Mainstream Media Warns Of American “Economic Hellscape” If The Government Shutdown Continues

Authored by Michael Snyder via The Economic Collapse blog,

Is the mainstream media overhyping the economic impact of the government shutdown for political purposes? 

Of course they are. 

Once upon a time the mainstream media in the United States at least attempted to maintain a facade of objectivity, but those days are long gone.  In this case, they want to stir up as much public resentment against President Trump as possible in order to try to force him to end the government shutdown.  And when NBC News breathlessly declared that the U.S. “would face an economic hellscape” if this shutdown stretches on for an extended period of time, their article quickly went viral all over the Internet.

But will it really be “an economic hellscape”?

Here are some of the things that they say we will be facing in their “doomsday scenario”

  • 38 million low-income Americans lose food stamps

  • 6 million face an uncertain timetable for collecting tax refunds

  • 2 million without rental assistance and facing possible eviction

  • 800,000 paycheck-less federal employees plunged into dire financial straits

  • Shuttered parks and museums while overstressed airports cause tourism to tank

  • Federal court system slows to a crawl

  • Disaster relief money doesn’t get to storm-ravaged areas

Yes, things would certainly be unpleasant for a lot of people, and there would be a whole lot of anger around the country.

But such a scenario does not qualify as “an economic hellscape”.  I would encourage the folks over at NBC News to pick up a copy of The Beginning Of The End if they really want to know what the initial phases of a major economic crisis scenario could look like in this nation.

The most alarming item on their list is the fact that 38 million Americans could soon lose access to food stamps.  According to the U.S. Department of Agriculture, that will officially happen by the end of February

By the end of February, the Supplemental Nutrition Assistance Program, or SNAP, run by the Department of Agriculture, would be out of funding — meaning almost 40 million low-income Americans could find themselves struggling to pay for food, said Joseph Brusuelas, chief economist for the accounting firm RSM US.

Things would certainly be tough for a lot of low income people, and there would be a lot more traffic at shelters and food banks, but nobody would starve to death.

The worst case scenario would be if mobs of angry people started taking to the streets and rioting in large urban areas.  That is definitely a possibility, especially if this shutdown lasts for several more months.

But for the moment, most of the focus is on the hundreds of thousands of federal workers that are not getting paychecks right now.  We are being endlessly bombarded with sob stories about how much these workers are suffering after missing one paycheck.

If people can’t handle going a couple of weeks without pay, how are they going to handle things when a real crisis erupts in this country?

With no end to the shutdown in sight, some lower paid federal workers have decided that it is time to find a new job

Transportation Security Agency officers forced to work without knowing when their next paycheck is coming are no longer just calling in sick. Now, 18 days into the partial government shutdown, some are resigning, according to Hydrick Thomas, who heads the TSA Council on the American Federation of Government Employees.

“Every day I’m getting calls from my members about their extreme financial hardships and need for a paycheck. Some of them have already quit and many are considering quitting the federal workforce because of this shutdown,”  the official said in a statement posted to the union’s website on Tuesday.

I can’t say that I blame TSA workers too much for quitting.  It is an absolutely miserable job, and the starting salary for TSA security officers is somewhere “between $25,000 to $30,000 a year”.

Of course we don’t actually need a TSA at all.  Many of us would love to go back to the days before 9/11 when we could get on flights without having someone inspect our private areas.

Another aspect of the shutdown that is horrifying NBC News is the fact that no new beers are being approved right now

The Alcohol and Tobacco Tax and Trade Bureau is out during the shutdown. That means the federal government will not approve beer labels or process permits, which translates into no new beers.

At this moment there are literally millions of people around the world that actually have nothing to eat and no clean water to drink, and this is what we are whining about?

I have an idea.  Why don’t we shut down the “Alchohol and Tobacco Tax and Trade Bureau” permanently and let people make beer without having to get permission from the federal government first?

As I have proposed, we could save enormous amounts of money by simply shutting down useless government agencies that we do not need.

But that would make far too much common sense to work in America in 2019.  We live at a time when the American people expect the federal government to protect them from just about every potential danger that you can possibly imagine.

Look, I don’t want to seem completely unsympathetic to the plight of all of these federal workers that are being used as pawns in this game of political brinkmanship.  Because 78 percent of all Americans are living paycheck to paycheck, that means that a lot of these federal workers are not going to be able to pay their bills, and that would be extremely stressful for anyone.  And at this point, thousands of federal workers have already begun filing for unemployment benefits

More than 4,700 federal employees filed for unemployment in the last week of December, compared with 929 the week prior, according to the Department of Labor. There is no federal data available yet for the first week of January. Unemployment rules vary by state; generally the government provides benefits to eligible workers who have lost a job “through no fault of their own,” for a maximum of 26 weeks.

But the mainstream media is blowing things way out of proportion when they start using phrases such as “economic hellscape”.

Yes, this shutdown is going to cause some significant pain for a lot of people, but it is definitely not the end of the world.

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Yuan Slides After PBOC Reportedly Wary Of Recent Sharp Gains

As we detailed last night, the recent surge in the yuan has been almost unprecedented against a backdrop of dismal economic data, a still tightening Fed and an aggressively easing PBOC.

And it appears PBOC has had enough of it as MNI reports this morning that the central bank does not want a sharp appreciation by the yuan, citing a source close to the People’s Bank of China.

That prompted an immediate reversal of some of yesterday’s gains…

Not entirely a surprise, as  Michael Every, head of Asia financial markets research at Rabobank in Hong Kong, warned:

“The yuan can hold up fine” until the Fed hikes again, trade tensions resume and China “goes all-in on stimulus,”

“It’s a ‘when’ and not an ‘if’ for when it reverses direction again and we test new lows.”

It seems when is now. Will Yuan catch down to ‘fundamentals’?

 

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“We Don’t Take Orders From Bolton”: US Withdrawal From Syria Begins

Contrary to assurances from Trump’s National Security Advisor, neocon John Bolton, and Secretary of State Mike Pompeo, who suggested earlier this week that US troops would remain in Syria for at least a little while longer, the Associated Press reported on Friday that the US has begun the process of removing the 2,000 soldiers based in northeastern Syria.

Citing information provided by activists with the Syrian Observatory for Human Rights, the withdrawal officially began Thursday night local time. A convoy of about 10 armored vehicles and some trucks left the town of Rmeilan into drove into Iraq. Col. Sean Ryan, spokesman for the coalition fighting the Islamic State group, later confirmed that the US has started “the process of our deliberate withdrawal from Syria.”

Withdrawal

Trump’s abrupt decision last month to order US troops out of Syria angered former Defense Secretary James Mattis, who resigned over the decision, and stoked fears that Trump was abandoning the Kurds to a massacre by Turkish forces, who have vowed to pick up the slack in Syria when it comes to fighting ISIS.

“These have been folks that have fought with us and it’s important that we do everything we can to ensure that those folks that fought with us are protected,” Pompeo said of the Kurds while visiting Irbil, the capital of Iraq’s semi-autonomous Kurdistan region, after talks in Baghdad.

After launching a campaign of airstrikes against ISIS in 2014, President Obama deployed troops on the ground the following year to combat ISIS, which at the time controlled large swaths of northeastern Syria. Since then, the group has been beaten back, and now control only 1% of their former territory.

