What’s that rumbling noise coming from the East? It’s the sound made by the Eurocracy in Brussels p*ssing themselves with laughter at UK Politics. What chance of a face-saving and mutually beneficial compromise with Brussels now? It’s all become too insane for any chance of a rationale decision. Excellent. (I shall explain below…..)
Back on Planet Earth, its officially the start of the new financial season. The US Labor Day holiday is behind us. Everyone is back at their desks and has got oodles of readies to invest. Expect to see a deluge of new Eurobonds hit the market as the bond buying frenzy continues – right up till it bursts! Traders are taking a sanguine view of the latest Trade War shots, and largely discounting the counter-barrages. Analysts are looking for bias confirmation in this week’s data slew – signs the world has already tipped into recession to fuel the bond rally and that Central Banks will wade into to rescue stocks on any sign of a wobble.
The short-term is about trading the next tick up or down in line with Tweets. The medium term is about when Powell will be forced to ease again. On the basis I hope someone is managing my funds for my long and happy retirement, I do hope someone is thinking longer-term.
What we really should be thinking about is where does global trade settle in a new world of 3D printing, nano-tech, AI and robotics. Which nations have the innovatory skills, the educated workforces and the ambition to rise above global trade based on cheapest to produce manufacturing model? It’s unravelling in front of us! That’s the stuff we should be talking about… but markets remain caught in the headlights.
When I try to find out about long-term investment perspectives, what I find is very disappointing. I’ve read lots of stuff about “the decline of the American empire” and how this naturally hands dominance to the next emerging power – clearly China. Each article is largely the same: characterising how the US matches the usual stages of growth, accumulation, the ascendency of empire followed by decline and fall. Often the UK is the case that proves the rule. (Hey, we ain’t dead yet!) Its apparently an unchallengeable rule all great powers crumble to dust.
Bollchocks. What the simplistic model doesn’t account for is the number of challengers that fall before they overtake the dominant empire. From Carthage onwards we’ve seen innumerable challengers rise and disappear without ever becoming top dog. Even Sweden looked a contender a couple of times. So was Germany. Don’t write off the US and UK yet! And China ain’t won either.
But we really do need to talk about the UK. It’s not looking good… is it?
Faced with the current political muppetry, no wonder Sterling is at a low, UK equities look forlorn, and the prospects for the UK economy have never looked bleaker. The mood looks unbelievably fraxious! We’ve never seen such division. Excellent – These are great reasons to get ready to buy. Get your buying boots ready.
I have no idea what the next few days will bring. I’ve voted Labour all my life, but if there is a snap election… then it’s time to change. I’ll be delighted if Boris can get a deal, but I don’t believe in the tooth fairy either.
UK Politicians? If ever a stable needed cleaning out, its Westminster at the present time. Even calm rational me is infuriated by what I’m watching. My TV has never come to close to getting a boot kicked through it as this morning as a disgrace of a Tory MP sanctimoneofied about why he was voting against Boris, while the awful Labour Shadow Attorney-General compared our Prime minister to Nazis Thugs and dramatized the sacking of an (apparently) disloyal aide as a “young woman of colour frog-marched out of Downing Street at the point of a gun.”
Step back a moment – when looking at what the Westminster Clustersh*tf**k means for UK investment possibilities, view it over the long view. Firstly, it’s a complete game. The Great British Political FUBAR has been amplified and driven by the media desperate to give us their opinions. Its not real. It’s a circus, to which too many media-greedy politicians have proved very happy to juggle knives while mono-cycling over pools of hungry sharks. MP’s crave the opportunities the BBC et al hand them to seem statesman-like. Such a shame most of them come across as *****.
Step Back and Figure it Out. The nations “representatives” may have succeeded in making themselves a laughing stock, but this is long-term. I read a fascinating piece by David Murrin (Emergent Asset Management) last night: “The Brexit Wars – The Final Battle”. He looks at today’s likely battle in parliament as part of a longer-term process. Well worth a read to put the political sh*tstorm thus far into context. The possibilities from here on it are legion…
In terms of market opportunities in the UK.. its getting very close to the bottom. Buying boots ready..
via ZeroHedge News https://ift.tt/2HIieml Tyler Durden
Huawei accused the US government on Tuesday of harassing its employees and orchestrating a campaign of cyberattacks to try and infiltrate its internal network, Bloomberg reports. The company made these claims in an official statement, but didn’t say how it got this information.
The accusations are the latest in a back-and-forth conflict between Huawei and the US government, which has been accused of trying to use its influence to stop the Chinese telecoms giant from gaining supremacy in the market for fifth generation wireless gear.
The Trump Administration has notoriously blacklisted the Chinese company, banning American companies from doing business with it (potentially depriving it of critical components like microchips manufactured by Qualcomm). Trump has accused the company of aiding Beijing by carrying out espionage against its clients, making Huawei a “threat to national security.”
In its letter, Huawei accused Washington of using “every tool at its disposal”to try and undermine the company, including ordering law enforcement to harass current and former employees.
“It has been using every tool at its disposal – including both judicial and administrative powers, as well as a host of other unscrupulous means – to disrupt the normal business operations of Huawei and its partners,” the company said. Other measures included “instructing law enforcement to threaten, menace, coerce, entice, and incite both current and former Huawei employees to turn against the company and work for them.”
It added that “no company becomes a global leader in its field through theft.”
“We strongly condemn the malign, concerted effort by the U.S. government to discredit Huawei and curb its leadership position in the industry,” the company said. “No company becomes a global leader in their field through theft.”
Regarded by some as a “bargaining chip” in the US-China trade talks (indeed, President Trump has often treated it like one, most recently promising President Xi the US would back down from its harassment of Huawei as an overture to Beijing, though the next round of talks didn’t pan out so well).
The American military has launched an international campaign to convince its allies to reject Huawei technology in their next generation of wireless networks, warning allies that using Huawei equipment could put the data of citizens and the military at risk.
Though Huawei remains the world leader in 5G, Washington’s efforts have been a hindrance to the company. Huawei’s Billionaire founder, Ren Zhengfei, warned in an internal memo in August his company faced a “live or die moment.”
Huawei’s accusations follow a report by the Wall Street Journal published last week claiming that the DoJ was expanding its investigation into Huawei’s efforts to steal technology from American firms.
via ZeroHedge News https://ift.tt/2LjVPhz Tyler Durden
Since the end of the last recession, the outlook for the U.S. economy has never been as dire as it is right now. Everywhere you look, economic red flags are popping up, and the mainstream media is suddenly full of stories about “the coming recession”. After several years of relative economic stability, things appear to be changing dramatically for the U.S. economy and the global economy as a whole. Over and over again, we are seeing things happen that we have not witnessed since the last recession, and many analysts expect our troubles to accelerate as we head into the final months of 2019.
We should certainly hope that things will soon turn around, but at this point that does not appear likely. The following are 28 signs of economic doom as the pivotal month of September begins…
#1 The U.S. and China just slapped painful new tariffs on one another, thus escalating the trade war to an entirely new level.
