Month: August 2019

Authored by Sven Henrich via NorthmanTrader.com,

Bull and bear are entering the Thunderdome in September and October and only one will emerge victoriously. Both have 5 known developments to contend with inside the dome: The Fed, the ECB, the China trade deal, earnings and Brexit, all of which can and will throw curveballs as neither bull nor bear can be certain how either of these developments unfold nor what the reactions to them may be.

It’s a time of extreme uncertainty and before you accuse me of saying markets can either go or up or down I will come straight out and say markets can go either up or down, it really depends on how these developments shake out. I’m not a fortune teller, I’m a realist and I analyze technical structures in context of a complex macro picture.

And so everyone is clear: Charts are always evolving and markets are a journey, some don’t seem to grasp that concept. Markets are always shifting and our job is to evaluate risk and reward as charts evolve, especially in a time of great uncertainty.

For purposes of this article I want to focus on the immediate developments in front of us in September, the Fed, the ECB, and the China trade deal and I’ll outline what I see to be the key technical decision nodes as they present themselves right now.

On Thursday I had an opportunity to discuss some of the technical and macro considerations on CNBC Fast Money and I wanted to offer some more detail behind the discussion in today’s article.

For reference here’s the discussion from Thursday:

This screaming sell signal could send stocks spiraling, says strategist Sven Henrich @NorthmanTrader. Here’s what has him worried. pic.twitter.com/8LJtmtAmcX

— CNBC’s Fast Money (@CNBCFastMoney) August 29, 2019

To me the central questions going into the next two months are these: 1. Will there be a China deal or not? 2. Will central banks remain in control, can their coming actions kick the can further down the road and help avert a global recession or not?

Let me handicap both of these questions a bit before I jump into the technicals:

China Trade deal: The likely largest impetus for a large rally in the Q4 would be a positive resolution of the China trade deal, but at this stage there is no guarantee of this. Markets want a resolution hence they rally each time there is a sign of easing of tensions and obviously this has been the standard playbook all year:

“What would you do if you were stuck in one place and every day was exactly the same, and nothing that you did mattered?”

— Phil Connors (Bill Murray), Groundhog Day pic.twitter.com/fY5Atw1l93

— Sven Henrich (@NorthmanTrader) August 30, 2019

That’s a lot of optimism and so far it has meant squat. There is no China deal, but we’ve entered a phase of high stakes gamesmanship between the US and China and the stakes are increasing as 9 major economies are already overtly flirting with recession. No China trade deal and the risk of a global recession increases exponentially by the month hence markets may be running out of patience soon and phone calls may not be enough.

The global slowdown in PMIs and growth is a real and present danger to the global economy and a deal is needed to rescue uncertainty.

So yes, get a deal, no matter the substance, just the relief and appearance of certainty will cause a major rally, don’t get one and the continued drag of slowing data and uncertainty risks a global recession being triggered. It is this binary.

Central bank intervention: No bull market without central bank intervention. We’re back to the same program we’ve seen over the past 10 years. Markets are in trouble and we look for the Fed to save markets. I can’t deny the possibility that the Fed and ECB again launch rate cut and ultimately QE bazookas and succeed in re-inflating asset prices higher.

I do however question the efficacy of it all, especially in context of the boarder valuation and technicals picture and I encourage everyone to visit this tweet thread for the further background. Start of thread, click to expand thread:

S&P 500 median price to sales ratio:
2000 2.0
2007 2.0
2019 2.6
Stock market value vs GDP ratio
2000 146%
2007 137%
2019 145%

— Sven Henrich (@NorthmanTrader) August 28, 2019

Key concerns:

1. Limited Fed ammunition coming off of a much lower rate basis, after all the the Fed only has 8 rate cuts before being back at zero bound, the ECB still being on negative rates never having raised rates, and Europe on the brink on recession despite.

2. Conflict between Fed & markets. Markets want a 100bp cut, the Fed tries to keep calm with mid-cycle adjustment talk. In fact everybody is again screaming for aggressive rate cuts. Save us. Examples from just week: Pimco, Stifle, Danske Bank, and of course the wanna be rate cutter in chief:

If the Fed would cut, we would have one of the biggest Stock Market increases in a long time. Badly run and weak companies are smartly blaming these small Tariffs instead of themselves for bad management…and who can really blame them for doing that? Excuses!

— Donald J. Trump (@realDonaldTrump) August 30, 2019

All firming up the main message: No bull market without central bank intervention. If the Fed doesn’t cut aggressively everything falls apart. And why wouldn’t it? After all, aside from trade optimism, the multiple expansion rally in face of slowing growth of 2019 was largely Fed driven:

It only ran into trouble when the Fed actually cut rates in late July. No, this market is banking all its hopes and dreams on central banks and a China trade deal. But seriously why are we expecting the Fed put to work again which brings us to concern number 3:

3. Financial conditions are already the loosest in 25 years, if you have slowing growth with the loosest conditions why would even looser conditions produce growth? See mortgage applications, declining despite mortgage rates dropping. So it comes down to efficacy and this is an open question.

And for historical context look at where the Fed is cutting rates now versus previous cycles:

Perhaps some journalist can actually grill Jay Powell on why in the world the Fed is cutting rates w/ the loosest financial conditions in decades.
In the past the Fed raised rates during loose conditions & cut rates once conditions tightened.
Not this lot. pic.twitter.com/8kAlYoo3xq

— Sven Henrich (@NorthmanTrader) August 21, 2019

Now put these loose financial conditions in context of the overall macro structure:

The bond market and the yield curve is signaling precisely what they’ve signaled in past pending downturns: The 10 year rejects its long term trend line hard and yields drop hard into inversion while equity markets are in engaged in a topping process as consumers are still confident due to a cyclical low unemployment rate. The typical end game: The yield curve steepens sharply following inversion as unemployment signals a shift higher. Hence unemployment is the last shoe to drop. Unemployment is at 3.7%. Please show my any history that says low unemployment of such a degree is sustainable for an extended period of time.

And note what happens to markets each time when the final shoe drops. Markets correct hard. Following the 2000 top markets corrected to the .618 fib, in 2007 they gave back the entire bull run and more. Hence I said in the interview that the .382 fib and lower megaphone target of 21o0 is actually not dramatic from a technical perspective. And if a global recession will result in a US recession then this technical target may even just be a stepping stone for a much larger journey to come, but we are far from this as of now, hence no point speculating about this now.

So from a market perspective it really comes down to how long low unemployment can be sustained and if markets can engage in another final hurrah rally and much of this is dependent on the above mentioned factors: China trade deal and central bank efficacy.

Now look at markets in 2019: Virtually all gains have come on multiple expansion, at the same time all new highs have come on very pronounced internal weakness.

In fact if you look at the $SPX versus the value line geometric index you see a total decoupling from what the indices are telling you: Ever lower highs on value line versus new highs on $SPX:

At the same time all new highs have been rejected each and every time, here’s the $WLSH driving this point home:

These are simple observable facts.

Most recently we’ve seen markets engage in a process of consolidation similar to the fall of 2018.

And this consolidation has come at a cost, the break of the 2019 up trend:

And note how $ES is currently engaged in a ping pong between the 50MA and the 200MA.