Initially, Trump had said the pullout would be complete within a matter of weeks, but plans became murky after the Pentagon requested four months to complete the withdrawal. Last night, the Wall Street Journal reported that the withdrawal would begin immediately.

Scores of ground troops are headed toward Syria to help move troops out, and a group of naval vessels headed by the amphibious assault ship USS Kearsarge is headed to the region to back up troops at the vulnerable moment they are leaving the country, the officials said. The Kearsarge carries hundreds of Marines, helicopters and other aircraft.

“Nothing has changed,” one defense official said. “We don’t take orders from Bolton.”

To account for shifts in plans, the military will stage the personnel and equipment needed for a possible withdrawal, rather than move the U.S. forces out. Troops tasked to help with the eventual withdrawal already are in the area, in places like Kuwait and al-Asad air base in western Iraq.

After expressing his immense displeasure with the US’s walk-back of its withdrawal plans, Turkish President Recep Tayyip Erdogan – who recently resorted to threatening the US over their plans to linger in Syria – will no doubt be glad to hear about this.

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Futures Slide, Global Rally Fizzles; Oil Set For Longest Rally On Record

For the second day in a row, the S&P’s recent torrid post-Christmas rally which has seen the S&P up +10.44% over the last 11 sessions, the best such stretch since October 2011, is in danger of ending as U.S. stock futures edged lower 0.3%, while European shares were mixed and Asian markets rose at as sentiment was bolstered by continued dovish tone from the Federal Reserve and hopes for a breakthrough on trade. The dollar slide continued even as Treasuries finally advanced and the oil rally continued for a record 10th day, while the US government shutdown tied the longest ever, as it entered its 21st day.

With renewed promises of patience from Federal Reserve, as Fed vice chair Clarida followed Powell on Thursday evening saying the central bank should be ready to adjust monetary policy if headwinds to the economy from financial markets or global growth prove persistent, suggesting caution about moving ahead with interest-rate increases, while the ECB was mulling another dump of cheap money in the form of TLTRO and news that trade talks between Washington and Beijing are moving to higher levels, the Friday feeling was in full effect, even if it appeared to peak in the US where futures initially rose then dropped to session lows.

The Fed’s dovish stance also pushed down the dollar and nudged Treasury yields lower after five days of gains again. That cheered emerging markets and confidence more generally having been flattened during the brutal end to 2018: “Equities are having a good run after a pretty horrible end to last year,” said Rabobank quantitative analyst Bas Van Geffen. “It is the changing wording of the Fed, it seems to be making more and more room for an eventual pause (in the rate hike cycle)”.

Asia had crawled to a 5-week high overnight as shares rose in Shanghai, Tokyo, Seoul and Hong Kong while European stocks were on the edge of fourth straight day of gains and longest winning streak since September.  S&P 500 futures and Nasdaq indexes pointed to a slightly softer open in New York after jumping early in the session after Steven Mnuchin said Chinese Vice Premier Liu He will “most likely” visit Washington on Jan. 30 and 31 for further trade talks. China’s yuan, which slumped last year as trade tensions worsened, is heading for its best week since 2005, back when the country dropped a fixed peg to the dollar.

A pause to the recent massively overbought rally is to be expected: the S&P 500 is now up more than 10% from its Dec. 26 low – one day after Steven Mnuchin spoke to the Plunge Protection team. The S&P is also up on 6 out of the 7 sessions in 2019 so far and each of the last 5. That’s the best streak since September and if it rises again today, it will achieve in the second week of the year a feat that only occurred twice in all of 2018. The index is now up +10.44% over the last 11 sessions, the best such stretch since October 2011.

In Asia, the ASX 200 (-0.3%) and Nikkei 225 (+1.0%) were mixed with the initial upside in Australia clouded by weakness in the key financials and mining related sectors, while the Japanese benchmark outperformed as it coat-tailed on the recent USD/JPY moves. Elsewhere, Shanghai Comp. (+0.7%) and Hang Seng (+0.5%) conformed to the overall positive risk tone following the recent trade-related optimism with Vice Premier Liu He said to possibly visit the US later this month and amid hopes of further supportive measures as China may adopt more tax cuts for the manufacturing sector.

Failing to carry over Asian strength, European indices are mixed, having pared back some of the initial gains from the open. Some initial outperformance was seen in the FTSE 100 (+0.1%) jumped as much as 0.7 percent on the back of the latest slide in sterling against the euro on mounting Brexit uncertainty while UK housing names were higher after the sector was upgraded by BAML, with Persimmon (+4.4%), Taylor Wimpey (+4.8%) and Barratt Development (+2.6%) at the top of the index, however, the index was later pressured on currency effects as Sterling whipsawed on Brexit developments. Other notable movers include, Richemont (+2.3%) after the Co’s Q3 revenue of EUR 3.92bln was in line with the expected EUR 3.93bln and posting a 5% rise in constant currency sales for the October-December period.

The market’s bullish mood was supported by Fed Chairman Jerome Powell who underscored the message of patience with further interest-rate hikes, while saying the central bank will keep shrinking its balance sheet. At the Economic Club of Washington on Thursday, Fed chief Jerome Powell reiterated the U.S. central bank would be patient about hiking interest rates.

“The word ‘patient’ is used often when the Fed’s policy direction is still tightening but its next rate hike can wait for a considerable time. So risk assets now enjoy support from what we can call Powell put,” said Tomoaki Shishido, economist at Nomura Securities. “Similarly, Trump also softened his stance on China after sharp falls in stock prices. He has offered an olive branch to China and there’s no reason China would not want to accept it,” he added.

In FX, the dollar was on course for its fourth straight weekly fall against other top world currencies having also hit a three-month low the previous day. The flip side was that the Japanese yen was a shade higher again at 108.29 per dollar and the euro was up at $1.1530 on course for its best week since August. But it is China’s yuan that has been the real mover though. Against the backdrop of the sensitive trade negotiations, the Chinese currency has risen 1.8 percent this week which is its biggest gain since July 2005 when Beijing abandoned the yuan’s peg to the dollar.

Yuan traders had started offloading dollars in their proprietary accounts on Thursday following the wrap-up of three-day U.S.-China trade talks in Beijing. Markets treated absence of any bad news from those negotiations as good news. “Some corporate clients were joining to sell their dollars,” said a trader at a foreign bank in Shanghai.

Bond markets have been turning too. U.S. Treasury debt prices erased early gains after a soft 30-year bond auction and in reaction to Powell’s comments on the Fed “substantially” reducing the size of its balance sheet. The 10-year U.S. Treasuries yield last stood over 2bps lower at 2.7168%.

Finally in commodities, the notable mover was crude as oil rose for a 10th consecutive day, heading for its longest run of gains on record, as OPEC cutbacks reined in supply while the plunging dollar boosted demand. Futures returned to a bull market this week after recovering more than 20% from the lows reached in December. Saudi Arabia gave assurances on Wednesday that the production cuts by OPEC and its partners that came into effect this month will be deep enough to prevent any surplus.