#2 JPMorgan Chase is projecting that the trade war will cost “the average U.S. household” $1,000 per year.
#3 Yield curve inversions have preceded every single U.S. recession since the 1950s, and the fact that it has happened again is one of the big reasons why Wall Street is freaking out so much lately.
#4 We just witnessed the largest decline in U.S. consumer sentiment in 7 years.
#6 Sales of luxury homes valued at $1.5 million or higher were down five percentduring the second quarter of 2019.
#7 The U.S. manufacturing sector has contracted for the very first time since September 2009.
#8 The Cass Freight Index has been falling for a number of months. According to CNBC, it fell “5.9% in July, following a 5.3% decline in June and a 6% drop in May.”
#9 Gross private domestic investment in the United States was down 5.5 percentduring the second quarter of 2019.
#10 Crude oil processing at U.S. refiners has fallen by the most that we have seen since the last recession.
#11 The price of copper often gives us a clear indication of where the economy is heading, and it is now down 13 percent over the last six months.
#12 When it looks like an economic crisis is coming, investors often flock to precious metals. So it is very interesting to note that the price of gold is up more than 20 percent since May.
#21 According to CNBC, the S&P 500 “just sent a screaming sell signal” to U.S. investors.
#22 Masanari Takada is warning that we could soon see a “Lehman-like” plunge in the stock market.
#23 Corporate insiders are dumping stocks at a pace that we haven’t seen in more than a decade.
#24 Apple CEO Tim Cook has been dumping millions of dollars worth of Apple stock.
#25 Instead of pumping his company’s funds into the stock market, Warren Buffett has decided to hoard 122 billion dollars in cash. This appears to be a clear indication that he believes that a crisis is coming.
#27 The Economic Policy Uncertainty Index hit the highest level that we have ever seen in the month of June.
#28 Americans are searching Google for the term “recession” more frequently than we have seen at any time since 2009.
The signs are very clear, but unfortunately we live at a time when “normalcy bias” is rampant in our society.
If you are not familiar with “normalcy bias”, the following is how Wikipedia defines it…
The normalcy bias, or normality bias, is a belief people hold when considering the possibility of a disaster. It causes people to underestimate both the likelihood of a disaster and its possible effects, because people believe that things will always function the way things normally have functioned. This may result in situations where people fail to adequately prepare themselves for disasters, and on a larger scale, the failure of governments to include the populace in its disaster preparations. About 70% of people reportedly display normalcy bias in disasters.[1]
For most Americans, the crisis of 2008 and 2009 is now a distant memory, and the vast majority of the population seems confident that brighter days are ahead even if we must weather a short-term economic recession first. As a result, most people are not preparing for a major economic crisis, and that makes us extremely vulnerable.
In 2008 and 2009, the horrible financial crisis and the bitter recession that followed took most Americans completely by surprise.
It will be the same this time around, even though the warning signs are there for all to see.
via ZeroHedge News https://ift.tt/34j7owP Tyler Durden
One day after stocks first tumbled, when the US and China launched a new round of sanctions over the weekend, then rebounded for no comprehensible reason, then tumbled again following a Bloomberg report of difficulties in setting a schedule as both sides had failed to agree on a date for Chinese officials to meet their U.S. counterparts in Washington, S&P futures once again magically recovered all losses but not for long and have since sunk again, sliding 0.8% to just above 2,900 as investors awaited the next batch of news on trade talks.
US futures dragged the world lower and global stocks slipped toward a recent two-month low on Tuesday, as U.S.-China trade tensions drove investors to the relative shelter of gold, the Japanese yen and government debt; as a result treasuries advanced, while the pound first sank below 1.20 against the dollar for the first time in three years as Brexit brinkmanship raised the possibility of an early election in the U.K, only to surge shortly after for reasons not exactly clear.
To be sure, September has been off to a rocky start for risk assets as traders remained sensitive to the twists and turns of the Sino-U.S. trade war. With mistrust on both sides, officials from the world’s two largest economies are struggling to agree on basic terms of re-engagement and even when to hold meetings planned for this month, Bloolmberg reported while violent confrontations in Hong Kong and the risk of an imminent Chinese incursion continue to weigh on sentiment.
With U.S. markets closed on Monday, global markets took their cue from weak PMI survey data in Europe and China which raised concerns the global economy was struggling on many fronts. An index of global stocks slipped 0.2% on Tuesday, heading toward a two-month low hit in early August. An index of Asian stocks was down 0.7%. In the trade war between Washington and Beijing, tensions have shown little sign of abating even though U.S. President Donald Trump has said they would meet for talks this month.
“Since the trade dispute has become the driving force behind equity markets, we advise against adding significantly to equity exposure, particularly for those with an adequate strategic allocation,” Mark Haefele, chief investment officer at UBS Global Wealth Management said.
European stocks were on the back foot as investors locked in profits from a three-day streak that saw indices scale near one-month highs, with the Stoxx Europe 600 Basic Resources Index falling for a second day, down as much as 1.4%, on news Chinese and American officials were struggling to schedule trade talks; metals retreated with copper hitting a 2-year low as diversified miners fall, with Rio Tinto -0.7%, BHP Group -0.5%, Anglo American -1.4%, Glencore -1.3%. Steelmakers also dropped: ArcelorMittal -1.2%, Evraz -1.7%, Voestalpine -1.3%, hit after Fitch analysts cut their 2019 global steel price forecast to $600/t from $650/t, as global prices continue to be hammered by poor sentiment from the ongoing U.S.-China trade tensions, increasing downside risks to the global economy. Base metals also fell in London, with copper -0.6%, zinc -1.5%, nickel little changed; aluminum -0.5%; iron ore -1.6% in Singapore.
Earlier in the session, Asian stocks dropped for a second day, led by energy producers, as Beijing and Washington struggled to set a meeting schedule for trade negotiations. Markets in the region were mixed, with Japan advancing and India retreating. The Topix climbed 0.4% in thin trading, supported by automakers and chemical producers. The Shanghai Composite Index closed 0.2% higher, with Foxconn Industrial Internet and China Yangtze Power among the biggest boosts. Sports-related shares jumped after China announced a plan to boost athletic development. India’s Sensex fell 1.4%, dragged down by financial shares, amid concerns that the biggest bank overhaul in decades may hurt the nation’s bad loan cleanup and slow lending approvals.
The move away from equities boosted demand for government debt with yields on benchmark U.S. Treasury debt tumbling to toward a three-year low hit last week as investors also ramped up their bets the global economy is headed toward a recession. Market watchers are hoping that U.S. data would undermine some of those bearish bets on the global economy with surveys from the Institute for Supply Management due later in the day while U.S. payrolls data is due on Friday.
“The ISM … is going to be (a) particular important market mover as those who have been buying bonds strongly, suggesting that the U.S. is on course for recession, need to see some sort of justification,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
The yield on 10-year U.S. Treasuries fell 2 basis points to 1.4876%, off a three-year low of 1.443% touched last week. The yield dropped more than 50 basis points last month, the biggest monthly drop since August 2011. U.K. gilts and Italian debt led the rally in European sovereign bonds.