Not only a break of the 2019 uptrend, but also a break of a larger rising wedge. That’s what I referred to in the CNBC Fast Money interview. In the interview I also mentioned a potential bullish pattern on the $VIX and you can see it in the chart below, a bull flag if you will:

Indeed if I use a futures chart I could make the case $ES has corollary bear flag in process of building:

I full recognize that these short term patterns could get easily challenged tested or even invalidated by a single “tariffs delayed” tweet for example. But as of now these potential patterns are not invalidated.

So now how to handicap this upcoming Thunderdome fight technically. The Fed may surprise and cut by 50bp or they may disappoint. The ECB may introduce a QE bazooka as is rumored or they may disappoint. A China deal may happen or it may not and a meeting, if it happens, may produce results or it may not. Lots of variables.

Note: I’ll present some technical scenarios below that are entirely speculative, but technically entirely defendable pending the outcome of these key developments. Don’t hold me to specific time frames, these are conceptual so you have a sense of how one can define risk/reward and pivots here in the current context. As I said earlier, charts and structures evolve and we must keep a close eye on any coming changes.

Let’s start with the bull case, the most commonly presented by Wall Street, the one says a China deal may happen and central banks remain in control with the next round of interventions, the scenario that says a global recession can be averted. I’m using the broadening wedge chart I discussed in the interview to highlight the case:

This scenario says that any corrective activity in September/October will get bought and will produce a larger Q4 rally to new highs, break above the upper trend line, retest it as support and then rally to continue the bull market.

One must clearly acknowledge: In the circumstances described above it can happen. That’s in essence what bulls are counting on, for central banks to save the world again. No bull market without central bank intervention. It’s that simple. Cynically I can observe that many that didn’t forecast the collapse in yields are now confidentially projecting that the collapse doesn’t mean anything and that previous data in different circumstances suggest that markets still have a lot of time before a recession. Maybe, maybe not. I would generally just suggest some humility in making grand predictions. Since nobody predicted the collapse in yields, perhaps it would be wise to just pause for a while and acknowledge that markets may be moving in unexpected ways, which seems to be the case here.

The bear case looks very differently. No China deal and a global recession unfolds despite central bank intervention, i.e. the Fed has to cut rates to zero again or even go negative as the global macro cycle turns in earnest:

Incidentally if that tag of the lower trend line occurs it would most likely be a massive buy for a big rally to come, but we’re far from that.

How could this bear case unfold? As I said in the interview none of this would be a straight journey and there would be of course many rallies in between. I mentioned the buyable dip scenario if the $VIX were to play its current bullish pattern and produce a move to, say, the 2700 zone, one can imagine the following scenario:

A break of the recent consolidation pattern to the downside for a measured move of equal distance, then a big rally (similar to the bull case above) and then the fate of that rally would determine everything. If it fails, one could see a larger topping structure that targets the open gap from January near 2460 and then another big rally into year end.

Look, I know it seems silly to paint these scenarios as nobody can predict the future and in reality markets may well evolve differently, but technically these are entirely reasonable potential outlooks and worth keeping in mind as we see the coming developments unfold.

My perspective here: Keep an open mind, carefully evaluate headlines as they come in. Are they meaningful data or are they simply gamesmanship (i.e. “phone calls”) and how are markets reacting to them in context of these larger structures that are clearly and cleanly visible?

From my perch neither bulls nor bears can rest easy here. The battle in the Thunderdome will challenge everybody.

*  *  *

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According to breaking reports the United States has conducted major airstrikes on Idlib in northwest Syria, which came just after a fierce bombardment over the past days by Russian jets on the province.

The unconfirmed local reports say a large series of explosions on Saturday rocked the countryside just outside Idlib city in what is believed to have been US coalition missile strikes on the insurgent group Horas al-Din’s headquarters (Al-Qaeda affiliate in Syria). 

The reported strikes may have also targeted top commanders of Hayat Tahrir al-Sham, the powerful al-Qaeda affiliate operating in Syria, formerly the Nusra Front terror group, including most significantly America’s “most wanted” terrorist Abu Mohammed al-Jolani.

#BREAKING US attacks the Jihadist group Horas Al-Din in #Idlib: reports pic.twitter.com/iPFFIjVd5R

— Guy Elster (@guyelster) August 31, 2019

If confirmed the surprising coalition airstrikes would be hugely significant and an almost unprecedented development, given the White House has for years threatened to attack Syrian government and Russian forces over this very thing — aerial bombardment of Idlib. 

According to local sources, eyewitnesses observed up to seven explosions before seeing a massive black plume of smoke rise high on the horizon. 

At least 40+ militants of the Al-qaida faction “Guardians of Religion Organization” also called “Hurras al-din” including high-ranked leaders/commanders were eliminated in the airstrikes carried out by International Coalition forces.#Syria #Idlib #HTS #SAA #AQ #Al_Qaida #Turkey pic.twitter.com/ToZtHKGCNT

— Rojava Network (@RojavaNetwork) August 31, 2019

It’s believed that Horas al-Din and Hayat Tahrir al-Sham may have been holding a high level meeting at a headquarters base. 

مصادر متقاطعة: طيران التحالف بقيادة أمريكا ينفذ هجوما بالصواريخ غرب الفوعة في ادلب، لم تتأكد أهدافه بعد وحديث عن قصف اجتماع لحراس الدين… pic.twitter.com/Cw5bdZ8vfD

— زمان الوصل (@zamanalwsl) August 31, 2019

According to Beirut-based Al Masdar News, dozens of jihadists have been reported killed in the attack:

The U.S. military reportedly bombed a group of jihadist rebels near the city of Idlib in northern Syria, local activists reported this afternoon [local time].

According to the reports, the U.S. fired cruise missiles at a base belonging to the Hurras Al-Deen group near the northeastern outskirts of Idlib city.

The reports said that dozens of jihadists, most of them foreigners, were killed during the U.S. military’s attack on the Hurras Al-Deen base near Idlib city.

#Idlib: At least seven seven explosions, targeting the headquarters of al-qaida “Guardians of Religion Organization” were reported a while ago. Report of International Coalition bombings.#Idlib #HTS #AL_qaida #SAA #Syria pic.twitter.com/PXXJ4sVsLX

— Rojava Network (@RojavaNetwork) August 31, 2019

The US coalition had actually targeted a jihadist base in Idlib province earlier this year, however, Saturday’s airstrikes if confirmed would mark a major escalation in US coalition counter-terror operations in Idlib.

developing…

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Submitted by VisualCapitalist.com

Higher education is often considered the first rung in the ladder of success.

That’s why thousands of students flock to top-tier universities around the world, hoping to translate their degrees into financial outcomes. After all, a degree from specific institutions can often mean that a wealthy and secure future is in the books.

With a new fall term just around the corner, today’s chart relies on the third annual Wealth-X report ranking of global universities with the most ultra-high net worth (UHNW) alumni. We’ve also tracked their combined wealth, and how much each UHNW alumni makes on average.

Analyzing UHNW Riches

The Wealth-X database defines ultra-high net worth alumni as those who own at least $30 million in assets. In addition, the alumni figures are based on the actual known UHNW individuals from each university, then projected based on the sample size to predict total alumni within the global UHNW population.

