Tag: news

Submitted by Andrew Bacevich via TomDispatch.com,

Whether or not Donald Trump ultimately succeeds in winning the White House, historians are likely to rank him as the most consequential presidential candidate of at least the past half-century. He has already transformed the tone and temper of American political life. If he becomes the Republican nominee, he will demolish its structural underpinnings as well. Should he prevail in November, his election will alter its very fabric in ways likely to prove irreversible. Whether Trump ever delivers on his promise to "Make America Great Again," he is already transforming American democratic practice.

Trump takes obvious delight in thumbing his nose at the political establishment and flouting its norms. Yet to classify him as an anti-establishment figure is to miss his true significance. He is to American politics what Martin Shkreli is to Big Pharma. Each represents in exaggerated form the distilled essence of a much larger and more disturbing reality. Each embodies the smirking cynicism that has become one of the defining characteristics of our age. Each in his own way is a sign of the times.

In contrast to the universally reviled Shkreli, however, Trump has cultivated a mass following that appears impervious to his missteps, miscues, and misstatements. What Trump actually believes — whether he believes in anything apart from big, splashy self-display — is largely unknown and probably beside the point. Trumpism is not a program or an ideology. It is an attitude or pose that feeds off of, and then reinforces, widespread anger and alienation.

The pose works because the anger — always present in certain quarters of the American electorate but especially acute today — is genuine. By acting the part of impish bad boy and consciously trampling on the canons of political correctness, Trump validates that anger. The more outrageous his behavior, the more secure his position at the very center of the political circus. Wondering what he will do next, we can’t take our eyes off him. And to quote Marco Rubio in a different context, Trump “knows exactly what he is doing.”

Targeting Obama's Presidency

There is a form of genius at work here. To an extent unmatched by any other figure in American public life, Trump understands that previous distinctions between the ostensibly serious and the self-evidently frivolous have collapsed. Back in 1968, then running for president, Richard Nixon, of all people, got things rolling when he appeared on Laugh-In and uttered the immortal words, “Sock it to me?” But no one has come close to Trump in grasping the implications of all this: in contemporary America, celebrity confers authority. Mere credentials or qualifications have become an afterthought. How else to explain the host of a "reality" TV show instantly qualifying as a serious contender for high office?

For further evidence of Trump’s genius, consider the skill with which he plays the media, especially celebrity journalists who themselves specialize in smirking cynicism. Rather than pretending to take them seriously, he unmasks their preening narcissism, which mirrors his own. He refuses to acknowledge their self-assigned role as gatekeepers empowered to police the boundaries of permissible discourse. As the embodiment of “breaking news,” he continues to stretch those boundaries beyond recognition.

In that regard, the spectacle of televised “debates” has offered Trump an ideal platform for promoting his cult of personality. Once a solemn, almost soporific forum for civic education — remember Kennedy and Nixon in 1960? — presidential debates now provide occasions for trading insults, provoking gaffes, engaging in verbal food fights, and marketing magical solutions to problems ranging from war to border security that are immune to magic. For all of that we have Trump chiefly to thank.

Trump’s success as a campaigner schools his opponents, of course. In a shrinking Republican field, survival requires mimicking his antics. In that regard, Ted Cruz rates as Trump’s star pupil. Cruz is to Trump what Lady Gaga was to Amy Winehouse — a less freewheeling, more scripted, and arguably more calculating version of the original.

Yet if not a clone, Cruz taps into the same vein of pissed-off, give-me-my-country-back rage that Trump himself has so adeptly exploited. Like the master himself, Cruz has demonstrated a notable aptitude for expressing disagreement through denigration and for extravagant, crackpot promises. For his part, Marco Rubio, the only other Republican still seriously in the running, lags not far behind. When it comes to swagger and grandiosity, nothing beats a vow to create a “New American Century,” thereby resurrecting a mythic past when all was ostensibly right with the world.

On two points alone do these several Republicans see eye-to-eye. The first relates to domestic policy, the second to America’s role in the world.