In FX, Sterling was the big mover in currency markets, nearing a three-year low with British Prime Minister Boris Johnson set for a showdown with Parliament over a no-deal Brexit. On the opposite performance end, the Bloomberg Dollar Spot Index touched the highest since May 2017 as uncertainty over the planning of U.S.-China trade talks supported the greenback; its seven-day winning streak is the longest since March. The dollar strengthened against all G-10 peers barring havens – the yen and the Swiss franc – as risk sentiment deteriorated; the biggest declines were seen in the NZ dollar and Norwegian krone.
After dropping to a record low on Monday, the offshore yuan failed to stage a rebound overnight as China and the U.S. struggled to set a date for planned trade talks this month. The onshore currency extended its decline Tuesday to the lowest level since February 2008, after news emerged that both sides had failed to agree on a date for Chinese officials to meet their U.S. counterparts in Washington. The offshore yuan fell as much as 0.47% overnight on the news, inching closer to 7.2 per dollar, before rising 0.2% as of 5:20 p.m. in Hong Kong. “The yuan will remain bearish, but the People’s Bank of China has been tightening its grip in the onshore yuan fixing and may attempt to anchor trading at the 7.1-7.2/USD range,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. The central bank set its daily yuan fix at a level stronger than market watchers expected for a 10th straight day, the longest stretch since June. When the onshore currency breaches the 7.2 level, the PBOC may step up measures such as issuing verbal comments to reinforce its intention to smooth the pace of the depreciating yuan, Cheung said.
In commodities, oil prices were also dented by trade war concerns. U.S. West Texas Intermediate crude lost 0.47% to $54.84 per barrel. Brent futures dipped 0.05% to $58.63 per barrel amid concerns an economic slowdown from the trade war may dent demand. Forecasters are looking for signs a weakening Hurricane Dorian will turn north from the Bahamas rather than slamming head on into Florida.
Market Snapshot
S&P 500 futures down 0.8% to 2,901.50
STOXX Europe 600 down 0.5% to 378.78
German 10Y yield fell 3.4 bps to -0.736%
Euro down 0.2% to $1.0945
Brent Futures down 1% to $58.07/bbl
Italian 10Y yield fell 3.1 bps to 0.626%
Spanish 10Y yield fell 4.0 bps to 0.088%
Brent Futures down 1% to $58.07/bbl
MXAP down 0.3% to 152.31
MXAPJ down 0.7% to 490.16
Nikkei up 0.02% to 20,625.16
Topix up 0.4% to 1,510.79
Hang Seng Index down 0.4% to 25,527.85
Shanghai Composite up 0.2% to 2,930.15
Sensex down 1.6% to 36,743.43
Australia S&P/ASX 200 down 0.09% to 6,573.40
Kospi down 0.2% to 1,965.69
Gold spot up 0.2% to $1,532.04
U.S. Dollar Index up 0.3% to 99.25
Top Overnight News from Bloomberg
Britain faces its third election in just over four years after Johnson said he would rather risk losing office than have his negotiations with the EU undermined. In a dramatic ultimatum, Johnson will try to trigger a snap vote on Oct. 14 if he loses a crunch vote in Parliament on Tuesday evening
BOE Governor Mark Carney is running out of opportunities to warn lawmakers just how much a no-deal Brexit will harm the economy. With Parliament set to be suspended next week, Carney’s appearance before the Treasury Committee Wednesday could be one of his last chances to publicly address MPs before Oct. 31
Chinese and U.S. officials are struggling to agree on the schedule for a planned meeting this month to continue trade talks after Washington rejected Beijing’s request to delay tariffs that took effect over the weekend, according to people familiar with the discussions
Italy’s new government would push through an expansionary 2020 budget and demand a review of European Union fiscal rules, according to a draft program seen by Bloomberg
France is taking advantage of record-low borrowing costs to plan its biggest-ever debt sale this week, just as signs emerge that investor sentiment may be faltering after a global rally
The U.S. East Coast from Florida to the Carolinas was bracing for devastating winds and a life-threatening storm surge from Hurricane Dorianas the Category 3 storm wreaks havoc on the Bahamas
Asian equity markets traded indecisively following a non-existent lead from Wall St due to the Labor Day holiday and as upcoming key risk events, as well as reports US and China are struggling to set a meeting for trade talks this month, added to the non-committal tone. ASX 200 (U/C) and Nikkei 225 (+0.1%) were choppy with upside in Australia limited by mixed data and amid the RBA rate decision where the central bank kept rates unchanged as expected, while advances in Tokyo were restricted by a mixed currency. Hang Seng (-0.4%) and Shanghai Comp. (+0.2%) conformed to the indecisive tone after reports noted difficulty in setting up planned US-China trade talks and after MOFCOM lodged a case against the US at the WTO, with PBoC inaction and a net daily liquidity drain of CNY 80bln also contributing to the lacklustre sentiment in China. Finally, 10yr JGBs were subdued after the pullback in T-notes but then gradually recovered after mixed 10yr JGB auction results.
Top Asian News
Japan Companies Are Sitting on Record $4.8 Trillion in Cash
Hong Kong’s Lam Says She Never Asked China’s Permission to Quit
China Sees Some Positive Signs in Hong Kong Despite Violence
European indices are marginally lower on the day [Eurostoxx 50 -0.4%] following on from a mostly subdued Asia-Pac lead and ahead of US markets’ first chance to react to the implementation of further US/China tariffs. UK’s FTSE 100 (-0.2%) derives some modest support, but remains in negative territory, from the weaker Pound as UK Parliament returns from their summer recess to challenge PM Johnson’s attempt to prorogue Parliament until 14th October. Sectors are mostly in the red, albeit defensive sectors are less dented than cyclicals. Turning to individual movers, easyJet (-3.9%) rests at the foot of the Stoxx 600 index due to a broker downgrade at Kepler Cheuvreux, whilst Iliad (-4.3%) is not far behind on the back of earnings. On the flip side, Renault (+1.2%) and Fiat Chrysler (+2.5%) shares spiked higher amid source reports that Renault and Nissan are seeking ways to end their alliances discord, a resolution may potentially lead to a Fiat Chrysler deal.
Top European News
U.K. Construction Shrinks Again as Brexit Sees New Work Dry Up
Moscow Police Detain Opposition Activists After Orderly Protests
Italy’s Draft Government Plan Pledges Expansionary 2020 Budget
Lego Reports 12% Drop in Profit Dragged Down by Asian Investment
In FX, the Pound has racked up more losses in advance of UK Parliament reconvening after the Summer break and in anticipation of a showdown between anti-no deal politicians across party divides and PM Johnson’s pro-Brexiteers. Like yesterday, stops were triggered in Cable once the previous 1.2015 ytd low was breached and again through the psychological 1.2000 before another round was tripped on a break of 1.1980 that sat just below 1.1986-83 ‘support’ from mid-May 2017. The selling has subsequently abated even though construction PMI missed expectations in line with Monday’s manufacturing headline print, but Sterling remains weak and extending relative declines vs G10 pears with Eur/Gbp firmly above 0.9100 and Gbp/Jpy hovering around 127.00 after an order driven lurch to circa 126.70 at one stage.
