Month: June 2018

Sleep-Walking Into The Next Crisis?

Authored by Kevin Muir via The Macro Tourist blog,

Quick – the United States suddenly backtracks on half century of globalization and enters a trade war with almost all of its trading partners – do you buy or sell equities? And how about bonds?

Don’t mistake this question as me going full tinfoil-hat – I know we are far from a trade war – but it is an interesting exercise to contemplate.

I don’t have an answer how a trade war would affect financial markets. The reality is that “it depends”. I know, I know – the old joke about the one-handed economist is probably applicable here, but the financial repercussions from a trade war are not as obvious as they might seem at first.

Trade wars cause rising prices – no denying that point. But whether that causes stock and bond prices to rise or fall depends a lot on the reaction function of the central bank.

By now most are familiar with the Trump administration’s recent actions regarding steel and aluminum tariffs. No need to rehash the developments. Nor am I passing moral judgment on their fairness. The United States has the right to pass whatever trade laws it deems fit. Though, I must admit, couching the tariff on “security concerns” is stretching it a little. Can’t say I disagree with Canada’s Prime Minister’s response (from The Hill):

“Let me be clear: These tariffs are totally unacceptable,” Trudeau said. “Canadians have served alongside Americans in two world wars and in Korea. From the beaches of Normandy to the mountains of Afghanistan, we have fought and died together.”

Noting that Canada purchases more U.S. steel than any other nation, Trudeau lambasted the Trump administration for initiating the tariffs under the guise of confronting a threat to national security. “Canada is a secure supplier of aluminum and steel to the U.S. defense industry, putting aluminum in American planes and steel in American tanks,” Trudeau said. “That Canada could be considered a national security threat to the United States is inconceivable.”

“These tariffs are an affront to the long-standing security partnership between Canada and the United States, and in particular, to the thousands of Canadians who have fought and died alongside American comrades-in-arms,” he finished.

But instead of getting all indignant, I would simply state the United States is “not that into” trade these days, and other nations should accept it and adapt.

The United States is becoming more protectionist. Full stop. Look at the individuals Trump is putting in charge of trade. That’s all you need to know.

Instead of arguing about whether these policies are right or wrong, let’s instead examine what they might mean for financial markets.

As I mentioned, trade protectionism causes higher prices. There is no disputing that fact. The only question is whether the central bank monetizes those increases and causes inflation, or whether the tariffs have the effect of causing a decrease in economic production as a less optimal economic solution is reached.

If the central bank was truly interested in preserving the long-run value of money, then an increase in tariffs would be met with an increase in interest rates. So that begs the question of whether the Federal Reserve will view these tariffs as a development that calls for higher interest rates.

And here is where it gets tricky. We won’t know what the Federal Reserve would have done absent these tariffs.

But at the risk of making a fool of myself, here is my thinking regarding the path of rate hikes. Powell will keep the Federal Reserve on a course of hiking every other meeting until something breaks. He won’t deviate from this schedule until there is a dramatic change in either the economic or financial landscape. If I am correct, then Trump’s tariffs will have no effect on monetary policy. Thus, given the no change in monetary policy, at the margin, Trump’s tariffs will be inflationary.

Back to the question I started the post with. Under the current circumstances, I would probably buy equities and sell bonds.

However, this is assuming that the United States is able to control the situation. Trump has taken the U.S. down a road where it is them against the world.

What if this results with the rest of the world viewing the behaviour as proof that the United States is not reliable?

Don’t forget that Trump is upset about trade deficits. That metric is really stuck in his craw. Yet, the nation with the reserve currency, almost by definition, runs trade deficits.

Therefore if Trump is insistent on eliminating all of America’s trade deficits through protectionist trade policies, he is hastening the abandonment of the US greenback as the world’s reserve currency. This will mean a lower level for the US dollar.

Over the past couple of months, the US dollar index has rallied from the severely oversold level of 90 all the way up to 95 a couple of days ago.

It makes sense to once again start leaning short against the US dollar. I know this seems counter-intuitive to all the worries filling financial media about Europe and emerging markets, but sometimes the best sales are those in which you are most alone.

All of my ramblings are based on the idea markets do not get spooked by Trump’s protectionist moves. So far, that’s spot on correct. Yet it’s a little surprising that the threat of a trade war has not caused even the slightest bit of concern. The markets have been lulled into believing that Trump’s moves are just negotiating tactics that will be quickly reversed in the coming weeks.

But a little part of me is worried that markets are overlooking some really negative developments. Sure, maybe Trump will backtrack on these policies just as quickly as he entered into them. But what if he doesn’t?

As the BBC reported, US officials are playing with fire:

The US is playing a “dangerous game” by slapping tariffs on European steel and aluminium, the European Union’s trade commissioner has said.

Cecilia Malmstrom warned the move by US President Donald Trump would have consequences for the economic recovery of the EU, as well as US consumers.

The EU has issued a 10-page list of tariffs on US goods ranging from Harley-Davidson motorcycles to bourbon.

Canada and Mexico are also planning retaliatory moves against the tariffs.

Ms Malmstrom said the EU would challenge the move at the World Trade Organization (WTO) but that tariffs on US imports were necessary as “we cannot just take these tariffs and stay silent”.

The commissioner said that despite the EU’s “rebalancing” action, the two sides were not in a trade war.

“What we are in is a very difficult situation,” Ms Malmstrom said. This situation could only be defused by the US withdrawing its measures against the EU, she added.

And the analogies to another historic period in history are not lost on everyone. From today’s FT:

The Republican senator, Ben Sasse, put it best: “‘Make America Great Again’ shouldn’t be ‘Make America 1929 Again’.”

Most of the world, including the majority of America’s business community, see Donald Trump’s punitive trade actions in a similar light. They are searching for economic logic where none exists. His impulse is political. Though slapping tariffs on metals and car imports will lead to a net loss of American jobs, Mr Trump’s actions are meant for the “forgotten American”. They will feel noticed, even if it costs them dearly.