“Sentiment in the oil market has turned around this week,” said Jens Naervig Pedersen, senior analyst at Danske Bank A/S in Copenhagen. The reversal “is on the back of a combination of OPEC+ production cuts taking effect, a stabilization in risk sentiment in equity markets and a weaker dollar. In addition, the oil market will be monitoring trade talks, which seem to progress slowly.”

In us political news, President Trump said he will most likely declare an emergency if there is no border deal but added should be able to make a deal with Congress, while there were earlier reports that US President Trump had been briefed regarding plan to use Army Corps of Engineers funding to border wall construction. Also commented that he has the absolute right to declare a national emergency and is not doing it yet but will do if shutdown carries on.

In the latest Brexit news, it is looking increasingly likely to be delayed beyond March 29th amid a backlog of essential bills, according to Cabinet Ministers cited by the Evening Standard. However, this has been dismissed by a UK PM May spokesperson.  UK PM May launched an appeal to Britain’s biggest unions last night in an attempt to win Labour support for her Brexit deal.

The partial U.S. government shutdown threatens to extend into a fourth week with about 800,000 federal workers set to miss their first paychecks. Economic data include CPI inflation readings

Market Snapshot

  • S&P 500 futures down 0.3% at 2,588
  • STOXX Europe 600 up 0.3% to 350.07
  • MXAP up 0.5% to 151.74
  • MXAPJ up 0.4% to 491.54
  • Nikkei up 1% to 20,359.70
  • Topix up 0.5% to 1,529.73
  • Hang Seng Index up 0.6% to 26,667.27
  • Shanghai Composite up 0.7% to 2,553.83
  • Sensex down 0.3% to 36,012.53
  • Australia S&P/ASX 200 down 0.4% to 5,774.58
  • Kospi up 0.6% to 2,075.57
  • German 10Y yield fell 2.0 bps to 0.235%
  • Euro up 0.2% to $1.1522
  • Brent Futures up 1% to $62.30/bbl
  • Italian 10Y yield rose 0.9 bps to 2.527%
  • Spanish 10Y yield fell 2.4 bps to 1.427%
  • Brent Futures up 1% to $62.30/bbl
  • Gold spot up 0.5% to $1,293.34
  • U.S. Dollar Index down 0.2% to 95.38

Top Overnight News from Bloomberg

  • Chinese Vice Premier Liu He is said to be scheduled to visit Washington on January 30 and 31 for further trade talks
  • Fed Vice Chairman Richard Clarida said the central bank should be ready to adjust monetary policy if headwinds to the economy from financial markets or global growth prove persistent, suggesting caution about moving ahead with interest-rate increases
  • Japan’s Prime Minister Shinzo Abe told Theresa May the whole world wants to avoid a no-deal Brexit even as she faces likely defeat when Parliament votes on her plan next week
  • The Trump administration was said to have directed the U.S. Army Corps of Engineers to examine whether the wall could be funded using money from emergency funding. Trump cancels trip to Davos gathering as shutdown grinds on
  • The European Central Bank should wait until the spring before tweaking its policy and keep all options open amid economic weakness and a fragile global outlook, according to Governing Council member Francois Villeroy de Galhau
  • Fast-money traders seem to have lost their stomach for betting on an interest rate lift-off in the heart of Europe. They entered 2019 with the smallest value of short wagers against German bunds in more than two years, according to exchange- traded product data
  • A trader who wants BNP Paribas SA to pay him 163 million euros ($188 million) over a “fat-finger” mistake is betting that Paris judges will help him avoid having to give up most of the claim
  • Emmanuel Macron next week launches a three- month national debate that he hopes will dissipate the anger displayed in the recent violent protests, without derailing the reforms he insists France needs
  • An American military official tells AP the U.S.-led military coalition has begun the process of withdrawing troops from Syria

Asian equity markets traded mostly higher following the 5th consecutive session of gains on Wall Street as global sentiment remained underpined by perceptions of a more patient Fed approach. ASX 200 (-0.3%) and Nikkei 225 (+1.0%) were mixed with the initial upside in Australia clouded by weakness in the key financials and mining related sectors, while the Japanese benchmark outperformed as it coat-tailed on the recent USD/JPY moves. Elsewhere, Shanghai Comp. (+0.7%) and Hang Seng (+0.5%) conformed to the overall positive risk tone following the recent trade-related optimism with Vice Premier Liu He said to possibly visit the US later this month and amid hopes of further supportive measures as China may adopt more tax cuts for the manufacturing sector. Finally, 10yr JGBs were lacklustre on profit taking following recent gains and with demand also limited by the upside in riskier assets.

Top Asian News

  • Nissan Shunned in Bond Market on Ghosn But Banks Seen Supportive
  • Why Ghosn’s Still Jailed and What It Says About Japan: QuickTake
  • What India’s Top Three Mutual Funds Bought and Sold in December
  • Chinese Stocks Post Biggest Weekly Gain in Nearly Two Months

Major European indices are mixed [Euro Stoxx 50 Unch], having pared back some of the initial gains from the open. Some initial outperformance was seen in the FTSE 100 (+0.1%) which is lead by strong performances in UK housing names after the sector was upgraded by BAML, with Persimmon (+4.4%), Taylor Wimpey (+4.8%) and Barratt Development (+2.6%) at the top of the index, however, the index was later pressured on currency effects as Sterling whipsawed on Brexit developments. Sectors are similarly in the green with some slight outperformance seen in energy names. Other notable movers include, Richemont (+2.3%) after the Co’s Q3 revenue of EUR 3.92bln was in line with the expected EUR 3.93bln and posting a 5% rise in constant currency sales for the October-December period. Meanwhile, Suez (-3.1%), Veolia (-2.6%) and Sage Group (-2.6%) are all in the red after being downgraded.

Top European News

  • Crispin Odey Says Believes Brexit Will Not Happen: Reuters
  • Euro Bond Supply Avalanche Meets Wall of Cash From Fund Managers

In FX, the dollar session was choppy but ultimately on the backfoot after losing the 95.500 level in early Asia-Pac trade as the Fed signalled a more patient approach ahead of the US CPI release later today. Both Fed Chair Powell and Vice Chair Clarida noted the Central Bank has the ability to be patient and flexible on rates given the State-side inflation data. As such the DXY fell to an overnight session low of 95.322 (vs. high of 95.508) and currently hovers around the middle of the range with US CPI in sight. Lloyds notes that the sharp decline in energy will likely weight on the headline CPI as they forecast a fall to 1.9% from 2.2%, though they expect the core figure to remain steady at 2.2%.

  • AUD,NZD, CNY, CAD – The marked outperformers and major beneficiaries as the USD/CNY is poised for its best week since 2005 with aid from the dovish Fed and a sub-6.80 PBoC fix. AUD/USD currently resides north of 0.7200 (vs. low of 0.7183) and reached levels last seen mid-December as optimistic Australian retail sales also underpinned the Aussie currency. Meanwhile, the Kiwi stands at the G10 leader as tailwind from its antipodean counterpart boosted the NZD/USD above its 50 and 200 DMA at 0.6786 and 0.6799 respectively to test 0.6840 to the upside, with the DMAs also set to form a golden cross. Finally, the Loonie is on the front foot as it reaps its reward from the declining greenback and the rising oil price with USD/CAD now below 1.3200 (vs. high of 1.3245) ahead of its 100 DMA at 1.3169.