AUD/JPY/CHF – In contrast to the underperforming Pound, and despite ongoing strength in the Greenback (ie DXY up to 99.356 at best), the Aussie and Yen are at the top of the major ranks, as Aud/Usd reclaims 0.6700+ status and Usd/Jpy slips back to test underlying bids/support around 106.00. No change in rates or wait-and-see guidance from the RBA overnight has helped the Aussie stabilise amidst the ongoing US-China trade stalemate and further Yuan weakness, while a broader downturn in risk sentiment is keeping the Yen underpinned alongside Gold, but not the Franc uniformly. Indeed, Usd/Chf is still holding above 0.9900, while Eur/Chf creeps deeper below 1.0850, albeit largely due to Euro depreciation on top of no verbal intervention from the SNB, so far.
CAD/NZD/EUR – The Loonie and Kiwi have both lost more ground relative to their US peer (and latter against the aforementioned recovering Aussie as Aud/Nzd eyes 1.0700), with Usd/Cad climbing above 1.3350 ahead of NA Markit manufacturing PMIs, and ISM in the US, while Nzd/Usd has pulled back under 0.6300 into the latest GDT auction and not really gleaning support from NZ Finance Minister Robertson noting some robust domestic data and firm economic fundamentals, as he also stated that the Government is ready to react in the case of a shock. Elsewhere, the single currency continues to decline as noted above, and closer to 1.0923 support ahead of 1.0900, but may find some traction from hefty option expiries close by (2 bn between 1.0945-50).
EM – The Rand and Lira look technically and fundamentally ripe to claw back ground vs the Buck, with Usd/Zar reversing from almost 15.2900 towards 15.1250 and Usd/Try touching 5.7650 compared to 5.8220 at the other extreme in wake of SA GDP and Turkish CPI that confounded forecasts on the upside and downside respectively.
RBA kept the Cash Rate unchanged at 1.00% as expected. RBA stated the outlook for global economy is reasonable and that it is to ease policy if needed to support sustainable growth, while it added rates are to remain low for an extended period. RBA reiterated that it will monitor developments in labour market closely and that signs of a turnaround in housing market but sees inflation likely to be subdued for some time and noted the outlook for consumption remains the main domestic uncertainty.
In commodities, WTI and Brent futures are on the backfoot in early EU trade, with prices around 54/bbl and under 58/bbl respectively. Prices may also see divergence as WTI had no settlement yesterday due to the US Labor Day Holiday, which will also see the weekly API and DoE inventory data pushed back by a day. Price action has largely been dictated by sentiment thus far, with ongoing US/China, Brexit and Hong Kong woes weighing on risk appetite. State-side, NHC said a tropical cyclone is expected to form later today over SW Gulf of Mexico, tropical storm warnings have been issued for portions of NE Mexico. The potential tropical cyclone Seven is located about 220 miles East of La Pesca, Mexico, with maximum sustained winds of 35mph. Meanwhile, Hurricane Dorian is reportedly stationary and is expected to drift North/Northwest later, away from the Gulf of Mexico. Elsewhere, gold is relatively flat but off of intra-day lows and in positive territory despite the DXY printing fresh YTD highs as investors increase positions in safe-haven assets. Conversely, the risk aversion has taken a toll on copper prices which currently reside below the 2.50/lb level. Finally, Dalian iron ore futures rose in excess of 4% amid a rosier demand outlook for the base metal as steel mills restock their supplies.
US Event Calendar
9:45am: Markit US Manufacturing PMI, est. 50, prior 49.9
10am: ISM Manufacturing, est. 51.2, prior 51.2;
10am: Construction Spending MoM, est. 0.3%, prior -1.3%
DB’s Jim Reid concludes the overnight wrap
For a brief moment yesterday the main headline out of No.10 Downing Street yesterday was the arrival of a very cute new adopted Jack Russell puppy named Dilyn. However fast moving political events soon overshadowed this. Although before moving on I can’t help wonder what Larry the Downing Street cat made of the new arrival.
The news quickly moved from puppies to polling as speculation intensified as the day progressed that a government commitment to a general election was imminent. PM Boris Johnson spoke outside No.10 just after 6pm UK time and suggested that if Parliament blocks no deal this week and votes for a delay, they are making his negotiations with the EU impossible. This move comes in the wake of news that lawmakers plan to raise a motion today to take over the order paper tomorrow and raise a bill to force the government to extend A50. It specifies the government must seek an extension to 31st January 2020 or agree to any extension EU27 provides. It also says this must be complied with by 19th October. The vote will likely take place tomorrow evening. Mr Johnson didn’t actually say that an election will follow a loss in tomorrow’s vote as was expected beforehand but it’s hard to see what the alternative is and there are plenty of well respected and connected journalists suggesting that an election on October 14th is being lined up. Interestingly this is a Monday as the crucial EU summit takes place on the 17-18th and takes the usual Thursday UK election slot. The last non-Thursday general election was in 1931. Apparently historically Fridays were always ruled out as politicians were worried that burgeoning end of the week pay packets were likely to lead to drunken voting. Insert your own jokes here but people from both sides of the Brexit debate might need a stiff drink at the end of this week! We should also add that with fixed term parliaments the PM can’t automatically call an election as 2/3rds of the House requires to vote for it. However this is surely a formality if the PM supports it as the opposition party has been calling for one. The most interesting scenario though is that the PM loses the vote tomorrow and the opposition refuse to vote for an election or insist on it being held after October 31st thus leaving the PM trapped. One to watch.
Sterling had a tough day on continuous speculation about the day’s likely news and weakened about -0.80% by the afternoon and was then relatively unmoved by the PM’s statement, partly helped by no US trading. It is trading down a further -0.27% this morning though.
In light of yesterday’s developments, it’s worth noting where the latest polls are. YouGov has run two separate polls in the last week with the 28-29 Aug poll showing a 33% versus 22% Conservatives-Labour split. The poll from 27-28 August in conjunction with the Times had a 34% versus 22% split. The Brexit Party picked up 12% and 13% respectively and Lib Dems 21% and 17% respectively. Since then the Survation/Daily Mail poll conducted over 29-30 August had a slimmer lead for the Conservatives over Labour at 31% versus 24% (albeit with a much smaller sample size). Most recently, the Deltapoll/Mail on Sunday poll had a 35% versus 24% split. It feels to me that the country is still very close to being 50/50 split on Brexit and the key to any election is which side unites more around one party than the other side. With Boris Johnson doing everything he can to win back a high proportion of the those who flocked to the Brexit Party, the Labour and Liberals are probably going to need a plan as how they can avoid splitting the remain vote.
So expect there to be a lot more focus on the polls in light of yesterday’s news, especially if the government lose tomorrow’s vote as expected. Over in markets 10y Gilts (-6.7bps) tracked the move in Sterling however most other European bond markets were a shade weaker to unchanged after the manufacturing PMIs broadly printed in line with expectations (more on those below). Indeed 10y Bund (-0.1bps) and OAT (+0.6bps) yields were flat to slightly higher along with 10y yields in Spain (+2.3bps) and Portugal (+0.9bps) although BTPs (-3.0bps) extended their strong recent run with the spread over Bunds now down to 167bps. To think that spread was closer to 240bps in early August.