The biggest price tag is geopolitical. Mr Trump’s decision to impose the tariffs on national security grounds was simply a matter of convenience. The notorious section 232 of the Trade Expansion Act has only been used twice before – each time with some justification. Mr Trump is barely trying to make the national security case against European or Canadian metal imports. He chose 232 because the law gives the US president maximum leeway to do what he likes.

He is using the same law to justify impending punitive duties on foreign car imports. But what goes round may come round. Having broken a cardinal rule of transatlantic trade relations, Mr Trump will not be able to unbreak it. He is replacing a system of rules with political whim. The correct free trade answer would be for Europe to offer no response at all. But the European Union, which has a list of retaliatory targets, including Harley-Davidsons, Bourbon and jeans, is politically obliged to retaliate. Brussels will also take the US to the World Trade Organization’s disputes resolution court.

Launching a simultaneous trade war against America’s allies and adversaries conforms to no known international rules of logic. It will raise domestic prices, cut US jobs and reduce America’s global influence. Warning that Mr Trump’s actions could break the WTO will also fall on deaf ears. That may well be an outcome that Mr Trump desires. His chief trade negotiator, Robert Lighthizer, has long nursed a grievance against the global body. Mr Trump rails frequently against unelected American judges. He could doubtless win more retweets with a tirade against unelected foreign judges.

America’s trading partners are learning how to read Mr Trump the hard way. The US president is committed to the pursuit of a trade war of all against all. Drawing parallels to the 1930s, Emmanuel Macron, France’s president, warned this week of “modern-day sleepwalkers”. But that is a poor metaphor. Mr Trump knows exactly what he is doing. The fact that it poses a threat to the global order is a feature, not a bug, of his actions.

If Trump can navigate these trade negotiations anywhere near as adeptly as he believes in his own mind, then maybe the financial markets are reacting perfectly to these developments. Yet maybe it’s one of those times when it doesn’t matter until it matters (and then it matters a whole lot!)

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Mattis Warns Of “Consequences” If Beijing Continues Weaponizing The South China Sea

The United States and China appear to be headed for a military collision in the Southeast Asia region, as Washington warns of a more powerful military response to the increased weaponization of the heavily disputed islands in the South China Sea.

Speaking at the IISS Shangri-La Dialogue, a civilian and military defense summit in Singapore, U.S. Secretary of Defense James Mattis blasted Beijing Saturday morning for the militarization of artificial islands in the South China Sea and warned there could be “much larger consequences” in the near term.

IISS Shangri-La Dialogue 2018 – James N. Mattis delivers opening plenary speech. (Source: IISS) 

“There are consequences that will continue to come home to roost if China does not find a way to work more collaboratively with nations that have interests in the disputed region,” Mattis said, while he addressed ministers and high-ranking delegates from over 50 countries. During the entirety of the speech, Mattis did not define what exactly those consequences would be.

The Wall Street Journal said Mattis’ warning to Beijing, was in direct response to a question from an audience member, which he responded by saying, “despite China’s claims to the contrary, the placement of these weapons systems is tied directly to military use for the purposes of intimidation and coercion,” adding that “China’s militarization of the Spratlys is also in direct contradiction to President Xi Jinping’s 2015 public assurances in the White House Rose Garden that they would not do this.”

IISS Shangri-La Dialogue 2018 – James N. Mattis delivers opening plenary speech. (Source: IISS) 

Beijing’s deployment of anti-ship cruise missiles, radar-jamming equipment, and strategic bombers to the disputed islands have dramatically increased geopolitical tensions around the region. Mattis said such action forced Washington to rethink its “cooperative stance” and disinvite China from the biennial Rim of the Pacific military exercise, expected to start in June.

Mattis acknowledged that Beijing’s penalty for militarization in the disputed islands has been relatively small, considering the vast amounts of global shipping lanes that pass by the islands.

The defense secretary added, “I believe there are much larger consequences in the future when nations lose the rapport of their neighbors when they believe that piling mountainous debts on their neighbors and somehow removing the freedom of political action is the way to engage with them.”

There is a reason to believe that Mattis is referring to China’s One Belt One Road Initiative where Beijing has used large amounts of debt to gain political leverage over developing countries for infrastructure projects.

“Eventually these things do not pay off, even if on the financial ledger sheet, or the power ledger sheet they appear to,” he said. “It’s a very shaky foundation when we believe that militarizing features are somehow going to endorse their standing in the world.”

James Mattis: US leadership and the challenges of Asia-Pacific security

The Trump administration recently replaced the term “Asia Pacific” with “a free and open Indo-Pacific.” It is a symbolic move that recognizing the growing importance of the Indian Ocean.

“Our Indo-Pacific strategy informs our relationship with China,” Mattis said. However, “China’s policy in the South China Sea stands in stark contrast to the openness of our strategy,” he continued.

Last Sunday, we reported that the U.S. Navy conducted its “freedom of navigation” patrols near the heavily disputed islands to demonstrate the right to sail through those international waters.

“We did not do freedom of navigation for America alone,” Mattis said.

“We do freedom of navigation, give freedom for all nations, large and small, that need to transit those waters for their own prosperity and they have every reason to do so,” he added.

Senior Col. Zhao Xiaozhou, of the People’s Liberation Army’s, hinted in a question to Mattis that the U.S. Navy’s recent freedom of navigation around the islands could be defined as militarization

“Mattis’ speech was negative,” Zhao said in an interview afterward.

“If China’s islands and reefs are continuously threatened by activities under the name of so-called freedom of navigation, China will eventually station troops on these reefs.”

China was the most spoken topic at the conference, even though President Trump and North Korean leader Kim Jong Un are scheduled to meet and greet on June 12.

Mattis failed to explain what exactly the next round of consequences would be, however, he did offer a reminder that an emerging market crisis is brewing in China. As for the military collision between Beijing and Washington, well, it could be very possible that China’s debt bomb explodes first – then war.

And President Trump appears surprised by the actions of his “close friend” Xi…

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History Is Clear, Central Banks Fail To Assure Economic Stability

Authored by Richard Ebeling via The Future Of Freedom Foundation,

The world has been plagued with periodic bouts of the economic rollercoaster of booms and busts, inflations and recessions, especially during the last one hundred years. The main culprits responsible for these destabilizing and disruptive episodes have been governments and their central banks. They have monopolized the control of their respective nation’s monetary and banking systems, and mismanaged them. There is really nowhere else to point other than in their direction.

