of labor strikes in China, as a result of deteriorating labor conditions, sliding wages and surging unemployment, had become exponential.

 

Since then the media’s attention did shift to this biggest, if no longer-underreported risk if not in the international arena then certainly to the domestic “growth” story: the imminent surge in unemployment as China’s slowing economy is finally “passed down” to the worker level.

We received the first evidence overnight, when in the Markit report confirming China PMI deteriorating manufacturing, it also noted that “staff numbers declined at the sharpest rate since January 2009 during February. Companies that recorded lower headcounts widely commented on company downsizing policies as part of cost-cutting initiatives, along with the non-replacement of voluntary leavers. Despite lower employment, manufacturers were able to work through outstanding business during February. Though marginal, it was the first reduction in the level of work-in-hand since April 2015.“

In other words, a labor bloodbath.

Today, Reuters finally peels away the first layer of just how bad China’s mass layoff wave will be when it reports that China aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity and pollution.

This admission, the first of many, will cost China.

As Reuters adds, “China’s leadership, obsessed with maintaining stability and making sure redundancies do not lead to unrest, will spend nearly 150 billion yuan ($23 billion) to cover layoffs in just the coal and steel sectors in the next 2-3 years.”

That number, coming from the government, is laughably lower that what our own estimate of how much it would cost China to preserve the peace, a number which will likely be in the CNY11+ trillion range.

Needless to say, the overall figure is likely to rise as closures spread to other industries and even more funding will be required to handle the debt left behind by “zombie” state firms.

The term refers to companies that have shut down some of their operations but keep staff on their rolls since local governments are worried about the social and economic impact of bankruptcies and unemployment. Shutting down “zombie firms” has been identified as one of the government’s priorities this year, with China’s Premier Li Keqiang promising in December that they would soon “go under the knife”.

As forecast here all throughout 2015, it was just a matter of time before China had no choice but to unleash the mass pink slips, and that is about to happen: “the government plans to lay off five million workers in industries suffering from a supply glut, one source with ties to the leadership said.”

A second source with leadership ties put the number of layoffs at six million. Both sources requested anonymity because they were not authorized to speak to media about the politically sensitive subject for fear of sparking social unrest.

Putting this number in context, the hugely inefficient state sector employed around 37 million people in 2013 and accounts for about 40 percent of the country’s industrial output and nearly half of its bank lending.

According to Reuters, this would be China’s most significant nationwide retrenchment since the restructuring of state-owned enterprises from 1998 to 2003 led to around 28 million redundancies and cost the central government about 73.1 billion yuan ($11.2 billion) in resettlement funds.

There are two big problems with this low-balled estimate. The first is that as China aims to cut capacity gluts in as many as seven sectors, including cement, glassmaking and shipbuilding, the downstream labor effects will be massive, and they will impact not only the public sector but all the countless workers in the private sector that service them.

According to some of the more bearish sellside estimates, as many as 20-30 million workers in both the public and private sectors will lose their jobs as a result of the massive overcapacity retrenchment that China will undergo in decades. Even that number may be a low estimate if the worst case scenarios about Chinese bad loans materializes.

The second problem is more nuanced.

The Ministry of Finance said in January it would also collect 46 billion yuan from surcharges on coal-fired power over the coming three years in order to resettle workers. In addition, an assortment of local government matching funds will also be made available.

However, the funds currently being offered will do little to resolve the problems of debts held by zombie firms, which could overwhelm local banks if they are not handled correctly.

“They have proposed this dedicated fund only to pay the workers, but there is no money for the bad debts, and if the bad debts are too big the banks will have problems and there will be panic,” said Xu Zhongbo, head of Beijing Metal Consulting, who advises Chinese steel mills.

In other words, China is about to unleash a war on two fronts resulting from its slowing economy, one dealing with soaring NPLs, which as a reminder is the basis of Kyle Bass’ bearish thesis on China and why he and many others think China will need massive devaluation in the coming year; the second will be dealing with the social fallout from the imminent mass layoff wave.

How any of this will happen is not clear:

Factories shut down would have to repay bank loans to avoid saddling state banks with a mountain of non-performing loans, the sources said. “Triangular debt”, or money owed by firms to other enterprises, would also have to be resolved, they added.

 

Although China has promised to help local banks transfer the bad debts of zombie steel mills to asset management firms, local governments are not expected to gain access to the worker lay-off funds until the zombie firms have actually been shut down and debt issues settled.