In equity markets, with the US off on holiday, volumes were down some 50% or so however markets did finish slightly on the positive side with small gains for the STOXX 600 (+0.32%) and DAX (+0.12%). The FTSE 100 (+1.13%) was a standout thanks to the currency move while Italy’s FTSE MIB also closed up +0.50%. In EM the Argentinian Peso strengthened +6.21% after the nation imposed capital controls while in commodities Gold (+0.59%) closed up but is trading down -0.30% this morning while Brent oil futures were down -2.90% yesterday.
In other news, yesterday late afternoon Bloomberg reported that the US and China were struggling to agree on a date to meet this month. S&P futures after being flattish at around Europe’s lunchtime traded as low as -1% down after headlines. They are down -0.54% as we type.
Bourses in Asia are trading flat to down amidst low volumes this morning. The Nikkei (+0.04%) and Shanghai Comp (-0.05%) are trading broadly unchanged while the Hang Seng (-0.10%) and Kospi (-0.17%) are slightly lower. In Fx, all G10 currencies are trading weak (range c. -0.1% – -0.5%) with the US dollar index trading up +0.37% at 99.281, the highest level since May 2017. Asian EM Fx is also trading weak with the onshore Chinese yuan down -0.15% to 7.1824 with the Indian rupee leading the declines (-0.88%). Meanwhile the 10y UST yield is up +2.9 bps this morning and the 2y yield up +1.5bps bringing the 2s10s curve back in marginally positive territory (+0.4bps). The yields on the 30y UST is up +3.9bps. As for overnight data releases, South Korea’s August inflation printed at 0% yoy (vs. +0.2% yoy expected and +0.6% yoy last month) – a record low – and core inflation printed in line with expectations at +0.9% yoy (vs. +1.0% yoy last month) while the final Q2 GDP was revised down one tenth from the initial read at +2.0% yoy. Separately, the BoK said that the recent low inflation is mainly due to supply-side factors and government’s policies on welfare and it’s hard to say it’s the precursor of deflation while adding that inflation will quickly rebound around the end of this year.
Back to yesterday, where with the ECB meeting now just a stone’s throw away, the PMIs were always going to be a bit more peripheral than normal and the fact that they were broadly close to consensus only furthered that argument. Indeed the manufacturing reading for the Euro Area was confirmed at 47.0 and unrevised from the flash with a slight upward revision for France (51.1 from 51.0) offset by a slight downward revision for Germany (43.5 from 43.6). There were however slight positive surprises for Italy (48.7 vs. 48.5 expected) and Spain (48.8 vs. 48.5 expected) although this needs to be taken in context of both still being in contractionary territory.
Meanwhile, the UK’s manufacturing PMI (47.4 vs. 48.4 expected) hardly made for pretty reading. The market is obviously more focused on Brexit developments however this was still the lowest reading in 85 months with new orders also at the lowest level in over 7 years. Most of the forward-looking indicators were fairly weak too with the data still very much consistent with the manufacturing sector in recession.
So the baton passes to the US today where we’ll get the August ISM manufacturing and final manufacturing PMI revisions. The market expects the ISM to have held steady at 51.2 which as a reminder was the lowest since August 2016. The reading has also dropped for 4 consecutive months and 8 of the last 11 months. We should flag that our US economists expect a temporary bounce in today’s ISM to 52.5 in light of the regional survey data however they do expect further downside risks in the near term owing to trade uncertainty.
To the day ahead now, where the only data of note this morning is the July PPI print for the Euro Area. In the US this afternoon the highlight is likely to be the August ISM manufacturing report, while the final August manufacturing PMI revisions will also be made. The July construction spending print is the only other data of note. Away from that the Fed’s Rosengren is due to speak late this evening.
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Hurricane Dorian has weakened from a Category 4 storm down to Category 3, now with winds of 120 miles per hour, but experts and officials say it’s too soon for Floridians to relax.
The storm stalled over the island of Grand Bahama for a day, staying in roughly the same position for 12 hours. Prime Minister Hubert Minnis described the storm as a “historic tragedy,” with five people confirmed to have died. Roughly 13,000 homes have been destroyed or seriously damaged.
Now, it’s setting its sights on the Eastern seaboard. There are already reports of flooding in Miami.
We have a report of ongoing coastal flooding on NE 30th Street at Biscayne Bay in Miami early this morning. Remember to never drive through flooded roadways. #TurnAroundDontDrown#FLwxpic.twitter.com/Pu3zIdL8Nr
Millions have been ordered to evacuate across Florida, Georgia, and the Carolinas. In Florida, where many people have been preparing for the hurricane since last week, many families have built up stockpiles of emergency supplies and food, according to CNN.
Some hurricane shelters in Stuart, Florida have already stopped accepting evacuees. “If they haven’t evacuated yet, it’s too late,” said CNN meteorologist Derek Van Dam in Stuart.
“In fact, the shelters, the evacuation centers here in Martin County are no longer accepting evacuees. The causeway that connects the barrier islands where the mandatory evacuations have been under way since 1 p.m. yesterday are now closed,” Van Dam said.
Coastal areas like Stuart are already experiencing bands of rain and wind, though the storm is still roughly 100 miles away. The National Hurricane Center’s latest update is still focused on the Bahamas. Gusts north of 60 mph have been reported in Florida, and they will likely strengthen throughout the day on Tuesday as the storm moves closer.
Norway has been hailed as a model for electric vehicles adoption with EV sales exceeding 57% of new car sales in June of this year. This accomplishment stands at odds with the rest of the world, where despite substantial subsidies, EV sales have lingered in the low single digits. The reality of Norway’s EV sales success is rooted in the simple fact that Norway has created an extremely distorted car market.
Norway’s cold weather makes the country one of the least suitable markets for electric cars since freezing temperatures tend to reduce an EV range by up to 40%. This fact alone makes Norway a less likely market for wide EV adoption. EVs high price tag, range limitations, slow charging time and limited second market makes them a niche product in many markets, said another way, EVs practical inferiority to internal combustion engine (ICE) cars has discouraged their adoption at a wide scale. To counter EVs inherent inferiority, the Norwegian government has introduced a host of market distorting – stick and carrot – initiatives to force EVs adoption:
EV Carrots:
EVs are exempt from VAT and other taxes on car purchases and sales.
Parking in public parking spaces is free.
EVs can use most toll roads and several ferry connections free of charge.
EVs are allowed to use bus and collective traffic lanes.
The company car tax is 50 per cent lower on EVs, and the annual motor vehicle tax/road tax is also lower.
Battery charging is free at a rapidly growing number of publicly funded charging stations.
As result of the above distortions, ICE cars cost more to purchase in Norway and are up to 75% more expensive to operate. Thus, it is no wonder that EV sales have been growing at a brisk rate in Norway. As a matter of fact, it is mind boggling as to why anyone would even purchase an ICE car in Norway under these conditions.