One caveat to note is that both bachelor’s and master’s degree-holders have been considered, while UHNW individuals who may have attended more than one university have been counted twice. With that in mind, let’s dive in.

Upholding a Stellar Reputation

It’s immediately noticeable that a majority of universities on the list are located in the United States, with a high concentration on the East Coast—including the elite Ivy League.

Established in 1636, Harvard dwarfs all its Ivy League counterparts for the richest graduates. Its 13,650 UHNW alumni is double that of second-place Stanford (5,580 UHNW alumni), with twice the total wealth to boot.

One way that Harvard falls short is when average UHNW alumni wealth is considered in this chart, with Stanford beating it by a difference of $170 million per graduate. Regardless, it’s clear Harvard graduates go on to have a significant impact on the world. Notable alumni include political leaders such as former U.S. President Barack Obama, and billionaires such as Michael Bloomberg.

Interestingly, Princeton climbs the charts for total alumni wealth ($1.1 trillion), despite a lower UHNW alumni count of just over 2,000—but this also puts its wealth per graduate at a high of $516 million. Notable alumni from Princeton include Jeff Bezos and Steve Forbes. Meanwhile, Brown and Dartmouth are the only Ivy universities that don’t make the list at all.

Excellence Outside the U.S.

Zooming out, private universities dominate most of this list of richest graduates. In the United Kingdom, Cambridge, Oxford, and the London School of Economics and Political Science (LSE) have over 6,500 UHNW alumni combined. This represents a total of $1.08 trillion in wealth, an average of $174 million per UHNW grad.

Notable alumni and achievements from these institutions include:

• Cambridge: Isaac Newton, Charles Darwin, Stephen Hawking
• Oxford: 69 Nobel prize winners, Stephen Hawking, JRR Tolkien
• LSE: 18 Nobel prize winners, including political leaders

*LSE’s label has been misrepresented in the original report as #26 instead of the actual #25.

Nearby in France, the graduate business school Institut Européen d’Administration des Affaires (INSEAD) has a total of 1,956 UHNW alumni and $356 billion in combined wealth—contributed by CEOs of companies like Credit Suisse, Royal Dutch Shell, Ericsson, and Lego.

It’s impressive that the National University of Singapore (NUS) enters the list, with 1,890 UHNW alumni and an average of $46.6 million to their name. Graduates from NUS have gone on to become Singaporean prime ministers and presidents, as well as high-ranking officials in the WHO and UN Security Council.

Here are the full statistics for the top 25 universities worldwide—does yours make the cut?

Where’s the Money, Really?

According to the report, a majority of UHNW alumni from these universities are “self-made” millionaires, who became successful through their own efforts rather than relying on family fortune or social status.

Of course, the name of a university is one step to climb on the ladder. What’s often glossed over is how steep the tuition fees at private institutions are, which can rack up significant student debt over time.

Graduates from Boston University, Columbia University, and Northwestern University relied the most on inheritance for their wealth, between 10-12%. A combination of both self-made and inherited wealth sources are also common for UHNW alumni—and it’s not a stretch to say that it helped them pay off debts before focusing on their wealth creation.

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Authored by Menno Middeldrop and team, from RaboBank Research

• The Dutch coalition government is reportedly considering a EUR 50 bn investment fund to support economic growth, to be financed by borrowing at negative rates
• Many details are yet to be determined, but the Netherlands should have sufficient fiscal space to finance additional investment spending on this scale in the years ahead
• This represents a notable shift from the debt-averse political consensus in the Netherlands and it could increase pressure on Germany to use fiscal policy to support growth.

News leaked last week that the Dutch coalition government is considering setting up a fund for investing in economic growth. Details are scarce, but media reports suggest a fund of up to €50 bn that would most likely be announced along with the rest of the Dutch budget in mid-September. It could be financed by borrowing from the market and spent on growth-friendly initiatives in areas such as infrastructure, innovation and education. Policy makers appear keen to capitalize on negative rates along the entire Dutch state yield curve.

Despite potential new borrowing, Dutch state debt levels would still be modest compared to other European countries and below the 60% Maastricht debt limit. The degree to which the fund actually results in additional investment and whether this will help growth, will depend on the governance around it.

From an international perspective, the idea of a government investment fund could impact the debate about the role of fiscal policy in supporting growth, in particular the special role of investment (in contrast to spending on (re-)current items). With limited space for additional ECB stimulus, the central bank has called on countries with available fiscal space to use their budget to support growth. The central bank’s policies have also made negative yields possible, giving governments an opportunity to finance such policies. The Netherlands has always been seen as squarely in the debt-averse camp, along with Germany. So this initiative could increase pressure on Germany to use its fiscal policy more actively, especially as the need for investment in infrastructure and digitalisation are seen as more acute there

Government investment fund: more questions than answers

The investment fund was initially reported by the Dutch newspaper De Telegraaf and later confirmed by other sources. The headline figure of EUR 50 bn remains indicative. Other details are also missing, probably because they remain to be worked out. But the main idea is clear: the government should make use of negative interest rates on Dutch government bonds to invest in things “such as” infrastructure and innovation. Apparently outlines of an idea were discussed between the coalition partners in the run-up to the state budget (to be released on 17 September) and were favourably received.

Since then there has been a widespread discussion on the topic in the Dutch media. The majority of responses have been supportive, based on the need to boost productivity growth in the Netherlands and the opportunity to borrow at negative rates. But there were also critics who felt that this was a distraction from the more immediate need to spend on income policies for the middle class or who cited earlier unsatisfactory experiences with a similar investment fund financed by natural gas income. Nevertheless, if the reports were a trial balloon to gauge the support for such a plan, there seems to be plenty of scope for the government to explore the idea further. And indeed, there is still much to be worked out and how the scheme is designed will be crucial for its impact and success. Open questions include the following …

What is the fund for?

Generally reports suggest that the focus of the fund should be on supporting the long-term growth potential of the economy. This is a welcome goal, as productivity growth has been slow in developed countries in general and in the Netherlands in particular (Figure 1).

It is not quite clear what types of projects would be funded. Infrastructure, innovation, education and green energy have been named. Since the idea of a fund was reported, proposals like moving Schiphol, the national airport, into the North Sea (to circumvent spatial and environmental growth constraints at its current location) and building a high speed railway line to the north of the country have also been revived.

Should the fund be purely focussed on long-term investment or can it also play a role in stimulating the economy during a recession? Many press reports cited the possibility of an imminent recession as a motivation for the fund. However, the set of projects that make sense from a cyclical stimulus perspective – things like “shovel-ready” infrastructure projects – is  smaller than the set that could support long-run growth.

How and when will it be financed?

The idea of the fund came shortly after the entire Dutch government yield curve, including the 30 year rate, moved below 0 percent (Figure 2). The possibility of borrowing money from the market and getting paid for the privilege has captured the imagination of the Dutch public and politicians alike. Some reports suggested the fund might be immediately stocked by borrowing from the market. Perhaps this reflects a sense that this opportunity to borrow at negative rates is a fleeting aberration. However, tasking the DSTA with prefunding this vehicle appears fanciful. First of all, it would undermine the Dutch State’s long-held policy of being a steady and reliable issuer. Furthermore, negative rates are a double edged sword. They may be an effective subsidy for borrowers, but are also a penalty for those looking to invest in liquid assets. As such, it makes better sense to raise capital as and when projects require financing.