In commodities, Brent (+0.6%) and WTI (+0.8%) prices are in the green benefiting from the positive sentiment seen across US and Asian sessions after dovish comments from multiple Fed speakers. Russian oil output for January 1st-10th has dropped to 11.38mln BPD from 11.45mln BPD in December; additionally, Russian Energy Minister Novak is reportedly planning to attend the upcoming January 22nd-25th Davos summit. Gold (+0.5%) prices are just shy of USD 1295.2/oz, the sessions high, following dovish comments from the Fed applying downward pressure to the dollar. Copper prices are similarly higher on the positive market sentiment, in particular that Chinese Vice Premier He is to visit the US later on in the month. Elsewhere, India’s steel ministry is refusing to back down on tougher import rules on steel, pressuring automakers into using local steel instead.

US Event Calendar

 

  • 8:30am: US CPI MoM, est. -0.1%, prior 0.0%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
  • US CPI YoY, est. 1.9%, prior 2.2%; CPI Ex Food and Energy YoY, est. 2.2%, prior 2.2%
  • 8:30am: Real Avg Weekly Earnings YoY, est. 1.2%, prior 0.54%;
  • 2pm: Treasury monthly budget statement postponed by govt shutdown

 

DB’s Jim Reid concludes the overnight wrap

Fortune continues to favour the brave in markets at the moment following another broadly positive last 24 hours for risk assets. It may have been a less convincing session on Wall Street last night compared to recent days with the S&P 500 for example passing between gains and losses no less than 19 times, however, a +0.45% closing move for the index does now mean it’s finished higher in 6 out of the 7 sessions in 2019 so far and each of the last 5. That’s the best streak since September and if it rises again today, it will achieve in the second week of the year a feat that only occurred twice in all of 2018. The index is now up +10.44% over the last 11 sessions, the best such stretch since October 2011.

There’s little doubt that sentiment over this period has been largely driven by communications from the Fed, and it’s no surprise that attention focused yesterday on Chair Powell’s public remarks. However, as we enter the 12th month of his Chairmanship, he seems to have improved at the art of Fedspeak, using many words but not saying anything substantively new. Markets were broadly unchanged during and immediately after his speech, and the S&P 500 rallied through the afternoon to ultimately close higher.

In terms of substance, Powell reiterated that the economy is “doing quite nicely” though he is attentive to “the financial markets expressing a view about the concern about downside risks associated with global growth and with trade.” To balance the divergent signals between strong data and tepid markets, Powell said he plans to “be patient and flexible and wait and see what does evolve.” So that’s consistent with our economists’ base expectations for two more rate hikes this year. Powell also repeated his guidance on the balance sheet runoff and the uncertainty over its terminal size, and he mentioned China as a key uncertainty to the global growth outlook.

After markets closed, Vice Chair Clarida presented a similar message. He referenced tighter financial conditions and global growth as key “crosswinds” affecting the US economy, and argued that “if these crosswinds are sustained, appropriate forward-looking monetary policy should respond.” He said the Fed would change its balance sheet policy if necessary, though any policy shifts would have to be consistent with their mandate. So, another Fed official seemingly in support of a pause in the rate hike cycle.

Back to markets where the DOW and NASDAQ also gained +0.51% and +0.42%, respectively yesterday. The VIX also ended at 19.50 which was down about half a point while 2y and 10y rates +2.3bps and +3.2bps respectively, meaning the curve was about 1bp higher at +16.5bps. The USD strengthened +0.32% while WTI oil closed up +0.44% to take its remarkable run of daily gains to 9 and the longest since January 2010. The price is up +17.89% during this current run which is the most over 9 sessions since March 2016.

Early on in the day there was some damage done by the US retail sector with Macy’s grabbing much of headlines with shares plummeting -17.69% for its worst-ever loss, after cutting its annual earnings forecast. Kohl’s also dropped -4.81% after reporting disappointing holiday period sales while Barnes & Noble dropped -15.76% in the wake of also downgrading earnings guidance. Target’s (-2.85%) holiday sales actually appeared more in-line with estimates however the company failed to escape the wider sector carnage. It was a similar story for retail CDS with spreads +36bps wider for Macy’s, +16bps wider for Kohl’s and +12bps for Nordstrom. The broader CDX IG index did however finish 2bps tighter while US HY cash spreads also tightened 2bps for its fifth consecutive rally, over which it has narrowed a remarkable -87bps.

Speaking of earnings, next week we’re due to get Q4 reports from 35 S&P 500 companies including the banks. So this should give investors something else to focus on other than the repetitive trade-related headlines of late. As an early preview, Q4 earnings growth is expected to be 11.4% which compares to around 25% growth reported in each of the prior three quarters according to data from Factset. Still, if Q4 comes in in-line this would be the fifth straight quarter of double digits earnings growth. It’s worth also noting that over the past five years on average, actual earnings have exceeded estimated earnings by nearly 5%. So history would suggest that there is upside to forecasts.

The partial government shutdown in the US is also busy repeating and has now entered its 21st day, tying the longest-ever shutdown, with around 800k federal workers expected to not receive their paychecks today. Indeed, there was a big uptick in jobless claims in DC last week, as furloughed workers are entitled to unemployment benefits until the shutdown is resolved, so we’re beginning to see the effects of the standoff in the macro data. Another side-effect of the shutdown is the delay to some of the GDP-sensitive data releases which is making life harder for economists to get a comprehensive read of how the US is tracking in the last couple months. With the Fed emphasizing data dependency this is clearly proving an issue. Today’s December CPI report won’t be affected however with the consensus expecting a +0.2% mom core reading which should be enough to hold the annual rate at +2.2% yoy. Our US economists expect the same which should keep Fed rate hikes in play this year if various uncertainties are resolved.

To Asia now where markets are largely tracking Wall Street’s gains last night with the Nikkei (+0.97%) leading the way, followed by the Hang Seng (+0.18%), Shanghai Comp (0.16%) and Kospi (+0.61%). Sentiment has also been given a boost by an overnight tweet from a WSJ journalist confirming that China’s Vice Premier Liu He is scheduled to visit US for trade talks on Jan 30 and 31st. Meanwhile, China’s onshore yuan is up +0.58% to 6.7495, the highest since July 2018 with the weakness in US dollar (-0.19%) also contributing to the rise. Futures in the US are however slightly down as we type (S&P 500 -0.11%).

Back to yesterday where in Europe the STOXX 600 more than fought off an early decline at the open to close up +0.34%. There were gains also for the DAX (+0.26%) and FTSE MIB (+0.63%) although the CAC (-0.16%) underperformed not helped by a soft French industrial production print (-1.3% mom vs. 0.0% expected). Bonds were a touch stronger (Bunds -2.2bps) with the ECB minutes confirming that the board did discuss changing the communication on language to acknowledge economic risks as tilting to the downside, although holding fire at the meeting. There was also a reference to TLTROs, which may have helped an index of bank stocks to outperform, gaining +0.75%.