(Source: Norsk Elbilforening)
Having these many incentives come at a great cost to the Norwegian treasury, or more precisely these incentives come at a great cost to the Norwegian taxpayer. Governments may create the conditions for wealth creation, but they don’t create wealth per se, wealth is created by private enterprise and is taxed and redistributed by governments for the public good. The Norwegian government seems to be believe that a switch to EVs (due their supposed CO2 emissions reduction) is in the public interest.
At what cost?
In 2014, Bjart Holtsmark (Statistics Norway) and Anders Skonhoft (Department of Economics, Norwegian University of Science and Technology) answered this question in an excellent research paper. According to that independent study, the annual EV incentives cost to the Norwegian treasury stands at a staggering $8100 per EV (excluding the value of free charging and bus lane access). At the end of 2018, Norway had 200,000 registered EVs (I am excluding PHEVs from the calculation since they have different incentives), this means the total annual EV subsidy cost to the Norwegian treasury stands at $1.62 billion dollars (14.6B NOK) per year as of the end of 2018. The annual subsidy has grown to around $1.95 billion dollars (21.6B NOK) as of June 30th due to the rapid growth in the EV fleet. Norway has a total of 2.7M private cars, if the country were to convert all of them to EVs under the same incentives scheme, the total annual cost to the Norwegian treasury would reach $22 billion dollars per year (198B NOK). To put these numbers in prospective, here is the breakdown of Norway’s 2018 fiscal budget:
(Source: Government of Norway)
Based on the above, we can see that the annual cost of Norway’s EV support scheme already exceeds the annual cost of Maternity and Paternity leave pay (21.2B NOK) and also exceeds the annual Unemployment Benefit budget (14.2B NOK) and the Child Benefit budget (16.8B NOK). As a matter of fact, if Norway were to convert all its cars to EVs, the country EV budget would become the second largest government expenditure at 198B NOK, only behind the retirement pension budget at 223B NOK. It is worth noting that Norway is running a sizable 20% primary budget deficit (excluding oil revenues) and 7% deficit including oil revenues. Norway’s EV support is already having a material impact on Norway’s finances, the excise duties on cars and petrol have declined by 25.9B NOK in 5 years from 50.7B NOK in 2013 to 24.8B NOK in 2018. If this revenue item had remained constant, Norway’s budget deficit for 2018 would have shrunk to 4.2% from 7%.
Emissions and social costs
At this stage one may ask what Norway is getting out of all of this? EVs are not a goal into themselves, EVs are a mean to an end, namely, reducing gasoline and diesel consumption, which ultimately means a reduction in CO2 emissions. Let’s take a look at Norway’s petroleum consumption since 2014:
(Source: Statistics Norway)
In 2014, Norway consumed a total of 5M liters of auto diesel and gasoline (tax and untaxed), by 2018 that number increased to 5.06M liters or a 1.2% increase. More damming still is that last year alone Norway’s CO2 road traffic emissions increased by 2.8% (excluding EVs CO2 lifecycle emissions). To be fair, road traffic emissions (although increased in 2018) did decline by about 10% from 9.9M tons in 2014 to 9M tons in 2018. Norwegian road traffic emissions statistics don’t capture a vehicle lifecycle emissions which are much higher at the outset for an EV due to the heavy CO2 emissions associated with battery production. This lifecycle gap in the data exaggerates the amount of CO2 emission reduction due to the displacement of emissions from where the car is driven to where it is produced. Another factor we need to consider is the continued improvement in fuel efficiency of newer ICE cars, which means as the ICE car fleet is renewed associated CO2 emissions are reduced naturally. Thus, when we take in consideration these factors, it is probable that the actual four-year reduction in Norwegian CO2 road emissions due to EVs is in the low single digits at best.
In light of the above, it is fair to say that Norway’s massive investment in EVs in eliminating a negligible amount of CO2 comes at a great financial cost. One reason for the muted impact of EVs on Norwegian gasoline and diesel consumption is that 64% of Norwegian households that own an EV also own an ICE car. Two cars households used ICE cars for 60% of their driving needs and EVs for 40%. The second car effect is apparent in the passenger car data: In 2014, Norway had 2.55M passenger cars (including 50K EVs and PHEVs) as compared to 2.76M passenger cars (Including 300K EVs and PHEVs) in 2018. This shows that the ICE fleet has remained constant and that EVs are supplementing ICE cars and not replacing them.
Another interesting feature of the Norwegian EV market is the split between the have and the have nots. The likelihood of purchasing an EV is 15 times higher for the richest 25% of Norwegian households as compared to the bottom 25%. Since the purchase price of an EV is cheaper than an ICE car in Norway that discrepancy can not be explained by the initial cost barrier. The fact that 84% of the richest households own at least one additional ICE car against only 21% of the poorest households seems to indicate that without access to a second ICE car, owning an EV – despite all the incentives – is less appealing to the average person. This is most likely due to EVs inherent limitations as compared to ICE cars. In many ways, Norway’s EV support policy is a second car discount and living cost subsidy mechanism for the rich.
Cited research by Halvorsen and Froyen Indicates that such an extreme support for EVs is encouraging Norwegians to rely less on public transport and on walking and cycling. Only 14% of EV owners use public transport, cycle, or walk, as compared to more than 50% for non-EV owners.
Favoring EVs as a policy to reduce CO2 emissions is marginally effective at best and very expensive. The policy creates a number of perverse incentives and contributes to an increase in economic inequality. In the aforementioned research paper on Norway’s EV policy, the authors conclude that the reduction in Norway’s CO2 emissions through EV adoption comes at the extraordinary cost of $13500 per ton of CO2. Considering that Norwegian road traffic emissions stood at 9M tons as of 2018. You can do that math as what it would cost to bring these emissions to zero at $13500 per ton. Several studies have shown that EVs have a relatively limited (17% to 30%) CO2 emissions reduction impact – on lifecycle basis – under the current European electricity mix:
(Source: European Environment Agency)
While it is likely that European electricity will become increasingly emission free in the coming decades, a larger decrease in CO2 transport emissions today can probably be achieved faster (and for a much lower cost) through a policy mix focused on public transport and highly efficient ICE vehicles. A recent study by the respected IFO Institute in Germany concluded that a switch to EVs would actually increase German CO2 road emission in comparison to a policy favoring fuel efficient diesel cars. My point here is not to promote a specific drive train technology, the point is that as a society we need to adapt effective and sustainable environmental and economic policies that will lead to tangible reductions in CO2 emissions. Norway’s model is absolutely not the one to follow. I will state for the record that once Norway reduces its generous EV incentives in 2020/2021, the country multi-year growth in EVs sales will likely reverse as was the case in Denmark in 2017.
Norway has pursued its extreme EV support policy due to the seemingly mistaken belief that one can both fight climate change and maintain a car culture. Considering the limits of of today’s personal vehicle technology and the limitations of public finances, the simultaneous pursuit of these two conflicting objectives is perhaps a well-intentioned folly.