Yet, to listen to some prominent and respected writers on these matters, government has been the stabilizer and free markets have been the disturber of economic order. A recent instance of this line of reasoning is a short article by Robert Skidelsky on “Why Reinvent the Monetary Wheel?” Dr. Skidelsky is the noted author of a three-volume biography of John Maynard Keynes and a leading voice on public policy issues in Great Britain.

Skidelsky: Central Banking Equals Stable Prices and Markets

He argues against those who wish to denationalize and privatize money and the monetary system. That is, he criticizes those who want to take control of money and monetary affairs out of the hands of the government, and, instead, put money and the monetary order back into the competitive, private market. He opposes those who wish to separate money from the State.

Skidelsky sees the proponents of Bitcoin and other “cryptocurrences” as “quacks and cranks.” He says that behind any privatization of the monetary system reflected in these potential forms of electronic money may be seen “the more sordid motives” of “Friedrich Hayek’s dream of a free market in money.” The famous Austrian economist had published a monograph in 1976 on theDenationalization of Money, in which Hayek insisted that governments have been the primary cause behind currency debasements and paper money inflations through the centuries up to our own times. And this could not be brought to an end without getting government out of the money controlling and the money-creating business.

In Skidelsky’s view, any such institutional change would be a disaster. As far as he is concerned, “human societies have discovered no better way to keep the value of money roughly constant than by relying on central banks to exercise control of its issue and to act directly or indirectly on the volume of credit created by the commercial banking system.”

Robert Skidelsky is a highly regarded scholar and is knowledgeable about many of the important political and economic ideas and events of the twentieth century, about which he has often written. But one cannot help wondering if his views of central banks and the governments behind them over the last one hundred years don’t concern life on some other planet; because they do not reflect the reality of monetary systems and government management of them on Planet Earth.

The Pre-World War I Gold Standard

The twentieth century began with all the major nations of the world having monetary systems based on a gold standard. Gold was money, the medium of exchange through which goods and services were bought and sold, and by which the savings of some were transferred to the hands of interested and credit-worthy borrowers for investment purposes through the intermediation of banks and other similar financial institutions. There were money-substitutes in the form of banknotes and checking accounts to ease the inconveniences and transaction costs of using metal coins and bullion in many everyday exchanges. But they were recognized and viewed as claims to the “real money,” that is, specie money.

Yes, this was, in general, a central banking managed gold standard. And the gold standard “rules of the game” were not always followed, the essential general principle of which being that banknotes and deposit accounts should only increase for the banking system as a whole when there were net increases in the quantity of gold deposited in bank accounts, for which new banknotes would be issued as additional claims to that greater quantity of gold-money. And vice versa, if there was a net outflow of gold from the banking system due to banknotes being returned to the issuers for gold redemption, then the net amount of those banknotes in circulation was to be reduced.

Though this core “rule” of the gold standard was not always rigidly followed by national central banks, the consequence of which were occasional financial crises and “panics,” the system worked amazingly smoothly, in general and on the whole, in providing a relatively stable monetary environment to foster and assist domestic and international trade, commerce and global investment. When the monetary system did periodically suffer disruptions, the mismanaging hand of the government and their central banks could usually be seen as the primary, or certainly a leading, cause behind it.

Monetary Madness During and After World War I

This came to an end with the coming of the First World War in 1914. All the belligerent nations in Europe went off the gold standard, with banknotes and other bank accounts no longer legally redeemable in gold. Governments used various direct and indirect methods to have their central banks finance growing amounts of loans in the form of created quantities of paper money to cover the costs of their, respective, war expenditures. To use British economist, Edwin Cannan’s, somewhat colorful mode of expression concerning the currency situation of his own country, Great Britain was soon suffering from a “diarrhea” of paper money to feed the cost of the British war machine.

This culminated in the catastrophic hyperinflations that gripped many countries on the European continent in the years immediately following the end of the First World War in 1918. The worst of such instances were experienced in countries like Germany and Austria. Especially in Germany, the paper money had become virtually worthless by the time the hyperinflation was ended in November 1923, by shutting down the money printing presses and introducing a new currency promised to be linked to gold.

However, the new postwar monetary systems that one country after another attempted to introduce were not like the gold standard that has existed before the war. Nominally, currencies were linked to gold at new official redemption rates of so many banknotes in exchange for a unit of gold. But gold coins rarely circulated in daily transactions, as had often been the case before 1914; gold was redeemable only in larger quantities of bullion (gold bars); and few countries kept significant quantities of gold on deposit in their own central bank vaults any more. (See my articles, “War, Big Government, and Lost Freedom,” and “Lessons from the Great Austrian Inflation”.)

The Federal Reserve and the Coming of the Great Depression

The short-lived return to seeming economic “normalcy” with growth and stability in the mid and late 1920s, however, came to an end with the American stock market crash of October 1929, which began to snowball into the “Great Depression” in 1930 and 1931. But why had this happened? In the United States, a major cause was the Federal Reserve’s attempt to “stabilize” the general price level at a time of economic growth and productivity gains that otherwise would have likely brought about a slowly falling general price level reflecting greater outputs of goods and services produced at decreasing costs that would have enabled an increasing number of those goods to be sold at lower prices. In other words, what has sometimes been called a “good deflation.” That is, rising standards of living through a falling cost of living, which need not be detrimental to the profitability of many firms since their ability to sell at lower prices is due to their ability to produce more at lower costs of production.

The Federal Reserve’s “activist” monetary policy to counteract this “good” deflationary process in the name of price level stabilization required an increase in the supply of money and credit in the banking system that pushed interest rates below market-determined levels and therefore brought about an imbalance and distortion between savings and investment in the American economy. When the Federal Reserve cut back on monetary expansion in 1928 and early 1929, the stage was set for a collapse of the unsustainable investment house of cards created by investment patterns out of sync with the real savings in the economy to sustain them.