Who will decide that the fund invests?

Should the “fund” be financed on-the-go then one might wonder, what’s the point? Dutch governments could easily invest in long-term growth projects using the regular budget. Establishing a separate fund should probably be seen as a commitment device to making the necessary investments, not just for the current governments but also for those in the future.

The Netherlands has an experience with a similar setup and several Dutch economists have cited this experience as a reason to be sceptical of this new idea. Natural gas revenues were supposed to be allocated separately from the rest of the budget on investments that would “strengthen the economic structure” of the Netherlands. However, it appears that the investment spending from the fund merely substituted for investment out of the regular budget. Furthermore, part of the fund was raided to finance regular state spending. It also lacked a strong strategic investment framework.

Without clear rules on what the new fund can spend its money on an who decides what counts as an appropriate  investment, a repeat of these earlier experiences seems likely. An independent government agency with an investment spending mandate would be the most effective way to avoid this, but it is far from clear this will be politically feasible.

Fund unlikely to break the budget

Regardless of the exact structure, a fund of the scale proposed is likely to fit within the fiscal space the Dutch government has. We do expect that spending under the fund would fall under the EMU budget rules and that the Dutch government would be keen to stick to them. However, according official (CPB) estimates the EMU surplus will be 1.2% of GDP this year and the debt ratio will be 49% of GDP. Investments spending of EUR 50 bn, which is about 6% of GDP, could be easily accommodated if it were spent over several years and would still see debt stay below the 60% Maastricht threshold. Given the ongoing demand for safe-haven bonds in line with the elevated level of geopolitical tension, and with the ECB widely expected to soon wade in and further reduce the de facto supply of such bonds, an incremental funding programme for the proposed investment vehicle is also unlikely to weigh on spreads. As stated, we consider that a wholesale market-based prefunding of the fund, as speculated about in certain corners of the press, looks to be a flight of imagination.

Growth-effect depends on how wisely money is spent

Investment spending from a government fund like this could have both a short-term and a long-term growth impact.

In the short term, extra investment spending would boost GDP-growth directly and through a multiplier effect through private sector spending. The size of this effect depends on the state of the economy. Currently, the government is finding it difficult to implement its existing investment plans due to the tight labour market. However, as the economy weakens we expect unemployment to rise and there to be more space for this type of spending. More slack in the economy should also result in a stronger multiplier effect and reduce the risk of crowding out private sector investment. Indeed, if many of the risks facing the Dutch economy currently come to pass, the extra spending would be welcome stimulus.

The long term effect on growth (and thus indirectly on debt-sustainability) will depend on how wisely the government invests these funds. Investment in infrastructure, research and education could all benefit long-run economic growth. However, there are also strong cases to be made for investing in expanding the housing supply and in making growth more climate friendly. The social returns on such investments would justify their (negative) funding costs, but wouldn’t translate into higher growth of potential GDP.

Is this what the ECB had in mind?

The ECB has called on countries in the euro-zone with fiscal space to do more to stimulate growth. The ECB might thus welcome the plans from the Netherlands. However, it does not look like the Dutch government has classic stimulus measures in mind, that would boost aggregate demand in the short term. Not to mention, that the Netherlands is too small to influence overall Eurozone GDP enough to factor into the ECB’s calculus by itself.

It is also doubtful that the ECB’s call for more fiscal support to the economy has influenced Dutch politicians. Rather than seeing this as a question of fiscal-monetary policy coordination, another way to look at it would be to see it as part of the monetary policy transmission channel. The ECB has helped to create, at first low and now negative yields on Dutch government bonds through its negative deposit rate, its bond purchases and by stoking expectations of more easing to come. Due to deep-seated political preferences the Dutch government has so far not responded much to these incentives, but sub-zero rates are apparently a game-changer for Dutch politicians.

Pressure on Germany to invest more could increase

A Dutch investment fund would in itself not change much for the rest of the euro-zone. It could have an influence, however, on the debate regarding German fiscal policy. The Netherlands and Germany have always seen to be in the same club of countries that support conservative fiscal and monetary policy. An investment fund in the Netherlands could increase the pressure from other EU countries, the European Commission, the ECB and the IMF on Germany to do more. It could also play a role in the debate in Germany itself. Already there are signs that the political mood in Germany is shifting towards more investment (and possibly this has influenced the mood in the Netherlands as well). A long-term investment fund or program would arguably also be more politically palatable in Germany than straightforward stimulus. It would also be more welcome, given the consensus that Germany lags behind in digitalisation and needs more infrastructure investment. While from the perspective of the ECB and the euro area as a whole, coordinated investment across the currency union, targeting projects with the highest potential returns in regions with high unemployment, could be considered optimal policy. But that would require an even bigger shift in attitudes about fiscal policy.

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Authored by Alasdair Macleod via GoldMoney.com,

The reason for persistent strength in the price of gold can be found in the changing relationship between time preference for monetary gold, and a new round of interest rate suppression for the dollar. Evidence mounts that the forthcoming recession is likely to be significant, even turning into a deep slump. Bullion bank traders are waking up to the possibility that dollar interest rates are going to zero and that pressure is likely to be put on the Fed to introduce negative rates. The laws of time preference tell us bullion banks must urgently cover their short bullion positions in anticipation of a dollar rate-induced permanent backwardation for gold, silver and across all commodities.

This article dissects the moving parts in this fascinating story.

Introduction

For some time now, I have maintained the wheels are likely to fall off the global economic wagon by the year-end. Furthermore, for many of my interlocutors, the recent rise in the gold price is just evidence of an impending cyclical crisis, anticipating and discounting the certain inflationary response by central banks. But in this, we are describing only surface evidence, not the underlying market reality.

In the combination of trade protectionism and an emerging credit crisis we face a problem upon which almost no formal research has been done, so it is not something that even far-thinking analysts have considered. To my knowledge, no mainstream economist has pointed out the lethal mix these two dynamics together present. Very few even recognise the existence of a credit cycle, traditionally called a trade or business cycle. Not even the great von Mises called it a cycle of credit, having identified and described it with great accuracy in his The Theory of Money and Credit, first published in 1912. But a spade must be called a spade: it is in its fundament a credit cycle.

There are many Austrian economists who fully understand the credit cycle. But to it we must add the destructive synergy of American trade policy aimed at China. Much economic research has been conducted on the causes of a credit cycle, trade cycle, business cycle, whatever it may be called. Much research has also been conducted on the economic consequences of trade tariffs. But nowhere is there to be found any research or commentary on the destructive power of combining the two.

Yet, these were precisely the conditions in October 1929, when Wall Street awoke to the certainty that Congress would vote in favour of the Smoot-Hawley Tariff Act at the end of that month. The shock of a 35% top to bottom fall in the Dow in October 1929 was only a prelude to an extended collapse following President Hoover signing it into law the following year. The economic research that followed the subsequent depression was conducted almost entirely by inflationists promoting reflation, so the destructive synergy between a credit crisis and trade protectionism has been ignored.