In other news, PM May confirmed late afternoon yesterday that the UK is still in talks with the EU over the backstop and that government is still seeking support for a deal across parliament. Yesterday Labour leader Corbyn said that he would take a confidence motion when it can succeed (so not necessarily immediately after next week’s vote, should May lose) and also that his party would not rule out an Article 50 extension should Labour come to power. Overall though there wasn’t much new in Labour’s policy on Brexit yesterday and Sterling nudged down -0.33% by the end of play. Across the pond it’s worth adding that President Trump said that he will not attend Davos later this month as a result of the government shutdown. An indication maybe that the shutdown will continue for a while longer, or alternatively perhaps the ski conditions aren’t up to scratch yet.

Finally, looking at the rest of the day ahead, this morning and shortly after this hits your emails we’re due to get the December Bank of France industrial sentiment reading followed later by a data dump out of the UK which includes November trade balance, industrial and manufacturing production, construction output and monthly GDP data. This afternoon in the US the aforementioned US CPI report will no doubt be the big highlight, especially with the monthly budget statement postponed due to the partial government shutdown. Meanwhile, we’ll finally get a rest from all the Fedspeak with no speeches due however over at the ECB we are due to hear from Mersch and Visco.

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Pound Jumps On Report Brexit To Be Delayed

Brexit Day is less than three months away and never during the process has the UK’s fumbling attempt to organize an ‘orderly’ exit from the trade block looked more fraught with conflict and chaos. After returning from their holiday break this week, MPs promptly rebelled against the government, passing a series of amendments over objections from the government that will make it extremely difficult to run down the clock to force MPs to either hold their noses and accept the deal she negotiated with the EU, or risk the pandemonium that could follow a ‘no deal’ Brexit.

With circumstances finally starting to shift this week following months of deadlock, murmurs about the possibility of delaying Brexit Day have grown ever-louder. Which is why it’s hardly a surprise that, on Friday, an anonymously sourced report in the Evening Standard cited “senior cabinet officials” claiming Brexit Day would likely be delayed sparked a brief rally in the pound.

GBP/USD climbed as much as 0.8% to $1.2851, leaving it on track to strengthen for a fourth-straight week.

GBP

In the report, ES’s sources pointed out that the withdrawal treaty isn’t the only long-running controversy that must be brought to a conclusion before Brexit Day. There are at least “six essential bills” that must be passed before Britain leaves the European Union.

Heres’s a quick rundown of that, and two other controversies that stand in the way of a workable Brexit:

  • Senior ministers told the Standard that a majority of the Cabinet now support the idea of staging indicative votes in the Commons to see if a different Brexit plan is supported, despite Theresa May publicly opposing the idea.
  • Work and Pensions Secretary Amber Rudd refused three times on live radio to deny she would resign if the Prime Minister attempted a disorderly departure from the EU without securing a withdrawal deal.
  • Foreign Secretary Jeremy Hunt warned that “Brexit paralysis” was a risk if MPs vote down Mrs May’s deal on Tuesday but lack a majority for a different deal. He said it was clear that a no-deal Brexit would be blocked by Parliament following the landmark votes earlier this week.

While a delayed Brexit deadline would be positive for the pound, it would not be a “big game changer” due to the lack of clarity around what Parliament wants, said Mikael Olai Milhoj, analyst at Danske Bank.

“Positive as it means lower probability of no-deal Brexit, but should not be a big game changer”.

The rally started to fade as Theresa May poured cold water on the reports, saying there is not such plan in place and that the government’s policy is not to delay the UK’s departure from the EU.

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Poland Arrests Huawei Executive On Espionage Charges

In the latest sign that the US’s western allies are heeding its warnings about the espionage threat posed by Huawei and its executives, the Wall Street Journal reported on Friday that Poland had arrested a Huawei executive based in the country and accused him of “conducting high-level espionage on behalf of a Chinese spy agency.”

Huawei

According to a source quoted by Reuters, the executive was well-known in local tech circles. 

“The Chinese national is a businessman working for a major electronics company…the Pole is a person known in circles associated with cyber business,” Maciej Wasik, the deputy head of Poland’s special services, told PAP.

Officers from Poland’s counterintelligence agency have searched Huawei’s office, leaving with documents and electronic data. They also searched the executive’s home on Tuesday.

The executive’s name wasn’t released. A Chinese national, he was identified only as a graduate of one of China’s top intelligence colleges, as well as a former employee of the Chinese consulate in the port city of Gdansk.

But the Chinese national wasn’t the only person arrested in the crackdown: Polish police also arrested a citizen who was identified as a former top official in the Polish intelligence agency’s IT security department.

“Huawei is aware of the situation, and we are looking into it,” a spokesman for the company said.

Both suspects have been charged with espionage, a crime that carries up to 10 years’ imprisonment. They have reportedly pleaded not guilty. The arrest comes little more than a month after Huawei CFO Meng Wanzhou was arrested in Vancouver on charges of helping the company violate US and EU sanctions against Iran.

While little is known about this incident, we will be watching out for reports that Chinese authorities have arrested a handful of Polish nationals on vague “national security”-related violations.

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The Tragedy Of The Euro

Authored by Alasdair Macleod via GoldMoney.com,

After two decades, the euro’s minders look set to drive the Eurozone into deep trouble. December was the last month of the ECB’s monthly purchases of government debt. A softening global economy will increase government deficits unexpectedly. The consequence will be a new cycle of sharply rising bond yields for the weakest Eurozone members, and systemically destabilising losses in the bond portfolios owned by Eurozone banks

The blame-game

It’s the twentieth anniversary of the euro’s existence, and far from being celebrated it is being blamed for many, if not all of the Eurozone’s ills.

However, the euro cannot be blamed for the monetary and policy failures of the ECB, national central banks and politicians. It is just a fiat currency, like all the others, only with a different provenance. All fiat currencies owe their function as a medium of exchange from the faith its users have in it. But unlike other currencies in their respective jurisdictions, the euro has become a talisman for monetary and economic failures in the European Union.

Recognise that, and we have a chance of understanding why the Eurozone has its troubles and why there are mounting risks of a new Eurozone systemic crisis. These troubles will not be resolved by replacing the euro with one of its founding components, or, indeed, a whole new fiat-money construct. It is here to stay, because it is not in the users’ interest to ditch it.

As is so often the case, the motivation for blaming the euro for some or all the Eurozone’s troubles is to shift responsibility from the real culprits, which are the institutions that created and manage it. This article briefly summarises the key points in the history of the euro project and notes how the mistakes of the past are being repeated without the safety-net of the ECB’s asset purchases.

The birth of the euro

To swap a number of existing currencies for a wholly new currency requires the users to accept that the purchasing powers of the old will be transferred to the new. This was not going to be a certainty, and the greatest reservations would come from the people of Germany. Germans saved, and therefore risked the security of their deposits in a new money and monetary system. They were reassured by the presence of the hard-money men in the Bundesbank, who had a mission to protect the mark’s characteristics against the weaknesses that would almost certainly be transferred into the new euro from more inflationary currencies.

These anxieties were assuaged to a degree by establishing the ECB in Frankfurt, close to the watchful eye of the Bundesbank. The other nations were sold the project as bringing greater monetary stability than offered by their individual currencies and the reduction of cross-border transaction costs. Borrowers in formally inflationary currencies also relished the prospect of lower interest rates.