On point one: with absolute unanimity, Trump, Cruz, and Rubio ascribe to Barack Obama any and all problems besetting the nation. To take their critique at face value, the country was doing swimmingly well back in 2009 when Obama took office. Today, it’s FUBAR, due entirely to Obama’s malign actions.

Wielding comparable authority, however, a Republican president can, they claim, dismantle Obama’s poisonous legacy and restore all that he has destroyed. From “day one,” on issues ranging from health care to immigration to the environment, the Republican candidates vow to do exactly this. With the stroke of a pen and the wave of a hand, it will be a breeze.

On point two: ditto. Aided and abetted by Hillary Clinton, Obama has made a complete hash of things abroad. Here the list of Republican grievances is especially long. Thanks to Obama, Russia threatens Europe; North Korea is misbehaving; China is flexing its military muscles; ISIS is on the march; Iran has a clear path to acquiring nuclear weapons; and perhaps most distressingly of all, Benjamin Netanyahu, the prime minister of Israel, is unhappy with U.S. policy.

Here, too, the Republican candidates see eye-to-eye and have solutions readily at hand. In one way or another, all of those solutions relate to military power. Trump, Cruz, and Rubio are unabashed militarists. (So, too, is Hillary Clinton, but that’s an issue deserving an essay of its own). Their gripe with Obama is that he never put American military might fully to work, a defect they vow to amend. A Republican commander-in-chief, be it Trump, Cruz, or Rubio, won’t take any guff from Moscow or Pyongyang or Beijing or Tehran. He will eradicate "radical Islamic terrorism," put the mullahs back in their box, torture a bunch of terrorists in the bargain, and give Bibi whatever he wants.

In addition to offering Obama a sort of backhanded tribute — so much damage wrought by just one man in so little time — the Republican critique reinforces reigning theories of presidential omnipotence. Just as an incompetent or ill-motivated chief executive can screw everything up, so, too, can a bold and skillful one set things right.

Juan and Evita in Washington?

The ratio between promises made and promises fulfilled by every president in recent memory — Obama included — should have demolished such theories long ago. But no such luck. Fantasies of a great president saving the day still persist, something that Trump, Cruz, and Rubio have all made the centerpiece of their campaigns. Elect me, each asserts. I alone can save the Republic.

Here, however, Trump may enjoy an edge over his competitors, including Hillary Clinton and Bernie Sanders. With Americans assigning to their presidents the attributes of demigods — each and every one memorialized before death with a library-shrine — who better to fill the role than an egomaniacal tycoon who already acts the part? The times call for strong leadership. Who better to provide it than a wheeler-dealer unbothered by the rules that constrain mere mortals?

What then lies ahead?

If Trump secures the Republican nomination, now an increasingly imaginable prospect, the party is likely to implode. Whatever rump organization survives will have forfeited any remaining claim to represent principled conservatism.

None of this will matter to Trump, however. He is no conservative and Trumpism requires no party. Even if some new institutional alternative to conventional liberalism eventually emerges, the two-party system that has long defined the landscape of American politics will be gone for good.

Should Trump or a Trump mini-me ultimately succeed in capturing the presidency, a possibility that can no longer be dismissed out of hand, the effects will be even more profound. In all but name, the United States will cease to be a constitutional republic. Once President Trump inevitably declares that he alone expresses the popular will, Americans will find that they have traded the rule of law for a version of caudillismo. Trump’s Washington could come to resemble Buenos Aires in the days of Juan Perón, with Melania a suitably glamorous stand-in for Evita, and plebiscites suitably glamorous stand-ins for elections.

That a considerable number of Americans appear to welcome this prospect may seem inexplicable. Yet reason enough exists for their disenchantment. American democracy has been decaying for decades. The people know that they are no longer truly sovereign. They know that the apparatus of power, both public and private, does not promote the common good, itself a concept that has become obsolete. They have had their fill of irresponsibility, lack of accountability, incompetence, and the bad times that increasingly seem to go with them.

So in disturbingly large numbers they have turned to Trump to strip bare the body politic, willing to take a chance that he will come up with something that, if not better, will at least be more entertaining. As Argentines and others who have trusted their fate to demagogues have discovered, such expectations are doomed to disappointment.