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Amid what’s become a global showdown of sorts between the US and Huawei, the US and Poland on Monday inked a new deal to cooperate on new 5G technology which could eventually lead to a ban on China’s Huawei from the East European country. The agreement puts in place a “careful and complete evaluation” of any companies seeking to install 5G components and software:
“We believe that all countries must ensure that only trusted and reliable suppliers participate in our networks to protect them from unauthorized access or interference.”
Vice President Mike Pence signed the deal in place of President Trump — who cancelled the planned trip over the Hurricane Dorian emergency — with Polish Prime Minister Mateusz Morawiecki, as part of continuing efforts at keeping Huawei out of Europe over fears it’s using its advanced 5G networks to enable Chinese state spying.
A Huawei logo in Warsaw in Poland. Image source: AFP
“Protecting these next generation communications networks from disruption or manipulation and ensuring the privacy and individual liberties of the citizens of the United States, Poland, and other countries is of vital importance,” the agreement states.
Pence said the US-Poland deal would “set a vital example for the rest of Europe,” where the Chinese telecom giant has been making steady headway, especially in markets in Central and Eastern Europe. The US has been pressuring its European allies to ban Huawei, citing a track record of government and corporate espionage and cyber spying.
Pence also used the occasion to take aim at Russia and its alleged election meddling in the West. “With its efforts to meddle in elections across Europe and around the world, now is the time for us to remain vigilant about the intentions and the actions being taken by Russia,” Pence said while addressing a press conference alongside Polish President Andrzej Duda.
U.S. Vice President Mike Pence and Polish Prime Minister Mateusz Morawiecki in Warsaw Monday, via the AP.
Poland is reportedly in talks with Swedish telecom company Ericsson to bring 5G development to Poland. Earlier this year Pence had praised Warsaw for “protecting the telecoms sector from China”.
This also comes after earlier this year Polish authorities arrested a Huawei sales director who they alleged spied for the Chinese government, after which the worker was fired by the Chinese company and Polish officials stopped short of taking legal action against Huawei itself.
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Yves Mersch, European Central Bank’s key legal official, said that Facebook’s Libra stablecoin is “beguiling but treacherous” during a speech at the ECB’s legal conference in Frankfurt on Monday.
Bloomberg reported on Mersch’s remarks in an article published on Sept. 2. Per the report, he said that private currencies have little or no prospect of establishing themselves as viable alternatives to centrally-issued legal tenders.
Mersch: Only central banks can be trusted
He believes that only independent central banks can grant sufficient institutional banking to make a currency reliable and win public trust. He further noted:
“I sincerely hope that the people of Europe will not be tempted to leave behind the safety and soundness of established payment solutions and channels in favor of the beguiling but treacherous promises of Facebook’s siren call.”
Regulators worldwide have raised concerns over Libra’s potential money laundering and capital control implications. After visiting the Swiss financial regulators last month, United States lawmakers are still concerned over Facebook’s proposed cryptocurrency project, Libra.
Meanwhile, Bank of England governor Mark Carney, on the other hand, has suggested a transformation of the global financial system by replacing the United States dollar with a digital currency similar Facebook’s Libra.
Facebook’s lobbying efforts
Facebook is reacting to the regulatory pressure by ramping up its lobbying efforts. More precisely, the social media giant recently hired a Washington-based lobbying firm to help it grapple with the negative response to its planned Libra cryptocurrency.
At the beginning of August, the social media behemoth also hired former assistant to United States Republican senator Mike Crapo, Susan Stoner Zook, to join the lobbying team for its Libra cryptocurrency project.
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Marriage ages vary widely across the globe – with a lot of underlying reasons. An analysis of UN data (for all countries where data for 2013 or newer was available) shows that the oldest grooms in the world can be found in Italy, where men get married at the median age of 35.
The oldest brides live in Ireland (median age of 32.4 years), which is also the country with the smallest age gap between men and women. Grooms were on average one year older than brides in Ireland, reflecting a global trend of male median marriage ages always being higher those of females.
As Statista’s Katherina Buchholz details, median marriage ages tend to be higher in more developed countries, which is also where the age gap between men and women getting married was mostly, but not always, smaller.
In developing countries, including many in Africa, people got married younger on average, with age gaps being a little wider at times. Malawi had the lowest marriage age of countries analysed, with women getting married at 19.9 years and men at 23.7 years.
Scientific studies have found that smaller age gaps in marriages are correlated with higher socioeconomic status and higher class. In some developing countries, large age gaps show a reality of arranged marriages that are tied to families’ econmic well-being through dowry payments as well as reflecting customs that value youth in women and experience in men.
The country with the largest age gap in the analysis was Guyana, where the median marriage age was 20 for women and 31.8 for men. The Caribbean state has tried to battle child marriage in the past.
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In my last two articles I examined the detail behind the simultaneous plans of the Bank of England and the Federal Reserve to establish new payment systems. From the evidence at hand, the objective of central banks has been to make their new systems compatible with distributed ledger technology (DLT) as a basis for introducing central bank digital currency to supersede physical money over the next decade.
As we will learn, the rhetoric from globalist institutions and figureheads on the subject of digital currency has developed significantly since the EU referendum and Donald Trump’s presidency.
But to begin with, it is worthwhile looking at some of the commentary from the central banking community prior to the onset of renewed political ‘nationalism.’
2015
A few days after the EU referendum bill passed through parliament, the Bank of England’s Chief Economist Andy Haldane delivered a speechwhich discussed negative interest rates on currency (referred to as the ‘zero lower bound‘). He brandished the idea of removing the lower bound by abolishing paper currency and issuing a government backed currency in electronic form which would be held in digital wallets. Such a move would ‘allow negative interest rates to be levied on currency easily and speedily.’
Haldane also remarked that the distributed ledger technology within Bitcoin ‘has real potential‘ before going on to say:
Work on central bank-issued digital currencies forms a core part of the bank’s current research agenda. Perhaps central bank money is ripe for its own great technological leap forward.
This generated some press coverage at the time, notably from the Financial Times who said converting paper currency into digital would ‘help the bank to manage inflation by enabling it to bypass the current constraint against lowering rates below zero.’
In November 2015, the Committee on Payments and Market Infrastructures issued a paper simply titled ‘Digital Currencies‘. The CPMI works through the Bank for International Settlements in that the BIS hosts the CPMI secretariat. The governing body presiding over the CPMI is the Global Economy Meeting, which is one of three bimonthly meetings held at the BIS. The CPMI is also a member of the Financial Stability Board, another association hosted at the BIS.
In the paper, the CPMI reflected on how the bulk of digital currencies such as Bitcoin are transferred via a distributed ledger:
This aspect can be viewed as the genuinely innovative element within digital currency schemes.
One option is to consider using the technology itself to issue digital currencies.
They concluded by recommending that ‘central banks could consider investigating the potential uses of distributed ledgers in payment systems or other types of FMI’s‘ (financial market infrastructures). This is something that central banks are now openly doing.
2016
As the UK was preparing for the upcoming EU referendum, the Bank of England’s Deputy Governor for Monetary Policy Ben Broadbent spoke at the London School of Economics in March (Central banks and digital currencies).