What might have been a relatively short, “normal” recession and recovery process was disrupted first by the fiscal and regulatory policies of the Herbert Hoover Administration (including a trade-killing increase in U.S. tariffs that soon brought about retaliation by other countries). The was magnified to a degree never seen before in American history with the coming of Franklin Roosevelt’s presidency and the New Deal in 1933: the imposition of a fascist-type system of economic planning in industry and agricultural; increases in taxes far exceeded by massive growths in government spending through budget deficits for “public works” and relate federal projects that increased the national debt; the abandonment of what nominally still remained of the gold standard, followed by foreign exchange instability and paper money expansion.

Matching this were wage and price rigidities due to trade union resistance to money wage adjustments in a post-boom environment, and goods prices frozen due to the regulations of the fascist-modeled National Recovery Administration (NRA); there was also a downward spiral in international trade resulting from the revival of global protectionism; and there was a monetary contraction exacerbated by a fractional reserve system built into the workings of the Federal Reserve that set off a multiplicative decrease in money and credit inside and outside the banking system as bank loans went bad and depositors “panicked” leading to bank runs. All this brought about the tragedy of the Great Depression, which dragged on through most of the 1930s.

How the disruptive inflations during and immediately after the First World War, or the misguided monetary policies of the 1920s which led to the Great Depression whose severity was due to Federal Reserve mismanagement and anti-market government interventions and controls can be laid at the feet of the ”free market,” as Skidelsky asserts, is beyond me.

Post-World War II Monetary and Government Mismanagements

But, perhaps, he means the more “enlightened” central banking policies of the leading nations of the world in the post-World War II period. The immediate years after 1945 saw “dollar shortages” due to government manipulation of foreign exchange rates, experiments in nationalization of industries, forms of “soft” planning, periodic currency crises, and often misguided fiscal policies. Does Mr. Skidelsky not remember how in the 1960s Great Britain was considered the “sick man” of Europe due to government fiscal, monetary, and regulatory policies; or the Lira crises in an Italy that seemed to have a new government every other week? Is all this to be put at the doorstep of the “free market”?

What about the era of “stagflation” in the 1970s, with its seeming anomaly of both rising prices and increasing unemployment that so confused the Keynesian establishment of the time? In America this had been set off by the Federal Reserve’s accommodation starting in the 1960s to create the money to finance the “guns and butter” of the Vietnam War and LBJ’s “Great Society” programs. Was it not the wise and trustworthy hands of the Federal Reserve Board of Governors whose monetary policies created in the late 1970s and early 1980s one of the worst price inflations experienced in American history, with nominal interest rates in the double-digit range?  Another “win,” clearly, for the steady monetary central planning of the Federal Reserve!

What about the high-tech bubble of the late 1990s that went bust, or the recent financial and housing crash of 2008-2009 What had caused them? Alan Greenspan – the central banking “maestro” – set the stage for these with his “anti-deflation” policies at a time when prices were not falling, but which created unsustainable savings-investment imbalances not much different than the disastrous monetary policy followed by the Federal Reserve in the 1920s.

Under the additional guiding hand of Ben Bernanke at the Federal Reserve, interest rates between 2003 and 2008 in real terms were zero or negative; and government housing agencies subsidized tens of billions of dollars in home loans to uncredit-worthy borrowers made possible though monetary expansion and artificially low-cost lending backed with government guaranteed mortgage assurances. Was this all the fault of the “free market”? No. The fingerprints of the Federal Reserve and the agencies of the Federal government are all over this “economic crime.”

Government’s Hand Off the Monetary Printing Press

Yet, according to Robert Skidelsky it is the free market that cannot be trusted to competitively and privately integrate and coordinate the monetary system. How much worse of a track record could a private, competitive banking system create, compared to the monetary disasters of the last one hundred years under the control of central banks, including the American Federal Reserve?

It is not a matter of whether or not Bitcoin or other forms of cryptocurrencies end up being the market-chosen money or monies of the future. What is the fundamental issue is: monetary central planning – with its embarrassingly awful one hundred year track record with paper monies – or getting government’s direct or indirect hand off the handle of the monetary printing press.

Governments cannot be trusted with this power and authority, whether it is done directly by them, or through their appointed central banks. Back in 1986, Milton Friedman delivered the presidential address at the Western Economic Association. He declared that after decades of advocating a “monetary rule,” that is, a steady or “automatic” two or three percent annual increase in the supply of money in place of a more discretionary Keynesian approach, he had concluded that it was all spitting into the wind. Public Choice theory – the application of economic reasoning to analyze the workings of the political process – had persuaded him that the short-run self-interests of politicians, bureaucrats and special interest groups would always supersede the goal of long-run monetary stability, with the accompanying pressures on those in charge of even presumably “independent” central banks.

In this article and others written by him around the same time, Friedman never went as far as calling for the abolition of the Federal Reserve or a return to a gold standard. But he did say that, in retrospect, looking over the monetary history of the twentieth century, it would have been better to never have had a Federal Reserve or to have gone off the gold standard. The traditional criticisms of the costs of a gold standard, he said – mining, minting, storing the gold away, when the resources that went into all this could have been more productively been used in other ways – paled into almost insignificance compared to the costs that paper money inflations and resulting recessions and depressions had burdened society.

Skidelsky’s Straw Man and Evasions

Robert Skidelsky creates a straw man when he tries to put fear into people about unregulated cryptocurrencies threatening the monetary and price stability of the world. He cannot even get his argument completely straight. On the one hand, he says that Bitcoin has an eventual built-in limit on how much of it might be mined; and he warns that a Bitcoin money, then, would reach an maximum that would not have the “elasticity” to meet growing monetary needs of the future. And in the next breath he warns that a Bitcoin-like currency might not have a built-in check against inflation.  Well, which is it: the danger of Bitcoin price deflation or Bitcoin price inflation?

There has emerged during the last three decades an extensive and detailed literature about the possibilities and potentials of a private, competitive free banking system. The economists who have devoted themselves to serious analysis and exposition of such as a free banking system, people such as Lawrence H. White, George Selgin, and Kevin Dowd, to merely name three of the more prominent ones, have demonstrated that a market-based commodity money and a fully market-based banking system would successfully operate with greater coordinating ability and with far less likelihood of any of the monetary and price instability experienced under central banking over the last one hundred years.