In the meantime, just imagine how the Donald J. Trump Presidential Library, no doubt taller than all the others put together, might one day glitter and glisten — perhaps with casino attached.

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Late last month, Norwegian PM Erna Solberg proclaimed that if she became convinced that Sweden’s refugee crisis was set to spiral out of control or “break down” (as she called it), she may be prepared to close her country’s borders altogether in what would quite possibly amount to a contravention of Norway’s duties under the Geneva Convention and in a move that would almost surely trigger a rash of human rights violations. 

(Solberg)

It underscored how desperate some Europeans had become and ideed, it was just days later when EU migration commissioner Dimitris Avramopoulos warned that the bloc has just 10 days to implement a plan that will bring about “tangible and clear results on the ground” or else “the whole system will completely coallpse.”

The 10-day “countdown” is a reference to the leadup to an EU/Turkey Summit where Erdogan, as usual, stands in the way of progress.

He’s determined to extract money and political concessions from Brussels in exchange for his country’s help in stemming the flow of Asylum Seekers from neighboring Syria. A transcript from a leaked discussion between himself and European Commissioner Jean Claude Juncker and President of the European Council Donald Tusk on 16th November 2015 during the G20 Summit in Antalya suggests that Erdogan told Junkcker that Turkey can simply: “put them [the migrants] on busses.” That’s a rather theinly-velied threat to simply pass the migrants straight through to the gates (and we mean “gates” both that figuratively and literally at this juncture) of the Balkan rout noth.

The Summit begins on Monday and somehow we don’t have much in the way of hope. After all, in order to guard the bloc’s external border you need buy in from Erdogan (when he’s actually looking for buy out quite literally), and somehow poor Alexis Tsipras is expected to control the bottleneck after having been left for broke by the very same Brussels eurocrats who now want (no, demand) his help.

As KeepTalkingGreece puts in thousands of refugees and migrants wandering from Athens to Idomeni without knowing where to sleep and what to eat, where to lay their kids and elderly to sleep. What happens when they get to Idomeni, you ask? Well they try to beat down border gates with homemade bettering rams. Like so: 

If they can’t break through and make a run for it north, the end up simply stranded in Greece.

Victoria square #athens #greece #refugeesGr #RefugeesCrisis #refugees http://pic.twitter.com/wYD6x9KM4K

— prezatv (@prezatv) February 28, 2016

This has infuriorated the Greeks, who last month recalled their Amabassador to Austria after the country helf a series of meetings with Balkan countries without inviting the Greeks.

So don’t hold your breath for a solution (or for a harrowring raft ride across the Meditteranean) to the “safe shores” of Eruope. The is one crisis that is simply going to fester until it boils over. The Barbarians (and no, not in the perjorative sense, in the classic literary sense) are the gates – and they’re coming “home,” Frau Merkel, whether you like it or not.

But in any event, below is a draft document obtained by derStandard.at (Googel translated) which suggests EU officials are now set to mark a turning point: “The Closure of The Balkan Route.”

*  *  * 

Thomas Mayer. At the EU summit on Monday the immediate termination of the illegal flow of migrants and by Wave of Greece should be explained to Germany as a top priority of EU policy. This goes forth from one to the STANDARD present draft. Athens must immediately 50,000 places for potential asylum realize Greece gets “any help” the Union. Migrants with no chance of asylum should also be deported immediately to Turkey.

The EU summit with Turkey on Monday in Brussels and subsequent meetings of the 28 heads of state without the Turkish Premier Ahmed Davutoglu is expected to bring a dramatic change in the current policy and in dealing with refugees and migrants. This is at least the result of a yet secret declaration that Saturday evening was coordinated between the government headquarters in the capital cities. In the paper, which is pending before STANDARD, it literally means: “The irregular flow of migrants along the West Balkan route comes to an end this route is closed from now..”