Speaking about Bitcoin, Broadbent was adamant that the most important innovation within this particular digital currency was the distributed ledger. He spoke of potentially widening access to the BOE’s balance sheet ‘beyond commercial banks‘, and how DLT would make this process easier for non-financial firms and perhaps even individual households.
If so, our accounts would no longer be a claim on commercial banks but, like banknotes, the liability of the central bank.
Broadbent aligned himself with Andy Haldane by agreeing that were a central bank digital currency to replace physical assets, it would ‘open the door‘ to ‘materially negative interest rates.’
That would require explicitly abolishing cash, not just introducing an electronic alternative.
CBDC’s, as explained by Broadbent, would become ‘the fundamental structure of the financial system.’
If distributed ledger technology could provide a more efficient way for private sector firms to deliver payments and settle securities, why not apply it to the core of the payments system itself?
Suffice to say, Carney went on the record as saying that ‘in the extreme, a DL for everyone could open the possibility of creating a central bank digital currency‘.
2017
With the Brexit withdrawal process now underway and Donald Trump newly installed in the White House, media outlets began to promote the soundings of avowed internationalists on the subject of global currency. One of these was Mohamed El-Erian, a former deputy director at the IMF. In April, Project Syndicate published an article by El-Erian titled, ‘New Life for the SDR?‘. Here is the preface to that article:
The rise of anti-globalization political movements and the threat of trade protectionism have led some people to wonder whether a stronger multilateral core for the world economy would reduce the risk of damaging fragmentation. If so, enhancing the role of the IMF’s incipient global currency may be the best option.
In re-publishing the article, the UK Guardian mused that ‘amid the rise of populism and nationalism, some are asking if revamping the SDR could re-energise multilateralism.’
As for El-Erian himself, he asked whether ‘today’s anti-globalisation winds create scope for enhancing the SDR’s role and potential contributions?‘
A connection between rising nationalism and calls to reform the global monetary system had been established.
At the beginning of Autumn, the now former IMF Managing Director Christine Lagarde spoke at a Bank of England Conference under the heading, ‘Central Banking and Fintech – A Brave New World?‘ Here she commented that:
Citizens may one day prefer virtual currencies. If Privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.
We want no holes in the global financial safety net, however much it gets stretched and reshaped.
I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR.
2018
This was the year where the narrative around digital currencies was ratcheted up a notch. It began in February with BIS General Manager Agustin Carstens, who gave a lecture called, ‘Money in the digital age: what role for central banks?‘
Aside from asking what constitutes acceptable money, Carstens proclaimed that distributed ledger technology had ‘potential benefits‘, and expected central banks to ‘remain engaged on this topic.’
As with Andy Haldane and Ben Broadbent, Carstens singled out DLT as being the most attractive element of cryptocurrencies. In large part he denounced Bitcoin as being untrustworthy and inefficient. What he did not do, however, is denounce the technology that underpins it. The central message from Carstens was that only central banks can legitimise and regulate digital currencies to make them safe.
Credible money will continue to arise from central bank decisions, taken in the light of day and in the public interest.
Carstens’ intervention on the subject of money in the digital age created a path for national central banks to further the discourse.
Mersch labelled Bitcoin as ‘heavily resource intensive, and certainly not a green technology.’ Virtual currencies in general had no intrinsic value, particularly because they were neither legal tender or backed by central banks. For that to change, ‘regulatory acceptance is necessary.’ In other words, until central banks control the infrastructure and regulate their use, digital currencies will not succeed as real money.
In closing, Mersch said it would be up to citizens to demand a ‘digital representation of cash that replicates the features of cash‘. He did not go into specific societal circumstances that may occur to guide people in this direction.
Mark Carney was next with a speech in March titled, ‘The Future of Money‘. This speech in particular covered a lot of ground, but to summarise:
Carney cautioned against anyone assuming that the Bank of England was an ‘archaic vestige’ that will be ‘swept aside by a digital, distributed future.’
He called the rise of the ‘cryptocurrency revolution‘ amidst the financial crisis and rapid technological developments a ‘coincidence.’
Expanding on Yves Mersch’s speech, Carney stressed that ‘bringing crypto assets into the regulatory tent could potentially catalyse innovations to serve the public better.’
The chief take away from the speech was Carney’s call for payment systems to evolve to meet the ‘demands of fully reliable real-time distributed transactions.’ This is of course a nod to DLT, which at the time Carney said was not yet advanced enough to consider issuing central bank digital currency as a ‘near-term project.’
The Committee on Payments and Market Infrastructures then returned with a new paper, ‘Central bank digital currencies.’ They focused much of their attention on ensuring that a future central bank digital currency fulfilled ‘anti-money laundering and counter terrorism financing requirements.’
Add to this concerns raised by globalists on how cryptocurrencies are not environmentally friendly, and it becomes clear that there are multiple inherent weaknesses built into the current crypto network. Weaknesses which central banks are well placed to exploit over time. For example, the CPMI said that dangers arising from today’s cryptocurrencies may necessitate the need for a CBDC to be ‘non-anonymous‘.
For now, the CPMI recommended that central banks continue their ‘broad monitoring of digital innovations‘, which points to the introduction of a CBDC being a medium to long term objective.
Starting with Carstens, he cited the three tenets to ‘sound‘ money. It must be a unit of account, a payment instrument and a store of value. From Carstens’ perspective, cryprocurrencies meet none of these requirements, and he characterised them as ‘fake money‘ and an ‘environmental disaster‘.
As for distributed ledger technology, the versions used currently ‘are not any better than what we already have today.’ Which is why Carstens continues to advocate that central banks carry on experimenting with the technology:
I see central banks continuing to play a critical role in pushing the boundaries of how technology can enhance the payment landscape.
In November, Christine Lagarde’s speech prompted the mainstream pressto pick up on her overriding message: central banks should consider issuing their own digital currency.
Making the case for central bank digital currencies, Lagarde envisaged a system where central banks provide the currency, with commercial banks providing the service through which the currency flows. According to her, this would represent ‘public-private partnership at its best.’
If digital currencies are sufficiently similar to commercial bank deposits—because they are very safe, can be held without limit, allow for payments of any amount, perhaps even offer interest—then why hold a bank account at all?
What if central banks entered a partnership with the private sector—banks and other financial institutions—and said: you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over.
November also saw the European Central Bank launch an extension of its TARGET2 payment system called ‘TIPS’ (TARGET Instant Payment Settlement). This system allows access to payment service providers as well as banks.
As for where the ECB stand on DLT, their position is that it ‘cannot at this stage be considered as an option for the Eurosystem’s market infrastructure.’ But as you might expect, they in no way dismiss it entirely:
As DLT-based solutions are constantly evolving, the ECB will continue to monitor developments in this field and explore practical uses for DLT.
By the end of 2018, the Bank of England had advanced their plans to introduce a ‘renewed‘ RTGS payment system that would have the capacity to interface with distributed ledger technology.
In part two of this series we will look at developments so far in 2019 in regards to digital currency, and how this relates to the current geopolitical climate.
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