As for the 150 billion yuan earmarked to provide “social unemployment insurance”, one thing is certain – almost none if any of these funds designed to appears the newly unemployed, will actually reach the broader population.

Ultimately, Beijing’s attempt to centrally plan a transition into a regime with “unemployment claims” will fail, unleashing what China’s riot police has been preparing for ever since 2014, something we profiled in “Chinese riot police train for a “working class insurrection.”

Consider the photos below a preview of what China is about to unleash domestically as it begins handing out the mass pink slips.

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Mario Draghi better put up or shut up at the next ECB meeting as the market is more-than-pricing-in a very significant deposit rate cut (deeper into NIRP). In fact, at -56bps, 2Y German bond yields are the most "priced in" since 2011 (and bear in mind he disappointed in December).

 

And in close up – Draghi "disappointed" in December

 

Though ironically that surge in yields in December enabled more Bunds to be eligible (albeit briefly) for Draghi's mass purchase scheme.

SocGen expects a 20bps cut, but warns "other tools" are possible including more OMT and helicopter money:

This is what is next on the ECB's agenda:

1. A 20bp cut in the deposit rate in March, to -0.5%, mainly in order to steepen the yield curve, likely with an announcement of an immediate or forthcoming introduction of a two-tier charge on excess reserves allowing the ECB to soften the impact on banks by exempting parts of excess reserves from the lowest rate. Our best “guesstimate” of the effective lower bound, based on the experience in smaller currency jurisdictions, is around -0.75%, but there is no technical limit per se;
2. Extension of the TLTRO for one year, also in March, with four additional auctions until June 2017. Given that the recovery in investment has been slower than expected, there is an argument for maintaining the incentives for lending to the corporate sector, until a sustainable investment recovery takes shape. We would expect the same conditions to apply in terms of banks’ reporting obligations and with a fixed interest rate at the current MRO rate, with loans maturing in September 2019 or possibly a rolling three year ahead horizon. A specific reason for the ECB to prolong this programme is that counterparties that used this facility in the first two auctions paid a spread (later abolished) and will be able to repay these loans (€212.4bn) as of September 2016. With both pricing and regulatory factors increasingly weighing on the current TLTROs, we see strong reasons for the ECB to be even bolder, be it by lengthening maturities (forward guidance) or lowering the interest rate, possibly even into negative territory. In case consumer confidence starts faltering, including mortgage lending in the TLTROs may be an option; and
3. Extension of the Asset Purchase Programme (APP) until December 2017. We currently don’t expect the (core) inflation outlook to improve sufficiently to end the APP in March 2017. Instead, we see a tapering to start around that point (reducing monthly purchases by €15bn each quarter), with purchases ending in December 2017, also in view of liquidity issues increasingly coming to the fore in 2017. This extension/tapering could be announced in H2 2016.

For the next meeting in March, we do not expect asset purchases to be accelerated, given the uncertainties over oil prices, the external outlook and liquidity. Recent concerns over banks’ profitability in an environment of low yields could also suggest some caution from the ECB to flatten the yield curve further, although, arguably, the ECB will also be concerned with pushing investors out of government bonds into less liquid and riskier assets. Importantly, any increase in the APP now would lead to questions over where the ECB could find assets in the future, if the APP is extended. A few clarifications could thus come as early as at the March meeting, depending also on the perceived financial market stress. Here we list a few options for the ECB in March, in order of likelihood:

• Expanding into non-financial corporate bonds remains a possibility, but with limited volumes available, easing stress in the credit markets. Similarly, expanding collateral eligibility, or accepting non-performing loans in certain ABS formats as collateral, could support the securitization market.
• Signalling the possible abolishment of the lower interest rate bound for APP. This limit is in place to stop the Eurosystem from making (automatic) losses on the APP. However, there is also a preference among some central banks for purchasing shorter maturities to avoid duration risk. A clearer agreement on profit and loss distribution in the Eurosystem could support an opening for allowing limited buying below the deposit rate, specifically enlarging the available German bond universe, although the legal hurdles still appear high;
  and
• Signalling that changes in the issue share limit for non-CAC bonds and/or the country share limit remain possible. However, we think it will be difficult for the ECB to motivate such changes, in particular as regards the country share limit, due to risks of such a move being perceived as supporting fiscally weaker countries. Allowing for higher purchases of non-CAC bonds would be easier but could impact negatively on fragmentation.