Fine tuning still needed

The final declaration of the EU-28 will be voted on today in Brussels in the group of EU ambassadors still fine. At the core of the decisions will, however, change anything, according to diplomatic sources. Many of the measures that will be implemented immediately after the meeting train to train, based on agreements to be concluded with the Turkish side. Despite the excitement about the actions of the Turkish government against an opposition newspaper on Friday, the storm of the editorial by police, you go in Brussels expect that Davutoglu will appear on Monday and negotiated in recent days Agreements are then confirmed.

Repatriation agreements planned with Turkey

Nuclear case will be that Turkey immediately constructively participates in controlling the EU’s external borders in the Aegean and those migrants who can not hope to seek asylum in Europe, will resume in the course of recycling. The plan is a private repatriation EU-Turkey agreement, which should be in force from 1 June. Before that you will operate on the basis of the bilateral agreement of Greece. As reported, also the EU-Turkey action plan be promoted. The EU member states undertake the special summit to the Resettlement – to start – the direct settlement of Syrian refugees from Turkey in EU countries.

With regard to the measures in the area of ??Union, in forceful language describes the explanation of the Government a package of measures to be set in the coming weeks. To the consequences of closing the Balkan route, catch the jam thousands incoming refugees, the EU agreed to “do the maximum to assist Greece in this difficult moment.” If it were “a collective responsibility of the community, which requires fast and efficient mobilization of all available resources”, but “also the contributions of the Member States”.

A billion for refugee assistance

The Arenberg by the European Commission last week “emergency plan” for humanitarian aid is unconditional support of the government. For 700 million euros have been earmarked, 300 million in 2016. The Council of Ministers should decide the plan before the next EU summit on March 18 and take shape, according to the statement. Together with all previously agreed measures so could be invested in aid to refugees in the coming months about one billion euros from the EU.

strengthen Frontex

The second major issue is security. The EU will send over their border protection agency Frontex once more officials to Greece, which will be based on the borders with Macedonia and Albania. They should also ensure that the reception centers (hotspots) function in Greece, where the refugees are first recorded and prepared for the allocation of EU countries where they are to get proper asylum procedure. Until later than 1 April, the EU countries should make more, going beyond existing commitments officials for Frontex available. Europol is to strengthen the fight against smuggling. In March summit in ten days, the progress will be evaluated.

divide refugees in EU countries

Until then, the Government hope under its declaration to the fact that the hitherto has come in transition “Distribution Program” of refugees operates in the Member States. It is apparently planned with regard to states not in Eastern Europe, that not all countries have the same time by starting with the “relocation”. For in the secret document is also talk that some states are encouraged to voluntarily offer higher rates of refugees as provided. In any case, the burden on Greece would be alleviated if more immigrants coming into the country.

Finally, the EU summit will ensure that by the end to “a Back to Schengen” is coming. Until then, no later than intended in accordance with the recent proposals of the European Commission which checks at internal borders, as they are currently conducted in eight states, again belonging to the past. (Thomas Mayer from Brussels, 03/05/2016) 

via Zero Hedge http://ift.tt/1Qtnw29 Tyler Durden

Nomura's Bob Janjuah warend in January that "the bubble implosion can't be fixed this time," and, as he explains in his latest note, he is pleased with all six of his key forecasts for 2016…

In particular on Commodities, with his expectation that crude would trade below $30 (the price per barrel fell from $37 in early January to a low so far of $26 in February).

 

And on Rates, the 30yr UST yield fell from 2.95% in early January to a low so far of 2.49% in February, below his 2.5% target for 2016, and the 10yr UST yield fell from 2.2% in early January to a low so far of 1.66% in February, in line with his expectation over 2016 of a move in yields down from 2% towards 1.5%.

The reasons for his latest note are:

1.     To reiterate my bearish views on risk assets for H1 2016 – I continue to see much lower equity prices, lower core bond yields, wider credit spreads, and weakness in EM and commodities over the next four months (at least). In January I said that the S&P500 would fall from 2000/2050 to the 1500s as my target over 2016. I reaffirm this view. I note with interest that at the global equity market ”lows” so far in 2016, seen earlier in February, virtually all major global stock markets were in official bear market territory. For example, the Eurostoxx 50 fell over 30% from its 2015 high to its (so far) 2016 low. The MSCI World fell 20% from its 2015 high to its (so far) 2016 low. The key exception to this move into official bear market territory has been the major US indices, but I expect this to correct itself over the next four months or so.