It was clear at the outset that the new omnibus euro required new disciplines, and it was here that the system failed from the outset. Having sensibly set out the euro’s parameters in the Maastricht Agreement, political considerations then took over. The raison d’être of the euro, so far as the politicians were concerned, was to further the European Project and getting countries into the new Eurozone became more important than compliance with the terms.

The terms had been set in the Maastricht Treaty in February 1992, which was signed by the twelve members of the pre-existing European Community. To qualify, membership of the euro required an inflation rate no more than 1.5% higher than the average rate of the three lowest member states, a fiscal deficit of no more than 3% at the end of the preceding fiscal year, a ratio of gross government debt to GDP of no more than 60%, membership of the exchange rate mechanism for two years without devaluation, and long-term interest rates no more than 2% higher than the inflation rates of the three lowest inflation rates.

This was sensible stuff but was then ignored by the Maastricht signatories. Only Luxembourg fully qualified for membership under the Maastricht terms.

Even the EU’s sheet-anchor, Germany, failed. Her budget deficit in 1996 was 4% of GDP. France’s was managed (manipulated?) down to 4% from 5%. Greece’s budget deficit after some very creative accounting was shown as 8%, and Italy’s must have had a papal blessing, because it miraculously fell from 8% to 4%.

Germany’s government debt to GDP in 1996 embarrassingly just exceeded the 60% criteria level set at Maastricht. Belgium’s stood at 130%, Italy’s at 124%, and Greece’s (reportedly) at 110%. What debt? We see no debt. Of the original Maastricht signatories, only France and the UK squeezed through on this condition.

Despite this fudge, ten of the twelve Maastricht signatories went ahead and adopted the euro in 1999 and as circulating currency in 2002. The UK had dropped out of the EMU in September 1992, and Greece was so obviously non-compliant its entry was delayed by two years.

Until the Lehman crisis, national interest rates had converged towards Germany’s under the aegis of a common monetary policy. The ECB’s interest rate policy was necessarily a compromise. At one end of the spectrum were the low rates previously enjoyed by the economies with solid savings rates. These were Germany, Luxembourg, Finland, the Netherlands and Austria.

At the other end were the bad boys: notably Greece and Italy. In 1992, when Maastricht was signed, Greece’s overnight lending rate was 28%. By 1996, when the Commission released its first convergence report, it had fallen to 12.8%. When Greece joined the euro in 2001, it had fallen to 3.3%. Italy’s 3-month interbank rate fell from 13% to 9%, and then to 3.4% at these same times.

The ECB’s task was not helped by the careless assumption that savings rates were a drag on consumption. Capital which had originated as credit expansion instead of genuine savings migrated to nations with higher bond yields, first as a trickle but then in increasing quantities as confidence grew that monetary unification under the euro was there to stay. This being the case, it was believed by investors that investing in Italian and Spanish debt was as safe as investing in German and French debt for less return.

The capital flows into these savings-starved nations boosted their asset prices and GDPs. And the more that credit-originated capital flooded into them, the more asset prices and GDPs benefited. This meant that based on improving statistics, the euro was deemed a great success, lifting the Mediterranean nations out of poverty. The reality was that capital flows ended up in malinvestments and government profligacy. No one thought to complain, and Germany’s sound-money men were silenced by those who pointed to Germany’s growing exports to the high-spending euro members.

In this manner, the ECB’s monetary policy gave impetus to localised credit cycles, particularly for the PIGS and Ireland.[iv]Asset booms were turned into bubbles, which finally burst in the wake of the Lehman crisis. The EU’s monetary system was then saddled with trillions of euros of debt that could never be repaid, and the PIGS suddenly found further finance from the markets was unavailable. Interest rate convergence was reversing. Furthermore, the whole Eurozone banking system was threatened with collapse, which always happens when extreme credit bubbles go pop.

Member states had no realistic option but to bail out their banks, and public sector borrowing rocketed, funded by the EU, the ECB and the IMF. The crisis in Greece was worsened when in late 2009 the government was forced to admit it had lied about its budget deficit for years, and finally admitted to a far higher current-year deficit than previously disclosed. Greece’s 2009 budget deficit was doubled from about 7.5% to 15.1%. The rise in bond yields meant Greece was unable to continue to fund her deficits and roll over existing debt and capital fled to supposedly safer Eurozone jurisdictions.

Greece’s corrupt government was replaced in January 2015 by a far-left government, elected because it promised the voters it would reject onerous bailout terms. It turned out that as far as the ECB and Brussels were concerned, Greece’s problems were to stay in Greece, and any hopes that its troubles would be shared with the Eurozone were dashed.

In effect, it appeared that the expense of rescuing a very small member of the Eurozone risked destabilising the others. Yanis Varoufakis, the Greek finance minister, said the reason for the EU’s uncompromising approach was it was protecting the German banks from losses. A sensible compromise to help a member state struggling with debt had been dismissed out of hand.

Dealing with future financial crises

Commentators also argued that the EU and ECB had pursued a hard line on Greece in order to persuade other member states, who were clearly in similar difficulties, not to rely upon help from the centre. This argument makes sense. But worryingly, the Greek episode also exposed the lack of any mechanism to deal with the unexpected. There had been evidence of this at the outset, when the Maastricht conditions were enacted. Lawmakers made no allowance for economic and monetary cycles in 1992, but by 1999’s joining-date there had been three destabilising crises: Russian debt, the LTCM hedge fund crisis, and the Asian financial crisis. These combined to suppress global GDP growth and undermine assumptions about the predictability of national statistics. Dealing with future crises was obviously going to be a problem, and internal ones later arrived on cue, with Ireland, Cyprus, Spain and Portugal. Then there was and still is Italy.

Italy’s finances have many similarities with those of pre-crisis Greece, fuelled by the suppression of borrowing costs until the music stopped in the wake of Lehman. Despite voter rebellions at successive general elections, Italy’s problems are yet to descend into a Greek-style crisis, but that is the direction of travel. And Italy is far more serious than Greece because of its sheer size.

Furthermore, the era of resolving funding problems in government finances by central banks simply printing more money has ended, and global base money worldwide is contracting. Monetary expansion was how the ECB kept bond prices up and deferred unresolved problems. From this month there will be no more asset purchases, so borrowing costs for Eurozone governments are sure to rise from extremely low interest rates.

The more one considers the outlook for the Eurozone, the riskier it appears. Until it ceased in December, about €2,500bn has been invested in government bonds by the ECB. In effect, the ECB has engineered a second period of rate convergence, this time almost exclusively for Eurozone governments, while ignoring commercial interests. The lesson from the first period is it will be followed by a destructive period of rate divergence when the ECB’s steps out of the market, which it now has. Commercial banks have also been supporting their national governments despite artificially low yields, in the knowledge the ECB was underwriting bond prices.

Now that the ECB’s support for bond markets has ceased, either governments collectively stop running budget deficits, or they will have to be funded by other means. They are almost certainly not going to reduce their collective demand for more funds as the Eurozone slips into recession and rates rise against them.

Commercial banks will have to come to terms with the new reality. Having seen euro-bond yields converge then diverge in the first phase of the euro’s life, we are now seeing them diverge again. And as they diverge yet more, confidence that the Euro-system and the politicians at the centre have control of events will quickly erode, as they did last time.