It is unfortunate that a scholar usually as careful and thorough as Robert Skidelsky has chosen to downplay the historical reality of the failure of central banking, and not grapple with the serious and real literature on the private competitive free banking alternative.

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Reason Is Now Seeking Fall Journalism Interns

The Burton C. Gray Memorial Internship program runs year-round in the Washington, D.C. office. Interns work for 12 weeks and receive a $7,200 stipend.

The job includes reporting and writing as well as helping with research, proofreading, and other tasks. Previous interns have gone on to work at such places as The Wall Street Journal, Forbes, ABC News, and Reason itself.

To apply, send your résumé, up to five writing samples (preferably published clips), and a cover letter by July 1 to intern@reason.com. Please include “Gray Internship Application” and the season for which you are applying in the subject line.

Paper applications can be sent to:

Gray Internship
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Washington, DC 20009

Fall internships begin in September. Exact start dates are flexible.

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“Heavily Faulted” London Now At Risk Of Major Earthquakes

Earthquakes in Britain are unusual to say the least, and in London even more so. In fact, an earthquake has not struck the capital since the 1700s.

But, researchers from Imperial College have discovered two faults, one running under central London and another below Canary Wharf, that could cause a magnitude five earthquake.

The UK’s Mirror reports that experts say the findings have overturned the traditional view that London is geological stable.

“It now looks a modestly active, very heavily faulted, complicated area,” explained Dr Richard Ghail, a specialist in civil and environmental engineering at the university.

“It’s probably gone from the simplest to most complex geology in the UK.”

Ghail added that the likelihood of an earthquake is “enough to be scary but not fundamentally a problem,” saying that there is also a slim chance of magnitude six earthquake, which could cause structural damage.

The two faults are moving at a rate of 1 or 2mm a year… which some have joked is still faster than the current May’s government movements away from mainland Europe.

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Peter Schiff: Making Italy Great Again

Authored by Peter Schiff via Euro Pacific Capital,

This week, market watchers around the world are justifiably fixated with the high-stakes, high-drama political developments unfolding in Italy.

While a political crisis in the world’s 9th largest economy (International Monetary Fund figures, 4/17/18) would normally not be enough to cause an international meltdown, given how thin the global economic ice has become as a result of ever-increasing debt loads, even small disruptions can create systemic problems. But from my perspective, what makes the Italian drama so interesting is that it parallels so precisely developments in the United States. It’s amazing that more Americans do not realize, that when looking at Italy, they are looking at a fun house mirror reflection of the United States.

Italy is currently dealing with the results of an election in which populist political forces scored a big victory over the establishment, which they had judged to be both corrupt and ineffective.

In other words, the Italians replayed the 2016 Presidential election in the U.S. The big difference is that here the anti-immigrant tendencies of the right and the economic populism of the left were united in one person: Donald Trump. In Italy, those positions are represented by two separate parties that normally would be rivals. But politics can make very strange bedfellows, and the absurdity of the current economic reality has made them partners.

As a result, the top two finishers in their recent election, the left-leaning Five Star Movement and the right-leaning Northern League have cobbled together a contradictory political program that mirrors the Trump agenda. While both parties share nationalist goals to curb immigration and fight for greater autonomy from the European Union, Five Star’s secondary policy goal is to lower the (already low) retirement age and institute universal basic income for all citizens, while the Northern League’s secondary policy goal is to lower income taxes. In other words, their proposed coalition would look to spend more and tax less. That’s the Trump agenda with a little Parmesan cheese on top.

Apart from the appointment of a conservative Supreme Court Justice, Trump’s major political achievements have been massive government spending increases and tax cuts that have significantly widened the projected budget deficits. The irony is that the governments of Italy and the United States are among the most indebted countries in the world. (2017 IMF figures) And the solutions being proposed by both countries are to go even deeper into debt!

This seems to be the fundamental problem of populism. As its name suggests, the goal of the ideology is “to appeal to what is popular.” As a high percentage of people enjoy getting free stuff, government spending programs tend to have a high degree of popularity. Similarly, as a high percentage of people enjoy lower taxes, tax cuts also tend to be popular. But pixie sticks and cotton candy tend to be popular among first graders. Does that mean teachers should be handing out those goodies in whatever quantities their students demand? Will these items do the kids any good in the long run? Good government is about making difficult decisions, not popular ones.

But as we in America sit back and laugh at the goings-on in Italy, we would do well to recall that our problems are not all that different. Like Italy, we have debt that is spiraling out of control and, like Italy, we have absolutely no plan to confront it. What makes us different is that Italy is a part of the European Union, and the European Union is heavily influenced by German fiscal preferences. The Germans don’t like debt and, as a result, the European Union insists that member nations maintain annual deficits no higher than 3% of their respective Gross Domestic Products (GDP) as agreed in the Stability and Growth Pact. This is to ensure that the countries that share the monetary union also pursue relatively similar fiscal policies. This is meant to ensure those enjoying the benefits of a strong currency assume the responsibility of living within one’s means. Absent such controls, overly indebted countries could live off the fiscal responsibility of others. This would create resentment and political disunion.

But the United States has enjoyed this advantage without having to join a currency union. Just as Rome has largely outsourced its monetary policy to Brussels and Berlin, Washington has outsourced its monetary policy to the rest of the world. That is because the U.S. dollar is the world’s reserve currency. Financial markets need dollars to conduct international transactions. In addition, a good portion of public and private global debt is denominated in dollars. This has meant that the U.S. has been able to run up enormous deficits without exposing its currency to the selling pressure experienced by other countries. Countries that don’t have this ace in the whole, like Argentina and Venezuela, have seen their currencies plummet for their failures to rein in their debts. The fact that we have not had to pay this price, at least for now, has blinded us from the danger.