 

2.     To highlight that, in my view, stocks’ countertrend bounce off the February lows has now run its course and I believe we are – in early March – likely to see the onset of the next leg weaker in risk, vs stronger in core duration. I expect this next leg of weakness to last three to five weeks and to result in new lows so far in this cycle in stocks (S&P500 into the 1700s) and new lows in core government bond yields (target 1.5% in 10yr USTs). It is important to remember that in bear markets the strength is to the downside, the violence is to the upside, with countertrend rallies in bear markets often being the most painful. Markets simply do not go down (or up) in straight lines. But if I am right that this bounce is over, we should continue to see a series of lower lows and lower highs in stocks around the globe.

 

 

To protect against being wrong, particularly with respect to timing, it is prudent to put in place a stop loss, triggered if/when we see a consecutive weekly close in the cash S&P500 index above 2040.

 

3.     To admit that even I am a little surprised by the desperation already evident among central bankers. As per my January note, I expected the BOJ to ease in Q1, but going straight to negative rates has seriously harmed the BOJ’s credibility and the credibility of Abenomics. ECB QQE has clearly failed to create the inflation Mario Draghi promised us, but I have no doubt the ECB will ease again this month. And even the Fed is now “drip-feeding” negative rates into the market through its usual channels. The Fed has made a major policy error already, and I remain convinced that the Fed will be easing by the end of the year. But I would not be surprised if Fed hubris “forces” it to tighten once more before end-June. Focusing so much on an extremely lagging and “technically created” number like the unemployment rate is at the root of this policy error. The Fed is simply not focusing enough on important issues like weak earnings, poor quality jobs, imported deflation, weakness in investment spending, weakness in corporate revenue and profit (not EPS) growth, and deeply scarred consumer behaviour. I could go on, but suffice it to say that I think the Fed has backed itself into a corner, and will only be able to free itself to get ahead of the curve (rather than as it is now, way behind the curve) once the data and markets truly hit some form of capitulation bottom. As I have written in the past, I don’t see a “Fed put” until the S&P500 trades down into the 1500s.

 

4.     To stress that central bank credibility is draining fast and, assuming that the BOJ and ECB go again this month, I now see a risk of a breakdown in markets and outcomes that are the opposite of what central bankers are trying – and have been failing for over seven years now – to achieve, i.e. nominal GDP at 5%, EVEN IF THIS 5% CONSISTS OF 0% REAL AND ALL 5% FROM INFLATION. We are entering an extremely worrying time and we have got here even faster that I had feared – a place where monetary policy and central banks become the problem and not the cure. As discussed above, the Fed is in a hole of its own making by using self-serving metrics to fix a debt and asset bubble crisis with a policy that relies on more debt and even bigger asset bubbles. But in the short term – this next month – I am concerned that markets will react badly and contrary to policymaker expectations when both the BOJ and the ECB attempt to ease further this month. I suspect the ECB and the BOJ are – as far as markets are concerned – “damned if they do, and damned if they don’t” with any residual credibility likely to decay away this month. But both institutions should realise this is down to their own mistakes, whereby (like the Fed) they have sought to fix the ills of excessive debt, asset bubbles and a lack of competitiveness thorough policies which merely result in a zero-sum outcomes (FX wars) and/or which rely on the “greater fool” theory requiring “someone” to take on more debt to continually speculate on an un-burstable asset price bubble. Sadly, of course, mankind has so far failed to create un-burstable bubbles, especially where the underlying foundations are so flimsy. This competitiveness issue is global and critical. Since the global financial crisis (GFC) very little production capacity reduction has been allowed to occur in the DMs (courtesy of QE and ZIRP, which together facilitate the avoidance of default cycles, which are central to reducing capacity). At the same time, globally, particularly in places like China and in industries like Energy and Shipping, we have seen significant production capacity added since the GFC. Again, in part due to QE and ZIRP policies in DMs. Of course, this would be less of a problem if global aggregate demand growth had increased strongly over the last seven years, but this has clearly not happened. In particular, the debt-driven consumption frenzy of the years leading up to the GFC in the DMs has barely come back, while at the same time demand growth in the EM sphere has been much slower than hoped for (and needed), and latterly severe economic downturns in places like Russia, China, the Middle East and Brazil have hampered this handover even more. So the response to all of this has been the zero-sum game referred to above, FX wars, which merely operate to allow temporary and transitory relative shifts in competitiveness but with severe (unintended?) consequences.