In this context, the Eurozone’s track record of non-adaptability to changing market conditions is worrying. It leaves the prices of longer-term debt somewhat adrift, lacking natural buyers without a sharp steepening of yield curves. A buyers’ strike is beginning to look best-case, which brings us to the greatest risk of all, the pressure on bank credit to contract as banks attempt to reduce their exposure to falling government bond prices in order to preserve their capital.

Eurozone banks simply cannot afford to ride out the effect of falling prices on their core capital bases. The European Banking Commission and other regulators have introduced rules that make it impossible. Assuming a developing funding crisis begins to drive up bond yields, we can be sure that Eurozone banks will find it increasingly difficult to maintain their margins over minimum Tier 1 and Tier 2 capital requirements, as well as capital conservation buffers, countercyclical capital buffers and global systemically important institutions buffers.

There is therefore a growing probability that the withdrawal of the ECB as a buyer of government debt will bring forward the next Eurozone banking crisis, and it has the potential to escalate rapidly. Not only has the money-bubble through the ECB’s asset purchases gone, but there is a growing risk of contraction in the quantity of bank credit available for government bonds at a time when Italy, Spain, France and other smaller states will most need to issue new debt.

The removal of national currencies in 1999 reduced the status of Eurozone states to entities that can become bankrupt in every practical sense, even if not legally. And without the ECB financing them, they will rapidly become insolvent. Taking the Eurozone as a whole, government deficits last year needed a relatively modest €70bn or so increase in bond issuance. Assuming no deterioration in government finances, a similar level of funding could perhaps be achieved by the ECB keeping its deposit rate at minus 0.4% and relying on interest rate arbitrage plus coupon flows to create buyers willing to subscribe for very short-term government debt.

It allows no room for slippage. The signs are that the global economy is slowing, and the widening spreads on commercial loans confirms the process of central bank base money contraction is beginning to undermine business activity world-wide. At this time of the credit cycle the process of continuing debt expansion always falls entirely on the shoulders of governments and their central banks.

The emerging signs of a credit shock that will engulf public finances are everywhere. The Eurozone appears to be at the greatest systemic risk. The only way these dangers can be averted in the Eurozone is for the ECB to reinstate its asset purchase programmes to rig bond markets again. But having just stopped them, the ECB will need very good reasons to start them again. As usual, the order is crisis first QE second.

Following the last credit crisis, governments took over the banks’ liabilities through bail-outs. Since then, bail-in legislation has been enacted in all Eurozone member states. But if they try bail-ins to save just a few banks, they will likely collapse the whole system, because nervous bank bond holders and large depositors will flee the whole Eurozone banking system, rather than risk being forced to accept worthless bank equity.

Equally, the governments of Italy, Greece, Spain, France and others cannot afford the bail-out route, because they will be unable to fund them, and for a second time lifeboats will have to be launched by the EU, ECB and IMF. Only this time, the amounts will be far larger. It was funding failing Spanish banks that took Spain’s debt to GDP ratio from 35.6% in 2007 to 97% today. Just imagine where it goes to on the next credit crisis, and just imagine the demands on the Italians with their debt-to-GDP ratio already at 130%.

The Eurozone is now perilously on the edge of a financial and systemic abyss. The euro itself is not at fault. The institutions behind it failed to understand that converging interest rates in its first decade would lead to debilitating malinvestments, and that interest rate convergence would be followed by destructive divergence. National governments did not understand the full consequences of no longer being able to print their national currencies.

Don’t blame the euro. It is the victim of abuse by politicians who see it as a stepping-stone towards their grand objectives, and a hapless ECB, forced into increasingly destructive monetary policies. We must hope that the rest of the world is not destabilised by contagion from the Eurozone’s failure.

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Ankara Refuses Washington’s Ultimatum To Abandon Arms Deal With Moscow

Just days after President Erdogan insulted the White House by snubbing National Security Advisor John Bolton, Turkey has delivered its latest middle finger to the US by refusing to abandon its agreement to buy S-400 air defense systems from Moscow – a precondition for buying American-made Patriot air defense systems, according to RT.

If the US ties the sales to Ankara with Turkey tearing up its existing arms deal with Moscow, Ankara will have no choice but to choose the latter, said Foreign Minister Mevlut Cavusoglu, adding that the deal to buy the S-400s has already been finalized.

“The S-400 deal has already been finalized. We can agree with the US on the Patriot system, but not if there will be [a condition] to abandon the S-400s,” the minister said during an interview with state TV.

Cavusoglu added that Ankara had received the proposal to buy weapon and would consider the terms – but warned against Washington attempting to meddle in Ankara’s relationship with Moscow.

Moscow

The interview followed reports about the American ultimatum that circulated in Turkish media.

In a sign that relations between the US and Turkey were finally beginning to thaw (this was before Trump abruptly ordered the withdrawal of the 2,000 US troops from Syria), the State Department approved the sale of 80 Patriot missiles and 60 PAC-3 missile interceptors last month.

Ankara signed the deal to buy the S-400s last year, and the first batch is scheduled to be delivered later this year over vociferous objections from Washington. That came after Congress last year passed a law effectively blocking a shipment of 100 F-35 jet fighters to Turkey, which is a member of NATO along with the US.

The US similarly tried to pressure India out of buying S-400s as the transaction could potentially violate American laws on sanctions placed on Russia – though Washington proposed giving New Delhi a free pass if it also agreed to buy arms from the US.

Despite pressure from overseas, Turkey and India maintained that they can freely choose partners in the arms trade without interference from Washington or anybody else.

“We don’t need permission from anybody” to purchase the S-400s, said Turkish President Recep Tayyip Erdogan.

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Brickbat: Relying on Guesswork

ConfusionA new California law requires law enforcement officers to record the age, gender, sexual orientation, and race of anyone they stop. The catch? They can’t ask the person any questions about those characteristics and they can’t use the person’s driver’s license or any other documents to gather that information. They can only go by their perceptions. The law is aimed at curbing racial or other types of profiling.

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UK: Can Javid Stop The Boats?

Authored by David Brown via The Gatestone Institute,

  • “A question has to be asked: if you are a genuine asylum seeker, why have you not sought asylum in the first safe country that you arrived in? Because France is not a country where anyone would argue it is not safe in any way whatsoever, and if you are genuine then why not seek asylum in your first safe country?” — British Home Secretary Sajid Javid.

  • Asylum seekers in Britain are entitled to free accommodation, cash support at £37.75 per person per week, free healthcare, free dental care, free eyesight tests, free glasses, maternity grants and free schooling — much to the chagrin of many British nationals and former service personnel who do not have access to many of these benefits.

  • Another tragedy of Alan Kurdi proportions is only a matter of time. The media are poised and salivating at the prospect of capturing this impending disaster for their front pages; the hackles of a hundred migrant and refugee charities are raised in anticipation of the PR opportunities ahead of them.

  • Sajid Javid is a rising star in the British Conservative party. If he can stop the boats across the Channel, he will be perfectly positioned to take control of the British Conservative Party as well as the rising migrant crisis.

The British Home Secretary, Sajid Javid, has called in the Royal Navy to help deal with the migrant crisis in the Channel. Pictured: HMS Mersey patrols the Strait of Dover on January 9, 2019, in a bid to prevent further illegal migrant crossing attempts. (Photo by Leon Neal/Getty Images)

The British Home Secretary, Sajid Javid, has called in the Royal Navy to help deal with the migrant crisis in the Channel.