After 20 years of living with a currency they didn’t earn, the Italian voters don’t seem to understand this trade-off either. Basically, Five Star and the Northern League want to leave the euro so that Italy can once again print its own currency (the lira) in order to “pay off” its debt and meet promised government expenditures. (These are the policies that decimated the lira in the past and resulted in the 4,000 lira cappuccino). But without German savings backing up its currency, and the prospect of never-ending debt, investors would demand high interest rates to compensate them for the risks of owning Italian government debt. Currently, Italians can borrow at 1% to 2%. Imagine what might happen to the already weak Italian economy if rates went to 10% or more? To help prevent that, the Italian Central Bank would have to step in and buy Italian government debt. This is the classic recipe for hyper-inflation and steep currency decline. With a much weaker currency, the Italians could repay their creditors on the cheap and nominally meet its spending obligations. But all citizens would lose purchasing power. Prices for everyday goods would increase, Italians would have to make do with less, and Italy would no longer be among the world’s largest economies.

It’s important to realize, however, that without the weight of Italian debt pulling down the currency, the euro could be in a position to move much higher. Given the German preference for sound money, one would think it would welcome this development. But the Germans are making their own silly trade-off. They believe that an awkward union with less fiscally responsible neighbors is a necessary evil because it delivers a large and lucrative market for German products (there are no trade barriers within the eurozone). If they want to keep selling to Italians, they have to make sure that Italians are able to buy. This is the same kind of “vendor financing” model that has kept the Chinese buying American bonds even when those “investments” don’t seem capable of delivering a profit. But Germany enjoyed a strong balance of trade within Europe before the euro was established and it continues to do the same today with countries outside the eurozone. So why is the common currency so important to it? Many have argued, perhaps with some justification, that the Germans see the Eurozone as an economic means to obtain the political power in Europe that its military adventures failed to achieve in the last century.

The question we should be asking in the U.S. is whether our foreign creditors will support us as readily as the Germans seem to be willing to support Italy. But by pursuing a policy of such irresponsibility, “The Donald” is making these eventual decisions easier to make. A possible next recession is capable of pushing our annual deficits well past the trillion dollar-mark projections of the Congressional Budget Office for fiscal year 2020. If creditors fail to step forward to buy all the bonds needed to cover such a shortfall, then interest rates could spike much higher. To help protect the economy from higher rates, the Fed may have to monetize the debt, and the dollar may fall steeply. Sound familiar?

… It’s a mess. In our country, the urgency may not be as evident, but the problems are identical.

The prospect of “Quitaly” (the newly coined term for Italy leaving the Eurozone) may have factored into Trump’s decision this week to move forward with his 25% tariffs on imported steel and aluminum. (J. Diamond, J. Horowitz, CNN Money, 5/31/18) After putting the proposals on hold for more than a month (while negotiators tried to broker a truce), Trump may have calculated that a fearful Europe would not retaliate.

But like just about every other assumption Trump has made, that hope appears to be ill-considered. By infuriating our NAFTA partners, the Europeans, and the Chinese simultaneously, Trump is increasing the likelihood that when our day of reckoning comes, there may be no one there to break our fall.

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BofA Calls It: “The Global Wave Has Just Peaked For Only The Tenth Time In 25 Years”

Speaking at an investor conference on Friday, JPM CEO Jamie Dimon again impressed the audience with his particular brand of optimism, saying he doesn’t see any reason the nine-year economic recovery will end soon and stating that  “We’re probably in the sixth inning,” while predicting that “it’s very possible you’re going to see stronger growth in the U.S.”

Dimon also took a swipe at Moelis co-head of restructuring Bill Derrough who last week said  that “we’re feeling like where we were back in 2007” countering that “I’ve heard people say, well, it’s looking like 2007. Completely untrue. There’s much less leverage in the system. The banks are much better capitalized.”

While it is  to be expected that a billionaire (who will always be “richer than you”) such as Jamie Dimon will tend to have an optimistic bias, especially after his bank was bailed out by taxpayers a decade ago, there is one problem with his assessment of where we are in the business cycle: he is dead wrong.

First, it is by now well known that consolidated leverage in the system is at an all time high, with both the IMF and the IIF calculating in April that total global debt has hit a new all time high of $237 trillion, up $70 trillion in the past decade, and equivalent to a record 382% of developed and 210% of emerging market GDP.

Meanwhile corporate leverage in the US is also at all time highs, whether as a percentage of GDP…

… or on a net debt/ETBIDA basis. As for banks being “better capitalized”, let’s see how capitalized they are when the Fed removes $2 trillion in excess reserves, i.e. liquidity, from the financial sector.

Meanwhile, addressing the question of cycle timing and dynamics, two weeks ago Morgan Stanley said that we are so “late cycle” that the bank issued a very explicit warning that we have now reached the “end of easy”…

… and that “2018 is seeing multiple tailwinds of the last nine years abate”, as the bank’s strategists warn of a “tricky handoff” to a very late cycle economy “which suggests not just a harder environment, but a fundamental shift in how we approach the market.”

As part of its late cycle transition, Morgan Stanley showed its “tricky handoff” checklist… 

… where the bulk of adverse transformations are already taking place right now, while the rest – of which the most important one is the shift from growing central bank balance sheets to shrinking balance sheets – is expected in Q3 and Q4 2018: in other words over the next 3-6 months.

Morgan Stanley was even kind enough to show schematically when it expects every key asset class to peak in the immediate future, and with both IG and HY already in a downslope, it only leave bonds and stocks, the former expected to peak around September, while Stocks seen as hitting their cycle highs just around December, to wit:

Exhibit 3 suggests reducing risk aggressively now, especially with those structural challenges waiting in the wings. But our US equity strategists believe that stocks can mount one last rally into 3Q as earnings estimates continue to rise, and our top-down cycle markets are still giving positive signals. We’re retaining a small net long equities (+2%) for this reason, mindful that this last phase is a risky one.

A bit more equity strength, however, would be consistent with history. Equities have tended to top ~9-12 months after a credit spread trough. If that credit trough was late January/early February 2018 (we think it was), that ‘normal’ timing would put an equity peak in November/December this year. 10-year yields, in turn, tend to peak around three months ahead of stocks, which would place that peak in August/September.