 

5.     To stress that, in a world of NIRP and QE, and where the bid for liquidity in markets is many multiples of the levels of liquidity the sell-side can offer, I find it extremely difficult to get any visibility in FX markets. FX markets are the most exposed to central bank credibility and are also where significant flows can drive markets most immediately, more so than in other markets like Rates or Equities. My bias is to believe that the USD is the least worst “long” until the Fed flips on its current policy path. But as with the BOJ's recent easing and the market’s response (the opposite of what was trying to be achieved), the credibility issue of central banks in general, and of some central banks more than others at any given time, has now become a major uncertainty factor. As such, I feel that this is an extremely difficult market to call on anything other than a very medium-term basis. I am not alone here – the 20% rally in gold since December testifies to this. My key message for 2016 remains unchanged in terms of FX markets (strong USD until the Fed reverses course), but I am increasingly inclined to look at gold again as a safe haven for 2016, and am increasingly inclined to avoid tactical calls on FX markets.

Janjuah concludes by noting that his inclination when thinking about this note was to consider even more bearish targets for risk assets/even more bullish targets for core bond yields.

For now, I have decided to stick with what I published in January, but now I think we are facing an even more difficult 2016 than I had anticipated at the outset of this year.

 

The over-reach of central bankers and their failed policies is not news to me. What is news to me, especially after the BOJ's easing in January, is that markets are now either at or very close to losing all confidence in the post-GFC policy response crafted by the Fed/ECB/BOJ et al much earlier in 2016 than even I had expected.

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By EconMatters

The British Pound has a Brexit Referendum on Thursday the 23rd of June which is putting downward pressure on the currency. The ideal trading scenario would be the United Kingdom votes to leave the European Union, the Pound gets hammered in the short term after this event, and this represents a long term value going forward, a strong buy in my book.

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Moments ago, for some unexplained reason, the St.Louis Fed – which recently issued a research report which “discovered” that “Consumers Across The Country Are Borrowing More To Buy Cars And Go To School” – on its twitter account asked a simple question: “See how the ECB’s assets are growing?”

See how the European Central Bank’s assets are growing https://t.co/cjQBj8y2VP http://pic.twitter.com/ozbnMU7Kh0

— St. Louis Fed (@stlouisfed) March 5, 2016

The answer, clearly, is yes of course, we do: after all the ECB has been doing QE for over a year now, monetizing €60BN per month (a number which may grow to €70BN next week), and the result has been a massive growth in its balance sheet, even if European inflation expectations have recently hit record lows.

Regardless of the ECB’s asset growth, whether visible or not, we retorted to the St. Louis Fed (whose president James Bullard flip flops from hawk to dove and back to hawk depending on what side of 2000 the S&P is at any given moment) as follows:

You should show the assets of that central bank success story, the Bank of Japan https://t.co/V3dBdJLTxR

— zerohedge (@zerohedge) March 5, 2016

Then again, even the St. Louis Fed would have a problem asking anyone “if they see” how the BOJ’s assets are rising, because that question would be trolling at best, and proof of idiocy at worst. So, to avoid the St. Louis Fed that particular embarrassment, we take upon ourselves to ask: “See How The Bank Of Japan’s Assets Are Growing.”

The answer is shown in the chart below.

 

Which incidentally brings us to a point which Evercore ISI brought up in their Daily Economic Report in a slide titled, simply enough, “Scary.” This is what it said:

What’s scary about this huge balance sheet expansion, is that it’s not having a bigger impact (although we don’t have a counterfactual). Indeed, the Nikkei is down -11% ytd and the yen has strengthened +6%.