We cannot know the future with certainty, but we can point to the empirical evidence following Smoot-Hawley and draw an alarming parallel with today’s events. Thus alerted, we can then develop a convincing theoretical case for its repeat. Every week, reports of the global economy stalling now hit the headlines, drawing the parallel even closer. Yet, with equity markets close to all-time highs, little more than a mild recession, easily batted away with a little more monetary inflation, is the general expectation.

But our knowledge tells us there is almost certainly a large unanticipated shock ahead of us, and we should proceed in any analysis with that expectation. This article postulates how early evidence from the rising price of gold suggests the shock is closer than even perennially bearish analysts expect. We shall now take the inflationary consequences of an unexpected slump as a given in order to predict the changes in the relationship between physical gold and fiat dollars; a relationship that has for the last four decades led to a massive expansion of gold derivatives. To understand that relationship, and why it now appears to be reversing requires a working knowledge of time preference, the basis of interest; and more specifically the changing relationship of gold’s time preference to that of dollars.

Interest and time preference

One’s own bookcase provides the perfect illustration of time preference, which is the greater value of possession over non possession. There will be books bought on a whim which just clutter a bookshelf and have no value. Next time there’s a clear-out, they are destined for the charity shop: there’s no difference in time value, being worthless to the owner today and in the future.

Then there are the first editions, which have a commercial value. Books in this category will have a high current value to you compared with their non-possession. But perhaps the books with the highest personal value are the ones that have little value to anyone else: that battered copy of Wren’s Beau Geste, or the translation of Hoffmann’s Struwwelpeter read to you when you were a child. You may have even visited the museum in Frankfurt dedicated to Hoffmann and his famous book of moral tales for children. The value of these books in possession is far greater than their absence, even though you rarely open their pages.

This is the basis of time preference: the greater value placed on possession than non-possession. The books with sentimental value will have very little value to anyone else, other booklovers having their own favourites. Everyone’s time preferences are different. In economic terms, we express these varying values in terms of the difference between a current value in possession and the value of non-possession, but the certainty of repossession at a future time. The discounted value of the future possession is normally expressed as an interest rate on the monetary value today.

Assuming free market prices, in theory nearly everything of value has a time preference, an interest rate. That is, anything people value more in their immediate possession than the promise of ownership at some stage in the future. A future value, with very few exceptions, is always less than that of current ownership, and it is the difference between the two that is given to a current owner in one form or another to part with possession for a defined period of time.

The only examples that go against time preference are special cases. For example, an individual might forgo a decent salary today, in order to study so that he or she can earn more after passing a professional exam. In this case, the value of a current earnings stream is rejected in favour of potentially better prospects later. Or the philanthropist, who lends artworks for free to a public gallery so that a wider audience can appreciate them (but perhaps he does have a reward – to be thought of as a generous philanthropist and pillar of society).

The proxy for valuing time preference on goods is money, and the way it is normally expressed is as a money-rate of interest, often termed the originary rate. The originary rate of interest can be specific, assessed and applied in a single transaction such as obtaining the temporary use of a machine for a defined time. It can be a consolidated rate through the application of savings, reflecting the time preferences of the many goods and services whose possession is temporarily deferred by the saver.

Time preference is just the core consideration behind an interest rate. There will be other interest elements in addition, such as the trustworthiness and financial record of the borrower. But for the individual who has sacrificed the immediate satisfaction of spending the money put aside as savings, the time preference element will reflect the discounted future values of the goods and services that otherwise would have been purchased.

As well as time preferences reflecting baskets of specific goods and services, individuals will personally have different time preferences as well, as illustrated with the example of a personal library. But as is the case with any value, it is the marginal rate which is usually accepted as the market rate of interest, and therefore indicates the overall value of time preference within it. In addition, an interest rate must be greater than the sum of the originary rate and the compensation for all perceived lending risks, in order to create savings flows to feed investment.

This being the case, why is it that in financial markets, the forward price of something at a future date is usually higher than the present? The answer is simple: forward prices are not for possession, but for extending non-possession. Instead of being obliged to pay for possession today, a futures or forward price allows an individual to hang on to money for longer, rather than part with it now. And, assuming free markets set interest rates, with money’s time preference being greater than that of the average consumer item (in order to create savings flows referred to above), plus the addition for financial risk compensation, it should always be higher than the pure time preference applied to the underlying commodity, item or even just a title to ownership.

Therefore, higher prices for future deliveries of commodities and titles to ownership in financial markets are principally a reflection of money’s time preference, plus the risks associated with change of its ownership. To this should be offset the specific time-preference for individual commodities, but so long as they are in adequate supply, they will not be relatively significant compared with that of money.

This means the financial representation of time in a futures or forward contract in a properly functioning market is normally a positive cost. This condition is termed contango. We must also allow for the relative demand and supply characteristics of the underlying security between Date 1 and Date 2, which may temporarily lift a commodity’s time preference above that of money. If demand characteristics are such that the value of an immediate delivery overrides money’s time preference, then we have a backwardation. For example, there may be an acute shortage currently but supplies of the commodity in question are expected to be more plentiful at a future date. Backwardation is a temporary condition, and not the normal situation in financial markets.

To summarise so far, time preference tells us, except in a few specific cases, that the underlying or originary interest rate on money, which represents the time preference in all goods and services, must always be positive and include an extra margin to ensure savings flows occur. Furthermore, this is the basis for all pricing in financial markets for deferring delivery or settlement, which is called contango. In normal markets, backwardations are always unnatural and temporary, reflecting an excess of demand over supply for an earlier date over a later, but is never a general condition.

Negative interest rates create permanent backwardations

The reason it is vital to grasp the meaning and implications of time preference is to show that negative interest rates are unnatural, and do not accord with human action. It might not be obviously disruptive to financial markets when a central bank, whose currency is not the reserve currency, imposes a relatively minor negative rate on its commercial banks’ reserves. After all, a commercial bank will still charge its borrowers a positive rate, even though it may have to be imaginative when it comes to keeping depositors happy. But this is beginning to change, with both governments and large corporates now being able to issue bonds at negative rates. As we have seen from our discourse on time preference, this is a significant distortion from normality, indicating bond markets expect yet deeper negative rates in the currencies concerned.

In managing interest rates, the assumption central bankers make is that interest is the price of money. This is wrong for the reasons argued above. But instead of realising that deeper negative rates will not promote economic recovery in accordance with a cost of money approach to economic management, central banks’ economic models predict deeper negative rates are necessary in the event that a significant recession materialises.

However, this is new territory for policy makers, and they are naturally cautious about the prospect of deeper negative rates. Deeper negative interest rate policies will almost certainly be preceded or accompanied by quantitative easing, which allows a central bank to anchor term rates and government bond yields at the zero bound or even in negative territory. If the world faces a global recession, monetary expansion is likely to be the only course of action open to central banks, and deeper negative rates will become central to monetary policy if a recession persists.