Other more technical options that are possible in March include:

• Details on purchases of regional government bonds;
• Expansion of the list of public agencies, including more utilities (bordering on corporate bonds);
• Following the Japanese example of adjusting the volumes for which negative rates are applied to mirror changes in cash holdings. This is an innovative way of removing the incentive to hoard cash (there is also some discussion on the merits of abolishing the €500 note, which would also make it harder to hold cash), and could thus make monetary policy more effective; and Sharpen communication on “forward guidance”, changing the current language of rates staying low for an “extended period”, or, better, providing future interest rate forecasts (à la the Fed’s dots or the Swedish central bank’s interest rate path).

Finally, here is a look at the ECB's full remaining toolkit:

With Draghi again signalling further easing, markets are closely scrutinising the tools at the ECB’s disposal. The remaining policy options relate to: 1) interest rates, 2) the asset purchase programme, and 3) liquidity operations, with each instrument depending on the nature of the challenges and the inflation outlook. Here is how we broadly see the ECB action panning out under different scenarios:

1) In a weaker (core) inflation outlook scenario:

• Cut the deposit rate down to its new lower “effective” bound of around -0.75%;
• Accelerate APP, with adjustments to the limits and assets likely if the programme extends well beyond March 2017.

2) In response to an unwarranted tightening in monetary conditions:

• Same as above, but without adding new asset classes and with only temporary foreign exchange interventions.

3) In response to increased fragmentation:

• Extend targeted liquidity for corporate lending;
• Reduce MRO rate, possibly to negative, to increase take-up of TLTRO.

Other tools are possible in more extreme scenarios, such as the use of OMT and helicopter money, but would need clear support from governments due to the potential fiscal implications. In extreme adverse scenarios with euro break-up risks, ECB purchase support of
risky assets (bank bonds, ABS, equity) is also viewed as possible.

And finally, Goldman expects the ECB to ease monetary policy (by 10bps) at its March 10 meeting. More specifically, they expect:

• The rate on the ECB’s deposit facility to be cut by 10bp to -40bp.
• The announcement of an introduction of a tiered rate system for reserves, although the new system may become effective only at a later stage.
• The volume of monthly purchases to be increased by €10bn to €70bn.
• The parameters of the Public Sector Purchase Programme (PSPP) to be left unchanged …
• … but the prepared statement and/or Mr Draghi's comments during the press conference to stress that the PSPP parameters can be changed in principle should this become necessary in order to counter potential tensions in the financial system.

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In 1990, British Prime Minister Margaret Thatcher exclaimed her opposition the common currency and European integration very simply: "No! No! No!" Perhaps it is time to revisit her thoughts as Britain considers leaving The EU.

As DollarCollapse.com's John Rubino notes, as the eurozone spins out of control and Britain considers leaving the European Union, this is a good time to recall some of the debates that led up to the current mess. Here’s Margaret Thatcher being extraordinarily prescient about the common currency and European integration.

 

It’s safe to say that many in Britain are glad that Thatcher and her intellectual successors opposed “a federal Europe” – and that a growing number of Italians, Greeks and Spaniards wish they’d had Thatchers of their own.

via Zero Hedge http://ift.tt/1Qpofzo Tyler Durden

Moments ago we got the two latest monthly US manufacturing surveys in the form of the downbeat Markit PMI, according to which “the February data add to signs of distress in the US manufacturing economy“, offset by the traditionally more optimistic ISM, whose chair Bradley Holcombe went so far as to say “US manufacturing may have found a bottom.” Then overnight we also received the latest Markit manufacturing sentiment update from around the globe. Suffice it to say, it did not support Holcombe’s cheerful “bottom hunting” outlook.

As the below table shows, 28 regions have reported so far. Seven saw improvements in their manufacturing sectors in February, twenty recorded a weakening, and India was unchanged. This means that over 70% of the world saw manufacturing sentiment deteriorate in February compared to January.

In terms of actual expansion, there were 21 countries in positive territory and 7 in negative. In particular, Greece moved from neutral to contraction territory, while Taiwan dropped below breakeven from expansion.

The biggest wildcard remains China where economists note that the fall in headline PMI was mainly driven by declining production and new orders, while inventory of raw materials improved. The government ascribed the deterioration in the manufacturing PMI to celebrations surrounding the Lunar New Year, however as BofA notes, “growth momentum of industrial activities could have further weakened in February.”