And then, of course, this:

Well, if it didn’t work when the BOJ’s balance sheet rose by 250%, then it surely will work when the BOJ’s balance sheet rises by another 2.5x, at which point it will be just shy of 1 quadrillion yen.

At that point we doubt we would even have to ask the St. Louis Fed “if it sees” how the BOJ’s assets are growing…

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While it may not be the traditional (50/200DMA) signal, CBOE's Russell Rhoads points out that the so-called 'fear index' VIX has just signalled the first Death Cross since its apocalyptic warning in November 2007.

Yesterday (3/4) was the first time the 1 year average closing price for VIX crossed over the 5 year average since November 16, 2007.

 

With VIX having plunged to 2016 lows…

 

VIX Term Structure near its steeps..

 

VIX volatility at post-QE3 lows…

 

 

And VIX remaining decoupled from credit risk…

 

Complacency seems extreme by any measure.. The 'death cross' may be worth paying attention to once again as the ides of March strike.

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Everything happening today is in some ways interconnected: popularity of ‘non-establishment’ political candidates; ineffectiveness of central bank policy in lifting inflation; economic pessimism; weak capital spending (from handcuffed capitalism); and angst due to perceptions of inequality.

Scotiabank's Guy Haselmann explains…

Business investment and capitalism are being held back by a lack of visibility on what a future return might generate from an investment in a capital project. Not only are future economic forecasts cloudy and highly-uncertain, but the rules governing business engagement are changing too frequently. Capitalism and entrepreneurship are simply being hand-cuffed by unclear and overly-burdensome regulation.  Small businesses in particular do not have the economies of scale necessary to keep up under these conditions.

Domestic and global uncertainties always exist, but most would agree that they are unusually elevated. The strange and unpredictable political environment – and uncertainties over who will be the next President and what his/her policies will be – further restrains capital investment.  Understandably, determining the present value of a future cash flow is impossible when the tax code and health care costs are in flux.

Stimulative monetary policies cannot offset these powerful forces. In the past, I have referred to this dynamic as “Great Aunt Addy Policy” in honor of my aunt who drove with one foot on the accelerator and a heavy foot on the brake. Restrictive regulatory and fiscal policies are one reason why massive amounts of global central bank stimuli have underwhelmed. In addition, artificially low official interest rates distort financial asset valuations, which further harm the ability to properly assess the value of a future stream of cash flows.

Fed officials often cite Japan’s economic malaise as the basis for their own concerns and the basis for providing and maintaining highly accommodative policy. In my opinion, Japan’s quagmire should absolutely not be used as the prototype for Fed policy justifications. The reasons are beyond the scope of this note.  However, Japan has had sustained 0% rates since 1999 (and conducted various QE programs). Yet, it has had more success over that period raising debt than lifting inflation. Why then do other central banks follow their lead?

If there is a lesson from Japan, it is that low inflation is a function of high rates of savings, caused by low interest rates, rising VAT taxes, harmful economic and regulatory policies, poor demographics, and a falling population. Comparisons to Japan and associated deflationary fears are unfitting. By mis-diagnosing the reasons for subpar nominal GDP, and by taking the lead to offset its weakness, central banks have veered too far from their true capabilities without proper regard for the long run consequences and risks to financial stability.

Profitability has become ever more challenged in a ‘new normal’ world of slow growth and tepid pricing power. In such an environment, worker anger cultivates as a ‘labor vs capital’ battle ignites. Worker resentment and blame targets both employers and government officials.

Hence, the Fed is right to be concerned about stagnating wage growth, high levels of under-employed and rising inequality. Unfortunately, Fed officials have failed to fully comprehend that fixing those issues is beyond the scope of their policy tools.  More importantly, they have not realized how their well-intentioned policies have actually contributed to those problems, helping to fuel the anger witnessed in voting polls.

I will elaborate on this point in more detail, but first it would be helpful to review the past to see where we are now and where we might be headed.  For several decades, economic prosperity was powered-forward by credit-based initiatives. The lower stair-stepping of official interest rates has allowed consumption, economic activity and debt to grow sufficiently to drive economic advancement and prosperity. 