With the expansionary phase of the credit cycle demonstrably running out of steam, history tells us that not only are we overdue a crisis in bank credit, but the tariff war between China and America will probably synergise with the cyclical downturn in the credit cycle to trigger a slump on a scale not seen since the early 1930s.

That being the case, under our assumptions for economic prospects, deeper negative rates will become unavoidable. The first to explore this dangerous territory are likely to be the ECB, the Swiss National Bank and the Bank of Japan. So far, lending rates at the Fed and the Bank of England are still in positive territory, but faced with an economic slump, that may not persist. The Fed’s interest rate is particularly important, because international financial markets price everything in dollars. And unless the Fed is prepared to see a dollar being strengthened by deepening negative rates elsewhere, the Fed may have little option but to follow.

If the Fed introduces negative dollar rates, then distortions of time preference will take a catastrophic turn. All financial markets will move into backwardation, reflecting negative rates imposed on dollars. Remember, the only conditions where backwardation can theoretically exist in free markets are when there is a shortage of a commodity for earlier settlement than for a later one. Yet here are backwardation conditions being imposed from the money side. It leads us to one conclusion: if negative rates for the dollar are imposed on financial markets, they will almost certainly lead to a flight out of the dollar where deposits become taxed with negative rates, not into other currencies, but into all commodities and future claims upon them. The current situation, where since the 1980s derivatives have inflated commodity supply, thereby suppressing prices, will be reversed. The purchasing power of dollars will be undermined by an attempted flight out of money. And it is unlikely to be long before the difference between negative time preferences between dollars and mildly positive ones for everyday items promotes a similar flight out of retail bank deposits.

That is the black and white of it. But there is a grey area of close to zero rates, when they are less than the implied rate of interest on gold, because of its time preference. Here it should be noted that gold’s interest rate when sterling was on the gold standard generally varied between two and four per cent, using the yield on British Consols as proxy. The Fed fund rate is already testing the lower boundary for monetary gold’s historic time preference, and markets are now expecting the FFR to go lower still.

Negative dollar interest rates and gold

This leads us to consider how a negative dollar interest rate will affect the price of gold. Gold is different from other commodities, because it is also a medium of exchange. And while it may not be commonly used as such in capital markets, it is widely retained by central banks and diverse parties as a monetary store of value.

Gold has a monetary time preference of its own, in accordance with time preference theory. And when gold was money, expressed as such through money substitutes, we know from the British experience in the nineteenth century, gold’s time preference usually held above two per cent, and that was still roughly the case reflected in gold’s lease rate since the 1980s.

In the 1980s gold was increasingly used as the collateral for a carry trade, leading to an explosion in business for the London bullion market. The underlying position was that central banks had accumulated bullion as part of their monetary reserves, and the gold price was generally falling. As bullish conditions died, gold’s time preference fell. Central banks and government treasury departments added to this trend, being prepared to lease their gold in large quantities to specialist banks in the bullion market.

At that time, a bullion bank could lease gold from a central bank and use it as collateral to invest in US Treasury bills. Gold’s time preference was reflected in a lease rate of typically 1.5-2% (though there were some spikes to 3-5%). Lease rates rhymed with evidence of gold’s originary rate established in the nineteenth century.

Meanwhile, 6-month UST bills yielded about 6% or more, giving bullion banks a fat profit over the lease rate. While figures were never published, Frank Veneroso, at that time a leading independent gold analyst, gave a speech in Lima in 2002 estimating central bank gold leases and swaps were between 10,000 and 15,000 tonnes. In other words, up to half of all central bank gold was out on lease or swapped.

Since those days, the London forward market has continued to grow. Bullion banks extended their operations to offer bullion accounts for wealthier individuals around the world, almost entirely on an unallocated basis. Unallocated accounts allow a bullion bank to own the gold deposited with it and to leverage its use as collateral for carry trades and other opportunities of interest rate arbitrage. This market became so developed that insiders have postulated that for every ounce of physical bullion in the possession of bullion banks there could be a hundred of paper liabilities.

We have no way of knowing the true level of paper gold leverage today. A working assumption that actual gearing is closer to between ten or twenty times seems more realistic, given Bank for International Settlements statistics of OTC swaps and forwards and LBMA vaulting statistics, allowing for ETF and other custody holdings, segregated from bullion bank ownership. To this must be added the banks’ unallocated customer account liabilities which go unrecorded. In any event, we can be certain that in recent decades a positive gold lease rate led to a substantial systemic uncovered position, likely to be still institutionalised, given the evidence from the LBMA’s daily clearing statistics.

The dollar interest rate that matters today is the wholesale market rate, USD LIBOR of a term that matches a gold lease. At the time of writing, 12-month USD LIBOR shows at 1.949%. The gold 12-month forward rate is roughly the same, implying the lease rate is zero. Clearly, with gold lease rates reflecting no time preference for gold, its supply into wholesale markets is being severely restricted. Look at it from a central bank’s point of view: if a lease is coming due, there is no incentive to renew it, particularly given the unquantifiable counterparty and systemic risks that may arise in the current global economic climate.

We can conclude that the basis for highly geared interest rate arbitrage by borrowing gold is running into a brick wall. Not only is there no incentive for lessors but also there is also a diminishing appetite for lessees, because the opportunities are vanishing. Synthetic gold liabilities are being gradually reduced, not only by ceasing the creation of new obligations, but by buying bullion to cover existing ones. This will have been particularly the case when the USD yield curve began to invert in recent months (itself a backwardation of time preference), and was the surface reason, therefore, that the gold price moved rapidly from under $1200 to over $1500.

Bullion banks are now faced with the prospect that the Fed will reduce interest rates to zero again, even without a systemic crisis such as Lehman. Traders, who are not often deeply analytical, will almost certainly link gold’s move in the wake of the Lehman crisis, once dollar liquidity concerns subsided, from under $750 to over $1900, with dollar rates being suppressed at the zero bound. If rates return there and LIBOR remains positive, that will be a reflection of systemic risk, not time preference. Meanwhile, gold’s time preference will almost certainly be increasing as markets attempt to discount a new wave of base money expansion when the Fed attempts to stabilise the US economy and manage government finances.

Bullion bank traders can see therefore, the day has arrived when gold’s time preference exceeds that of the dollar by an increasing margin. Furthermore, there is the growing threat of negative dollar rates, as economic conditions deteriorate. Putting other considerations aside, the switch in time preferences suggests a bullion bank’s future trading strategy should be the polar opposite of their current position. Instead of holding a small stock of gold to finance a large dollar position, logically they should maintain a small reserve of dollars to finance a larger position in physical gold.

It is for this reason that not only is the gold price rising, but is likely to continue to rise, appearing to defy all expectations. It is impossible to quantify the extent to which the gold price will rise as the bullion banks scramble to unwind or even reverse their habitual short positions, but if there is a surprise it is likely to be on the upside.

The consequences

As well as being modified by its specific supply and demand conditions, Gold’s time preference is essentially for its moneyness, represented by its use as a medium of exchange and store of value. The moneyness aspect links it to its exchange value for all commodities, and it is this aspect of gold’s qualities that should warn us that a backwardation in gold, emanating from negative dollar interest rates, will herald a general backwardation in commodities as well.