Since November, 239 migrants successfully made the crossing from Calais, France to Dover, England in small inflatable boats. A total of 539 migrants tried to make the crossing in 2018.

According to the Daily Mail, “Most of those held by police crossing the world’s busiest shipping lane from France since November have claimed to be Iranian.” Whether this is factually correct, or a line given to them by the people smugglers they pay for their journey, is a reasonable question.

According to UK immigration lawyer Colin Yeo, “The latest asylum statistics show that around three-quarters of Iranian asylum claims succeed,” — a fact the people-smugglers presumably know well and capitalise on for profit.

The legitimacy of these migrant stories is a concern to the Home Secretary, who has been speculating as to what extent these migrants in the Channel are ‘genuine’ asylum seekers. During a visit to Dover he said:

“A question has to be asked: if you are a genuine asylum seeker, why have you not sought asylum in the first safe country that you arrived in?… Because France is not a country where anyone would argue it is not safe in any way whatsoever, and if you are genuine then why not seek asylum in your first safe country?”

Predictably, Javid has been vilified by the ‘Left’ for daring to ask an obvious question that requires an answer; was accused of “normalising anti-refugee rhetoric” by Labour MP Stella Creasy, and was used for political point-scoring by the Liberal Democrats, whose Home Affairs spokesman, Ed Davey, said that Javid’s remarks “show that the Tories’ nasty, hostile environment is alive and well”.

This political game of ping-pong is predictable and well worn, practised on both side of the Atlantic: Sajid and Trump taking a principled stand and defending borders, to the relief of taxpayers and the silenced majority; the liberal elite in their splendid isolation, protected by their wealth, arguing on behalf of the illegals.

A look at the numbers might suggest this is a migrant storm in a teacup, and that recalling two UK Border Patrol vehicles and calling in the Navy to the Channel is a right-wing overreaction to a relatively small problem.

Crossings cannot be tallied definitively, but the Home Office knows of 539 migrants who tried to cross the English Channel by boat in 2018, which is probably far fewer than the number who came by lorry. Only 312 completed the journey (the rest were caught).

The numbers belie a known truth: there are tens of thousands of migrants trying to break into Britain, biding their time on the coast of France until they can fund or find a way across. 113,145 illegal immigrants made it across the Mediterranean last year.

Sources on the ground attest to a growing number of Iranians in Calais. Accordingto the Economist:

“Several hundred Iranians made it to Calais via Serbia between August 2017 and October 2018, after Belgrade temporarily dropped a visa requirement. Most speak English and are keen to work.”

An Iranian asylum seeker who made the treacherous journey across the English Channel in a small boat just over a fortnight ago told UK Channel 4 that “the combination of the harsh conditions in France and the poor exchange rate are behind the spike in asylum seekers risking the crossing.”

England is seen as the land of milk and honey for many: its asylum claim process allows migrants to stay freely in the UK whilst their asylum claim is considered. Asylum seekers are entitled to free accommodation, cash support at £37.75 per person per week, free healthcare, free dental care, free eyesight tests, free glasses, maternity grants and free schooling — much to the chagrin of many British nationals and former service personnel who do not have access to many of these benefits.

Asylum-seekers (real or fraudulent) know their rights.

“The outcome of an asylum application cannot be pre-judged before it has been made and must be processed on its individual merit, irrespective of how that person reached the country,” Dr Lisa Doyle, Director of Advocacy at the Refugee Council, reminds us.

Colin Yeo, a leading immigration and asylum barrister at Garden Court chambers, told The Guardian that Javid’s apparent threat to reject applications was illegal: “I imagine the Home Secretary knows this, but if so it is depressing that he is still saying it as a way of trying to make himself sound tough.”

The contrast between legal and humanitarian arguments and the reality on the ground, cheek to cheek with the migrants themselves, is stark. I have spent time in the migrant camps of Calais, formerly known as ‘The Jungle’, and have seen at first hand the lengths to which migrants will go to make the crossing. They will cut through chain fencing, throw railway sleepers under the wheels of lorries to try and get on board, and physically battle the French police and their tear gas. Our photographer, almost lynched by the mob for his camera gear, had to be ‘repatriated’.

The numbers might suggest this is not yet a migrant crisis – but imagine the political and humanitarian furor when one of these crossings in an inflatable boat goes horribly wrong. The picture of little Alan Kurdi, the drowned Syrian Kurdish boy who washed up in Turkey, is indelibly etched into our consciousness. The photograph reportedly resulted in Chancellor Angela Merkel opening Germany’s borders to a massive wave of migrants, a political decision for which German nationals and most Western Europeans continue to pay the price.

The birth of the populist movement across Germany, Sweden, Italy, Austria, Hungary and Poland is a labour of Merkel’s making. She may not have children of her own, but she is seen by many as the Mother of all Migrants and the catalyst for the resulting populist surge.

Another tragedy of Alan Kurdi proportions is only a matter of time. The Channel crossing is spectacularly hazardous, home to the famous Dover Strait, according to Guinness World Records “the world’s busiest shipping lane”. Approximately 500-600 ships a day pass through this narrow strait between the UK and France, carrying oil from the Middle East to European ports and various commodities from North and South America to European customers.

The media are poised and salivating at the prospect of capturing this impending disaster for their front pages; the hackles of a hundred migrant and refugee charities are raised in anticipation of the PR opportunities ahead of them.

The pressure on the Home Secretary to deal with the migrants crossing the Channel is precisely because of this risk to life and the associated political ramifications. Hence his formal request for military assistance on Wednesday January 2. According to Financial Times:

“Gavin Williamson, the defence secretary, immediately responded by despatching HMS Mersey, an offshore patrol vessel, to the Kent coast, while the Royal Air Force will provide aerial surveillance.”

HMS Mersey will operate there while two Border Force patrol boats return from the Mediterranean, a redeployment likely to take several weeks.

This is something of a radical change in the dynamics at play in the UK. It is a remarkable demonstration of action and determination by a British government perceived as weak and ineffective on Brexit and a soft touch on terror. For the first time in a long while, it gives a semblance of hope to many patriotic Brits who voted for Brexit precisely in order to take back control of British borders and have a say in who gains access to the island on which they live.

Sajid Javid is a rising star in the British Conservative party. His tough line on migrants, particularly Muslim migrants, is precisely the salve needed to soothe the anger of the British nationals frustrated by political obfuscation over Brexit, disgusted by the mostly Pakistani grooming gangs, and targeted by terrorists.

Javid, who was born in Rochdale, faced criticism when he posted a tweet referencing “sick Asian paedophiles” and defended their deportation. He was asked whether he took such cases personally. He said:

“When I heard about grooming gangs where almost every individual involved is of Pakistani heritage, I can’t help noting that. But I can’t help noting the fact that Rochdale is a town that means something to me and I’m also of Pakistani heritage.”

“I’m the British home secretary,” he said. “My job is to protect the British public.” His actions suggest he intends to do exactly that.

If Sajid Javid can stop the boats across the Channel, he will be perfectly positioned to take control of the British Conservative Party as well as the rising migrant crisis.

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