I believe this cycle has reached a tipping point; basically, an end of the road.  Due to fiscal and regulatory constraints and general indebtedness, economies may no longer be able to generate the growth rate necessary to sustain improvements in prosperity; or even to adequately service existing high debt levels.

The proceeds from the massive amount of debt issuance during the last six years have gone mostly into financial market speculation, rather than into capital projects meant to generate future cash flows. Yield seeking is widely known, but is now ending. Debt has truly borrowed from the future mainly for today’s benefit.

The ‘portfolio effect’ – or purposeful encouragement of risk-seeking behavior – was supposed to create a wealth effect that spilled into the broader economy. A main reason for the Fed’s ‘gradual’ retreat from stimulus is to try to prevent the reversal of this effect from occurring too quickly (after all, there is no free lunch).

However, as central bank officials drop rates into negative territory, is it possible that the easing move actually has the actual net impact of a tightening through a negative wealth effect?  After all, a bond with a negative yield has a guaranteed loss for the buyer who holds it to maturity.

Some people ask why someone would buy a bond with a negative yield.  Speculators buy them when they believe they can be sold back to the market or to the central bank (via QE) at a higher price.  An investor might make money from a negative yielding bond if financing can be locked up for the life of the bond at a rate lower than the negative coupon.  Lastly, some benchmark asset managers are forced to buy them by law.

The intention of the negative rate move by the Bank of Japan was to influence banking behavior away from deposits and toward lending. Everyone should question why the markets had such an extreme and unexpected market reaction following the modest BoJ move. (Nikkei fell by 14%, and $/Y by 6% in the span of two weeks).

Without fixing the root causes of economic ailments, risk-seeking behavior today is playing an ever more dangerous ‘game of chicken’.  Investor behavior has shifted from ‘FOMU’ to ‘TINA’: from Fear Of Missing the Upside to There Is No Alternative.

Multi-asset portfolio managers (and others) prefer an equity investment (with perceived upside) and with, say, a 5% or greater dividend, over a bond with minimal yield, or a ‘sticker-shock yield’ near zero (or negative).  In other words, investors continue to chase the riskiest part of the capital structure; and do so, at potentially the worst possible time.

Voter outrage has not risen simply because most feel they are not participating in higher financial asset prices. A great article explaining voter frustrations can be found here. In this note, author Peggy Noonan writes about the “unprotected American” who has “limited resources and negligible access to power”. I will let her article speak for itself, but will transition her same argument into how the effects of Fed policies are felt by voters.

QE, money printing, and low (or negative) rates work against the “unprotected American” in a similar manner to something called “The Cantillon Effect”.  Just like inflation is a tax on money, and negative rates are a tax to the lender, money printing and QE are a stealth tax on those who get the money last.

If the government mailed a large tax bill to each household, there would be immediate outrage. By stealthily doing it through QE, money printing and inflationary policies, the government is doing that same thing in a different and more subtle manner.  However, the average voter may not clearly see it, or be able to express their outrage in economic terms.  Yet, it is quite obvious by watching the news that they are feeling it.

In summary, monetary policy and credit-fueled growth may have reached the end of their practical limits. Evidence of such is percolating. Providing monetary accommodation is the easy part, but taking it away has historically been problematic.  Not enough focus has been given to central bank exit strategies.

When and if banks in countries with negative yields begin to pass negative rates onto their depositors, then a whole new Pandora’s box will open. I will save that for another note.  In the meantime, watch Gold, buy long Treasuries, raise cash and move to capital preservation strategies.

The best thing the Fed can do is to raise rates in March.  You heard that right. To wait risks even bigger problems down the road.  A Fed hike in March would help pull other central banks away from the abyss of negative rates.  It should start with the Fed; the country behind the world’s reserve currency.  If the FOMC were truly ‘data dependent’, then they would hike.

“If you do not change direction, you may end up where you are heading” – Lao Tzu

For some weekend reading, we have attached a note that Haselmann wrote in January 2014 called, “2014 and Beyond”, which still has many themes relevant today.

via Zero Hedge http://ift.tt/1TWG7au Tyler Durden