We must not forget that markets anticipate events where they can, so with a recession threatening to turn into a slump and with a looming credit crisis in the wings the prospect of negative rates will be increasingly priced into the relationship between commodities and fiat dollars. Assuming economic prospects darken because of the coincidence of American tariffs and the emerging crisis stage of the credit cycle, it will be check-mate for central banks. They were never appointed nor are they technically equipped to save the currency at the expense of widespread bankruptcies, not just in the private sector, but of their governments as well. And that is what markets will be faced with.

The current situation has striking similarities with the 1930s, and the prospects for the global economy are driven by the same broad factors. With the gold standard then and not now the price effects are already showing differences. Nor was there a bubble of hundreds of trillions of outstanding derivatives then as there are today. This time, the monetary sins since the ending of the Bretton Woods agreement seem set to come home to roost all of a sudden, even if dollar rates are lowered towards zero and only stay there. But if they go negative and the more below zero that they go, the greater the backwardation on the whole commodity complex. The more rapidly commodities will be bought so the dollar, taxed with negative rates can be sold, and the quicker market actors will devalue the currency.

With all other fiat currencies referenced to the dollar, it will mark the start of a process that is likely to collapse the entire fiat currency system. Bullion banks which are too slow to recognise the change and have not shut down their gold obligations will be forced to steal their customers allocated gold, or go to the wall, adding to the disruption. All commodity derivatives will face a period of rapid contraction of open interest, in lockstep or one pace behind those of gold.

Instead of central banks stabilising the system by monetary easing, the easing itself will guarantee the crisis. The development of a problem in gold markets, driving the gold price rapidly higher while some banks are caught napping, is likely to anticipate a wider financial and systemic crisis. Therefore, with gold’s sudden move higher coupled with its persistent strength we can reasonably certain that we are seeing the start of the dismantling of the dollar-based monetary system, and that gold has much further to go.

via ZeroHedge News https://ift.tt/2Zsm1PI Tyler Durden

Protesters in Hong Kong returned to the streets in what Bloomberg has called “one of the city’s most violent days in its 13th weekend of social unrest,” after several top organizers were arrested and then released, including Joshua Wong, Agnes Chow and Andy Chan. 

Hong Kong police fired tear gas and sprayed protesters with blue dye from pepper-spray filled water cannons, while charging other protesters with shields and batons. 

Water cannons fired blue dye pic.twitter.com/U8YAR1PsrQ

— Tiffany May (@nytmay) August 31, 2019

“Liberate #HongKong, the revolution of our time,” some chanted amidst the fire.

We heard several loud “bang” sounds as the fire grew bigger.

This is beyond anything I have seen in the #AntiELAB protests so far. pic.twitter.com/goCWgVn3UO

— Eric Cheung (@EricCheungwc) August 31, 2019

Tens of thousands participated in an unauthorized demonstration – many of whom threw objects and gasoline bombs over barriers at the government’s headquarters. After initially retreating in response to the crowd control measures, protesters returned to a nearby suburb and set fire to a wall on Hennessy Road in the city’s Wan Chai district. 

this fire has gotten much bigger after 20 minutes. the street is full of dark smoke. #hongkongprotests#HongKong Clashes Escalate as Water Cannons, Firebombs Are Used https://t.co/JtIZo9EhGJ @bpolitics pic.twitter.com/pxdhcV0iRc

— Fion Li (@fion_li) August 31, 2019

While others marched back and forth elsewhere in the city, a large crowd wearing helmets and gas masks gathered outside the city government building. Some approached barriers that had been set up to keep protesters away and appeared to throw objects at the police on the other side. Others shone laser lights at the officers.

Police fired tear gas from the other side of the barriers, then brought out a water cannon truck that fired regular water and then colored water at the protesters, staining them and nearby journalists and leaving blue puddles in the street. –AP

#HongKong police used water cannons to disperse rioters near Causeway Bay. The water contains pepper. pic.twitter.com/A0aSgzTTea

— Global Times (@globaltimesnews) August 31, 2019

The protesters were undeterred.

protesters aren’t deterred by rounds of tear gas outside Sogo department store at all. what a scene in causeway bay. #hongkongprotests#HongKong Clashes Escalate as Water Cannons, Firebombs Are Used https://t.co/JtIZo9EhGJ @bpolitics pic.twitter.com/SOPyI4ZIzu

— Fion Li (@fion_li) August 31, 2019

Several people were arrested and tossed into police vans. 

“Violent protesters continue to throw corrosives and petrol bombs on Central Government Complex, Legislative Council Complex and Police Headquarters,” said the police in a statement. “Such acts pose a serious threat to everyone at the scene and breach public peace.”

TEAR GAS: Police fire tear gas at #antiELAB protesters outside Hong Kong’s Legislative Council offices#HongKongProtests #香港

More @business: https://t.co/MmE4GkqhtD pic.twitter.com/9ZnKPDCTUA

— Bloomberg TicToc (@tictoc) August 31, 2019

Protesters in Hong Kong returned to the streets in what Bloomberg has called “one of the city’s most violent days in its 13th weekend of social unrest,” after several top organizers were arrested, including Joshua Wong, Agnes Chow and Andy Chan.  Hong Kong police fired tear gas and sprayed protesters with blue dye from pepper-spray filled water cannons, while charging other protesters with shields and batons.  Water cannons fired blue dye pic.twitter.com/U8YAR1PsrQ — Tiffany May (@nytmay) August 31, 2019 Tens of thousands participated in an unauthorized demonstration – many of whom threw objects and gasoline bombs over barriers at the government’s headquarters. After initially retreating in response to the crowd control measures, protesters returned to a nearby suburb and set fire to a wall on Hennessy Road in the city’s Wan Chai district.  this fire has gotten much bigger after 20 minutes. the street is full of dark smoke. #hongkongprotests#HongKong Clashes Escalate as Water Cannons, Firebombs Are Used https://t.co/JtIZo9EhGJ @bpolitics pic.twitter.com/pxdhcV0iRc — Fion Li (@fion_li) August 31, 2019 While others marched back and forth elsewhere in the city, a large crowd wearing helmets and gas masks gathered outside the city government building. Some approached barriers that had been set up to keep protesters away and appeared to throw objects at the police on the other side. Others shone laser lights at the officers. Police fired tear gas from the other side of the barriers, then brought out a water cannon truck that fired regular water and then colored water at the protesters, staining them and nearby journalists and leaving blue puddles in the street. -AP #HongKong police used water cannons to disperse rioters near Causeway Bay. The water contains pepper. pic.twitter.com/A0aSgzTTea — Global Times (@globaltimesnews) August 31, 2019 The protesters were undeterred. protesters aren’t deterred by rounds of tear gas outside Sogo department store at all. what a scene in causeway bay. #hongkongprotests#HongKong Clashes Escalate as Water Cannons, Firebombs Are Used https://t.co/JtIZo9EhGJ @bpolitics pic.twitter.com/SOPyI4ZIzu — Fion Li (@fion_li) August 31, 2019 Several people were arrested and tossed into police vans.  “Violent protesters continue to throw corrosives and petrol bombs on Central Government Complex, Legislative Council Complex and Police Headquarters,” said the police in a statement. “Such acts pose a serious threat to everyone at the scene and breach public peace.” TEAR GAS: Police fire tear gas at #antiELAB protesters outside Hong Kong’s Legislative Council offices#HongKongProtests #香港 More @business: https://t.co/MmE4GkqhtD pic.twitter.com/9ZnKPDCTUA — Bloomberg TicToc (@tictoc) August 31, 2019 Protesters asked US President Donald Trump to take action and help the activists, who originally took to the streets to protest a controversial extradition bill which would have allowed China to bring suspects to the mainland to face trial in PRC courts.  This #antiELAB protester tells us why he’s urging Trump to take action on #HongKongProtests #香港 More @business: https://t.co/6KN3YO371w pic.twitter.com/55ZzVNpdqW — Bloomberg TicToc (@tictoc) August 31, 2019 Acting on orders from Beijing, Hong Kong rejected an application by the Civil Human Rights Front for a march to the Chinese government office. While previous marches have begun peacefully, police say that they have increasingly devolved into chaos and violence towards the end. 