The actual sequencing may differ (no two cycles are exactly alike). Our point is simply that we think our forecasts are consistent with the usual late-cycle pattern, where topping is a process, not a point in time.

But it’s not just Morgan Stanley. Recently, Bank of America joing the “late cycle” warning, writing that its proprietary “Global Wave” indicator just peaked for only the tenth time in 25 years, noting that in the last month, five of the seven components deteriorated including confidence, market, and real economy indicators.

As the name implies, the “global wave” is an advance indicator for global economic expansion and contraction, with virtually every peak in recent decades resulting in either a recession or a sharp market drop: of which, the last two took place just before the European sovereign debt crisis and around the time of the Chinese post-devaluation turmoil.

As BofA explains, previous downturns in the Global Wave averaged 12 months, although it concedes that some downturns have been brief, and as it is still relatively bullish on stocks, hopes the current one will be as well.

Previous negative-but-brief signals occurred in 2002 after President Bush introduced steel tariffs, and in 2005 when PMIs fell quickly before recovering.

Still, the facts are adverse for global stocks, as subsequent to previous peaks in the Global Wave, the MSCI All Country World Index averaged -3.4% in the next 12 months, and defensive regions (the US), defensive sectors (Telecom, Health Care, Consumer Staples) and defensives styles (Quality, Dividends) outperformed, on average.

In fact, even BofA is hard pressed to spin the historical precedent, and writes that while “a brief downturn is possible, but peak signals have been followed by sustained downturns more often than not.“

At the same time, in a separate analysis by BofA’s James Barty who looks at the contextual aftermath of the recent fireworks from Italy’s political drama, also disagrees with Jamie Dimon’s optimistic take, and writes that “we have to admit that the global economy is not firing on all cylinders anymore, and it is a similar story for earnings revisions, which have rolled over from their tax reform distorted highs of earlier this year.”

He then warns that “given the additional risks around Italy (and possibly trade), there are more than enough reasons for investors to remain cautious and not want to put capital to work, at least until it becomes clearer whether any slowdown in growth is merely temporary or something more serious.”

So what are investors to do? “Be patient. Be careful about crowded positions – short vol, long equities, long EM fixed income and FX were all crowded positions – and start to tilt portfolios later cycle.“

That’s textbook. What is the reality? Well, thanks to central banks once again assuring that there is nothing to worry about after the barrage of fireworks so far in 2018, the market remains upside down and not only did tech and small caps close at all time highs on Friday, but selling of vol is once again the go-to trade… 

… for all the 23-year-old trading veterans who are merely following the “all clear” signs from central bankers who have created a centrally-planned market monster in which every BTFDer is a genius, if only for a few more months when for the first time in a decade, central banks will shift from injecting liquidity into the system, to draining it.

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Oregon Governor Declares State Of Emergency After Public Discovers “Untreatable” Toxin-Laden Water

Authored by Emma Fiala via Steemit.com,

Toxins have been found in tap water in Salem, Oregon, resulting in the declaration of a state of emergency by Oregon Governor Kate Brown.

The declaration was issued for both Marion and Polk Counties and includes the capital city of Salem, as well as the towns of Turner and Stayton. The National Guard is expected to deliver water to residents using 10 water stations supplied by 2,000-gallon tankers.

Toxic algae blooms have been plauging the Pacific Northwest and, as it turns out, officials in Salem, Oregon misled the public about the presence of an algae bloom and the safety of their water as early as May 23rd.

On that day, the city of Salem issued a press release assuring residents that their water was indeed safe, despite an adisory issued on the very same day by the Oregon Health Authority alerting residents to the existence of toxic algae blooms the city’s water source, the Detroit Reservoir.

“The city has a vigorous water testing and sampling program, and staff are keeping a very close eye on the developing situation,” residents were told. “City of Salem drinking water remains safe to drink.”

Less than a week later, the city’s tone changed dramatically when officials began sending alerts informing residents that the city’s water was contaminated. Officials said the water is harmless to shower in or wash dishes and laundry with, but stressed that drinking the water could cause symptoms including vomiting and diarrhea and even kidney and liver damage.

Experts have warned that the water cannot be treated – filters, boiling, and other methods will not eliminate the troublesome cyanotoxins.

There has been confusion about the situation since it began, from the conflicting reports on May 23rd to an erroneous emergency alert on May 29th. Salem’s official website went down immediately after the city sent emergency alerts to residents.

In one of the wealthiest and most powerful countries in the world, the fight for clean water is taxing. From Salem, Oregon to the Standing Rock Reservation in North Dakota and from Flint, Michigan to the L’eau Est La Vie Camp in Louisiana, Americans are finding their access to clean water threatened.

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FBI Spying On Trump Started In London, Earlier Than Thought, New Texts Implicate Obama White House

A new report from John Solomon of The Hill ties together several loose threads floating around over the genesis of the FBI/DOJ espionage operation against the Trump campaign, who was involved in the “setup” of campaign aides, and how text messages between FBI employees suggest that the Obama White House was not only aware of the operation – but possibly directing it.

Not only is the timeline moved up from the summer of 2016 to spring, Solomon provides clarification on early contacts between the players involved in  DOJ/FBI sting and Trump campaign aides. 

The bridge to the Russia investigation wasn’t erected in Moscow during the summer of the 2016 election.

It originated earlier, 1,700 miles away in London, where foreign figures contacted Trump campaign advisers and provided the FBI with hearsay allegations of Trump-Russia collusion, bureau documents and interviews of government insiders reveal. These contacts in spring 2016 — some from trusted intelligence sources, others from Hillary Clinton supporters — occurred well before FBI headquarters authorized an official counterintelligence investigation on July 31, 2016.

The new timeline makes one wonder: Did the FBI follow its rules governing informants? –The Hill

“The revelation of purposeful contact initiated by alleged confidential human sources prior to any FBI investigation is troublesome,” Rep. Mark Meadows (R-N.C.), an ally of President Trump and chairman of a House subcommittee that’s taking an increasingly aggressive oversight role in the scandal, told me. “This new information begs the questions: Who were the informants working for, who were they reporting to and why has the [Department of Justice] and FBI gone to such great lengths to hide these contacts?”