Ultimately, the only relevant question is whether China can stabilize its economy, and lead to a recovery in global manufacturing which for the past 7 years has ultimately been a downstream function of how well China is doing. For now the answer remains nebulous at best.

via Zero Hedge http://ift.tt/1TkTcuB Tyler Durden

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

The possibility that Trump would step on favored political toes and act pragmatically to rein in Imperial over-reach terrifies the bloated Imperial city of Washington D.C.

Political scientist and theoretician Joseph Nye, Jr. differentiates between transformational presidents and transactional presidents: transformational presidents consciously set out to radically transform America and/or America's role in the world, while transactional presidents are pragmatists who focus on managing crises and responding with caution rather than taking bold and dangerous bets.

Nye explains the difference in Do Presidents Really Steer Foreign Policy?: George H. W. Bush was a (successful) transactional president, George W. Bush was a (failed) transformational president.

Other historians have drawn distinctions between ideologically driven presidencies (Reagan and Carter, for example) and those who practiced realpolitik–making decisions based on realities and circumstances on the ground rather than on an overarching moral or ideological framework. Richard Nixon is widely seen as a realpolitik president, as were Harry Truman and Dwight Eisenhower.

You see the overlap, right? Ideological presidents are transformational, as the world inevitably fails to match up to their ideals and goals. Realpolitik presidents are transactional, making decisions based on context, risk, and the situation on the ground. These presidents are often criticized for not "saving the world," i.e. intervening to "right" some morally reprehensible crisis, or for not "defending America's interests" more aggressively.

Obviously, every president has a mix of ideological underpinnings and pragmatic skills.

As I pointed out in Sorry, "Feel the Bern" Fans: President Sanders Won't Change Anything, very little of the Imperial machinery is under the direct control of the President, and Congress and the Supreme Court can block a variety of presidential aims.

The mainstream hysteria about President Trump (and to a lesser degree, about President Sanders) is misplaced: rather than be the ruin of the nation, either president would face a number of limits on his power.

Playing devil's advocate here–perhaps Trump would be an extremely transactional/ pragmatist president who would decide everything on a case by case basis. The two political parties and the Status Quo of institutions and Imperial agencies like predictability; everyone likes knowing politicos can be bought off or compromised, and they like ideological presidents because their choices are fairly predictable.

Trump upsets the Establishment precisely because he maintains a freewheeling lack of predictability and vulnerability to the usual blandishments of money and power. Not only can't he be bought, he doesn't toe any ideological line.

Here's a sample test for an effective president: can he/she cancel a big, costly, failed "but it creates jobs" weapons system like the F-35? The political pressure to maintain spending billions on a DOA weapons system like the F-35–$200 billion each, underpowered, buggy and unable to best the aircraft it replaces in unrigged air-to-air combat, even after decades of development and years of "fixes"–is immense.

Hillary Clinton would never cancel such a politically powerful weapons system, even though when speaking privately, every unbiased military advisor would admit it's a complete catastrophe. (Could the Skunkworks design and mock up a better, cheaper aircraft at a third of the cost of the failed F-35? Why not let them try? They did so with the F-16.)

Could President Trump (or President Sanders) take the political heat and cancel the F-35 in favor of a faster, better cheaper replacement that doesn't try to be everything to every service?

The possibility that Trump would step on favored political toes and act pragmatically to rein in Imperial over-reach terrifies the bloated Imperial city of Washington D.C. This is why he is painted as the Devil Incarnate by the mainstream (i.e. bought and paid for) media and both political parties.

A transactional president who would make pragmatic decisions that gutted Imperial over-reach and eliminated failed programs because they are unaffordable and ineffective is dangerous to the Status Quo because he can't be bribed or swayed by the usual siren songs of ideology or party politics.

Taking the other side of the argument: suppose Trump ends up caving in to the usual Imperial pressures. How would that any different from electing Goldman Sachs Hillary? Wouldn't it still be more entertaining and less dreary than four years of completely predictable Imperial over-reach and the protection of privileged financial elites with Goldman Sachs Hillary?

Why Trump and Sanders Were Inevitable: It was only a matter of time before we had a populist backlash to 30 years of flawed globalization policies that both parties embraced.

via Zero Hedge http://ift.tt/1oMhmRr Tyler Durden