Protesters asked US President Donald Trump to take action and help the activists, who originally took to the streets to protest a controversial extradition bill which would have allowed China to bring suspects to the mainland to face trial in PRC courts. 

This #antiELAB protester tells us why he’s urging Trump to take action on #HongKongProtests #香港

More @business: https://t.co/6KN3YO371w pic.twitter.com/55ZzVNpdqW

— Bloomberg TicToc (@tictoc) August 31, 2019

Acting on orders from Beijing, Hong Kong rejected an application by the Civil Human Rights Front for a march to the Chinese government office. While previous marches have begun peacefully, police say that they have increasingly devolved into chaos and violence towards the end. 

 

via ZeroHedge News https://ift.tt/32gEyeB Tyler Durden

Recent unprecedented airstrikes on Iraq widely believed to have been carried out by either Israeli drones or stealth jets have been acknowledged by Prime Minister Benjamin Netanyahu, who on Friday gave belated confirmation that the Israeli military has been active there.  

He said during a Facebook live stream event to political supports that “I am doing everything to defend our nation’s security from all directions: in the north facing Lebanon and Hezbollah, in Syria facing Iran and Hezbollah, unfortunately in Iraq as well facing Iran. We are surrounded by radical Islam led by Iran.”

Over the past six weeks there’s been three significant airstrikes on Iraqi paramilitary forces bases — at least one of which US officials have confirmed Israeli responsibility for. All of them targeted Iran-backed Shia paramilitary units. 

The ‘mystery’ attacks, two of which came in August and one in July, have renewed calls from Iraqi parliament for a complete US troops withdrawal from the country, especially given the demise of the Islamic State and now with no official justification for American forces to be there. 

The political and diplomatic firestorm resulting from the Israeli strikes and violations of sovereign Iraqi airspace have resulted in an awkward Pentagon statement saying the US had no role or foreknowledge of the attacks; however the statement stopped short of naming Israel or alleging who was behind them. 

Last week while on a state visit to Kiev, Netanyahu told reporters, “Iran has no immunity, anywhere”. He was responding to a specific question about the mystery attacks on Iraq. 

“We will act — and currently are acting — against them, wherever it is necessary,” he declared.

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MPs who oppose a no-deal Brexit have joined together across party lines to try and stop Prime Minister Boris Johnson from ‘proroguing’ (a fancy term for suspending) Parliament. And as several legal challenges to Johnson’s plan make their way through British courts, Wall Street analysts are trying to parse the most likely outcomes.

One team of analysts at Deutsche Bank, who have been closely following the increasingly convoluted Brexit process for more than a year, has updated their odds for various Brexit outcomes, along with a “simplified” flow chart that is almost comical.

According to the latest ‘Brexit Update’, entitled “Constitutional Warfare,” the team, led by Macro Strategist Oliver Harvey, examined several potentialities for how the Brexit process might play out between now and ‘Brexit Day’ (Oct. 31).

As we noted earlier, PM Boris Johnson on Friday warned that MPs who have joined in the legal or political challenges to Johnson’s plan have ironically increased the odds that the UK will leave the EU without a deal on Oct. 31.

Should all of the legal challenges to proroguing fail, MPs could opt to pursue a vote of no confidence in the government, or legislation to prohibit a ‘no deal’ exit. But if the past is any guide, the legislative approach would likely take too long, leaving the motion of no confidence and the formation of a government of national unity as the more likely option.

But an all-out rebellion against Johnson carries its own risks. For example, picking a leader for a national unity government could become a serious sticking point, as anti-no-deal Tories would vehemently oppose installing Labour leader Jeremy Corbyn as interim prime minister.

Already, several opposition MPs have ruled out supporting Corbyn as interim Prime Minister, leaving the question open as to who could lead the interim government. And there is also disagreement about whether the interim government should request an Article 50 extension from the EU27, as well as whether the UK should seek to revoke Article 50 altogether, effectively cancelling Brexit.

While most observers have effectively given up on the possibility that the withdrawal agreement might be renegotiated, DB believes there’s still a chance. “In our view, there is room for compromise on the backstop. The EU27 would be willing to entertain additional guarantees concerning the backstop, including possibly a time limit,” the analysts wrote.

However,if Johnson remains in power, the political consequences for a last-minute compromise with the EU27 on the backstop are clear. Should Johnson do a 180-degree turn on the backstop, he faces the prospect of possible defections to the Brexit Party from his own MPs, raising the prospects of another general election where the conservatives lose a sizable number of MPs to the BP, led by former UKIP leader and Brexit architect Nigel Farage.

Circling back to the odds of various outcomes mentioned above, the breakdown looks something like this:

• Successful no confidence motion before 10th September or in late October: 50% probability.
• Of which, unity government formed, followed by elections: 30% probability.
• Of which, no unity government formed, followed by no deal Brexit: 20% probability.
• Johnson administration completes a no deal Brexit on 31st October followed by snap election: 30% probability.
• Johnson administration completes successful renegotiation with EU27 and ratifies Withdrawal Agreement by end October: 10% probability.
• Parliament passes legislation to prevent no deal and Johnson government requests Article 50 extension: 5% probability.
• Parliament passes legislation to prevent no deal and Johnson government calls election before Oct. 31: 5% probability.

When it comes to what the market will be focused on in the near term, that will depend on what anti-no-deal MPs do next week: That is, whether they decide to try and legislate away the prospects for ‘no deal’, as MPs tried to do under Theresa May or whether they opt for a no confidence motion.

If MPs successfully pass legislation seeking to prohibit a ‘no deal’ exit, the ball will be back in the government’s court, the DB analysts wrote. Johnson could choose to ignore the legislation – in which case MPs could opt for the no confidence motion and unity government route.

But there’s always the possibility that Johnson might succeed in negotiating a new deal with the EU. After all, as we’ve explained in the past, despite the EU’s insistence that the backstop is a non-negotiable part of the withdrawal agreement, the fact remains that it is completely unenforceable. By insisting that it be discarded, Johnson has effectively called Brussels’ bluff. If they finally acquiesce, Johnson just might walk away with the ‘holy grail’ of Brexit talks: a reworked withdrawal agreement that he could sell to Parliament.

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