Retired assistant FBI director for intelligence Kevin Brock also has questions. Brock supervised an agency update to their longstanding bureau rules governing the use of sources while working under then-director Robert Mueller. These rules prohibit the FBI from directing a human source to perform espionage on an American until a formal investigation has been opened – paperwork and all. 

Brock sees oddities in how the Russia case began. “These types of investigations aren’t normally run by assistant directors and deputy directors at headquarters,” he told me. “All that happens normally in a field office, but that isn’t the case here and so it becomes a red flag. Congress would have legitimate oversight interests in the conditions and timing of the targeting of a confidential human source against a U.S. person.” -The Hill

The Text Messages

A series of text messages recovered by DOJ Inspector General Michael Horowitz between FBI lawyer Lisa Page and special agent Peter Strzok reveal political pressure around the same time as the Trump-Russia probe officially opened. 

“We’re not going to withstand the pressure soon,” Page texted Strzok on Aug. 3, 2016 – days after Strzok returned from London and opened the official Trump-Russia investigation. At the time, as John Solomon of The Hill notes, “they were dealing with simultaneous challenges: the wrap-up of the Hillary Clinton email scandal and the start of the Russia-Trump probe.”

The texts reveal that Strzok and Page were also concerned about someone within the DOJ leaking details of their investigation (“This is MUCH more tasty for one of those DOJ aholes to leak,” Strzok texted Page), as well as concerns that the White House was spearheading the investigation. 

“Went well, best we could have expected,” Strzok texted Page after an Aug. 5, 2016, meeting. “Other than Liz quote ‘the White House is running this.’ ” Page then texted to assure Strzok of a paper trail showing the FBI in charge: “We got emails that say otherwise.”

The next day, Strzok and Page went into further detail about President Obama. “So maybe not the best national security president, but a genuinely good and decent human being,” Page texted Strzok, to which he replied: “Yeah, I like him. Just not a fan of the weakness globally. Was thinking about what the administration will be willing to do re Russia.”

What ever did Strzok mean about Obama being weak?

London

Perhaps so that the agency’s targeting of Trump associates wouldn’t occur on U.S. soil, the very beginnings of “Operation Crossfire Hurricane”  – the code name given to the early official Trump-Russia investigation, all have ties to London. 

The ties are so strong that some have begun to accuse the UK of colluding with the Obama administration and Clinton campaign to influence the 2016 US election. 

According to documents and government interviews, one of the FBI’s most senior counterintelligence agents visited London the first week of May 2016. Congress never got the FBI to explain that trip — but, soon after it, one of the most consequential moments of the scandal occurred: On May 10, Australian diplomat Alexander Downer met in a London bar with Trump adviser George Papadopoulos, who boasted of knowing that Russia would release dirt on Clinton.

That contact was not immediately reported to U.S. intelligence.

By early June, a second overture to a Trump campaign adviser occurred in London. In a “Dear Carter” email, a Cambridge University graduate student invited Trump campaign adviser Carter Page to attend a popular July security conference in London.

While Page would not reveal the name of the graduate student, he did say that the student studied under Stefan Halper – the Cambridge professor and longtime FBI / CIA asset who was sent in to perform espionage on the Trump campaign.

Halper, according to Page, asked to be introduced to high-ranking Trump campaign official Sam Clovis. 

 On July 16, 2016, Carter Page relayed the overture to Clovis: “Professor Stef Halper spends part of the year in Virginia where he has a home in Falls Church; he’s a big fan of yours having followed you on CNN and offered a range of possibilities regarding how he and the University might be able to help.”

Halper, a month later, emailed Clovis, referencing his contacts with Carter Page. “May I suggest we set a time to meet when you are next in Washington?” Halper invited on Aug. 29, 2016.

There are more links to London which strengthen the case for a setup. One week before Carter Page left for London, former MI6 agent Christopher Steele – recently hired by opposition research firm Fusion GPS, made contact with the FBI for an unknown purpose. Weeks later, Steele began working with the agency, while his infamous “Steele Dossier” – full of wild, salacious and largely unverified claims, would become a key document in the application for a FISA warrant to spy on Page. 

What’s more, the London meeting between Papadopoulos and Alexander Downer was reported to the FBI just weeks after the July 23, 2016 release of Hillary Clinton’s emails by WikiLeaks. 

Downer notably arranged a $25 million grant to the Clinton foundation a decade ago to help fight AIDS. This was part of an overall $88 million funneled from Australian taxpayers to the charity. 

As Solomon of The Hill notes, “This timeline doesn’t prove wrongdoing; these contacts could have occurred organically, or been directed legally through intelligence channels. Yet, congressional investigators and FBI insiders tell me, they raise questions about when the investigation officially started and how.”

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Facebook Replaces User-Generated “Trending News” With “Breaking News” From 80 Undisclosed Publications

Facebook is replacing its user-generated “trending news” feature with a “breaking news” section – comprised of 80 publications which they will feed to users. 

 

In other words, Facebook will have complete control over narratives and topics which go against their internal corporate culture. 

 

Facebook’s Trending News section has been the subject of intense scrutiny since the 2016 election after it was revealed that the editors in charge of the feature were repeatedly discriminating against conservative articles, while promoting progressive content. Their clear bias resulted in the threat of an investigation from the Senate commerce committee. 

The new changes were explained in a Friday announcement: 

  • Breaking News Label: A test we’re running with 80 publishers across North America, South America, Europe, India and Australia lets publishers put a “breaking news” indicator on their posts in News Feed. We’re also testing breaking news notifications.
  • Today In: We’re testing a dedicated section on Facebook called Today In that connects people to the latest breaking and important news from local publishers in their city, as well as updates from local officials and organizations.
  • News Video in Watch: We will soon have a dedicated section on Facebook Watch in the US where people can view live coverage, daily news briefings and weekly deep dives that are exclusive to Watch.

While the Washington Post, Recode, The Verge, and Vox have confirmed they’re among the 80 “breaking news” publications, no other publishers names have been revealed.

We imagine Shareblue, Media Matters, the Southern Poverty Law Center and the Anti Defamation League are all included.  

 

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