Op-Ed Contributor

Wolfgang Schäuble on German Priorities and Eurozone Myths


APRIL 15, 2015

BERLIN — The annual spring meetings of the International Monetary Fund and the World Bank begin on Friday in Washington. I’m looking forward to them, even if the discussion in recent years has seemed, to some commentators, a bit too well-rehearsed to provoke much discussion or thought outside of the usual comfort zones.
The fact that the immediate sting of the global financial crisis has faded in much of the world has probably contributed to this complacency. Unfortunately, however, the world economy is not yet out of the woods. It still faces very concrete challenges. We are as badly as ever in need of a common understanding of what needs to be done.
The financial crisis broke out seven years ago and led many countries into an economic and debt crisis. A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis. Let me run through some of these myths.
First, it has often been said that German insistence on fiscal austerity meant that Germany, the largest economy in the European Union, has “punched below its weight” — and thereby pushed the eurozone more deeply into crisis — by not stimulating more demand. This misses the point. As in medicine, to prescribe the right treatment it is essential to have the correct diagnosis.
My diagnosis of the crisis in Europe is that it was first and foremost a crisis of confidence, rooted in structural shortcomings. Investors started to realize that the member countries of the eurozone were not as economically competitive or financially reliable as the uniform bond yields of the pre-crisis years had suggested. These investors began to treat the bonds of certain countries with much more caution, causing interest rates for those bonds to rise. The cure is targeted reforms to rebuild trust — in member states’ finances, in their economies and in the architecture of the European Union. Simply spending more public money would not have done the trick — nor can it now.
To this end, Germany has consistently advocated an approach of structural reforms and reducing public debt without throttling growth. This is not blind “austerity.” It is about setting a reliable framework for private-sector activity, preparing aging societies for the future and improving the quality of public budgets.
In Germany, this approach has shown tangible success: The economic recovery since 2009 has been broad-based, with domestic demand as the main driver of growth. Investment — both public and private — is increasing. We are speeding up debt reduction, in line with the I.M.F.’s recent call for “symmetric stabilization” (reducing deficits in good times, to offset deficits in bad times).
More importantly, many European countries are reaping the rewards of reform and consolidation efforts. Countries like Ireland and Spain, which put far-reaching reforms into effect when they hit financial trouble a few years ago, now boast some of the highest growth rates in Europe.
A second myth is the absurd claim by some commentators that Germany — being a creditor nation— was actually profiting from the crisis. I don’t see how any member country can benefit from a European crisis. It is true that the German government now enjoys historically low borrowing costs.
But so do almost all other eurozone members. Unconventional monetary policies pursued by the independent European Central Bank seem to have fulfilled their part there. Low interest rates help all borrowers — but they come at ever-increasing costs to savers and pension funds.

We should work hard to overcome this extraordinary situation and find our way back to a well-functioning market economy, in which interest rates serve to allocate savings to the most profitable investments.
This leads to my third point: For many vocal commentators the answer to the crisis in Europe has been ever-greater liquidity and ever-lower interest rates. Now that we have both, we are finding that these policy tools are no panacea, but create problems of their own. More and more experts on both sides of the Atlantic warn of dangerous bubbles in asset prices and risks to financial stability from ever-increasing leverage (financing by borrowing). And it is clear that the debt burden in many countries cannot be solved by incentives to take on even more debt.
On the fiscal side, we need to prepare government budgets for an eventual normalization of monetary policy and capital markets. The ongoing debate over “tapering” in the United States — the end of the extraordinary period of “quantitative easing” by the Federal Reserve to stimulate economic growth by purchasing huge quantities of bonds — shows how difficult it is to withdraw a stimulus once governments and markets get used to it.
The European Central Bank has warned many times that monetary policy cannot substitute for fiscal and structural reforms in member countries. Christine Lagarde, the managing director of the I.M.F., has also called for further structural reforms. Such reforms include, for example, more flexible labor markets; lowering barriers to competition in services; more robust tax collection; and similar measures. I fully share this view. Monetary policy can only buy time.

Our job is to make sure that this time is well used to put finances in order and economies on sustainable growth paths.
The priorities for Germany, as the current president of the Group of 7 nations, are modernization and regulatory improvements. Stimulus — both in fiscal and monetary policy — is not part of the plan. When my fellow finance ministers and the central bank governors of the G-7 countries gather in Dresden at the end of next month we will have an opportunity to discuss these questions in depth, joined — for the first time in the G-7’s history — by some of the world’s leading economists. I am confident that we can reach some common ground in Washington in advance of that meeting.
Wolfgang Schäuble is the finance minister of Germany.


The Fed’s Faulty 1937 Excuse

Central bankers aren’t likely to observe financial excesses until it’s too late.

By Christian Broda And Stanley Druckenmiller

Updated April 15, 2015 7:05 p.m. ET

Policy makers and financial pundits insist that the risk of the Federal Reserve raising rates too early exceeds that of moving too late. The Fed appears to agree. In recent years, the Fed has repeatedly moved its goal posts, seemingly to avoid raising the federal-funds rate from near zero.

But is the prevailing consensus correct if emergency economic conditions are long past?

Comparisons with 1937 or with Japan in the 1990s are commonly used as examples of mistakes to avoid. Both occasions were preceded by a severe financial crisis, and years later monetary policy was prematurely tightened.

The differences between the current policy conjuncture and these historical analogues are striking, however. Eight years after the 1929 crash, consumer prices in the U.S. had fallen by a cumulative 18% and unemployment remained above 14%. And in Japan today prices are still down relative to their pre-banking crisis levels.

In contrast, since 2007, prices in the U.S. rose by an accumulated 16%, and the Fed’s favorite annual inflation measure has never been below 1%. Current unemployment is at 5.5%, the same rate prevailing in the boom years of 1996 and 2004. The U.S. is currently far from being mired in deflation and low growth as was the case in the late 1930s or in Japan in the 1990s.

Therefore the initial conditions for considering the conduct of future monetary policy are radically different.
Another aspect of 1937 and Japan’s crisis is also being overlooked. In 1937 U.S. household net worth and the stock market were significantly lower than their 1929 levels. Similarly in Japan 25 years after the bust, neither household net worth nor stock prices have returned to their peak levels. By contrast, the U.S. stock market and household net worth have risen substantially above their 2007 peak levels.

Even the Fed now acknowledges that asset prices were then unsupported by economic fundamentals and contributed to the subsequent financial crisis.

How can the risk-reward of the Fed’s continued expansionary policies not account for the current high levels of debt and asset prices? The benefits of further supporting asset prices have fallen, and the potential costs of higher leverage continue to grow.

Near-zero rates during and in the years after 2008 no doubt helped end the so-called Great Recession.

But the U.S. economy is no longer under emergency conditions or facing the perils of 1937.

Why then does it require emergency monetary policy? While inflation targeting gave no warning of what was to come in 2008, why is inflation moving from 1.5% to 2% a necessary condition for raising rates from the current emergency levels? Even models that the Fed used to justify quantitative easing (QE) in recent years are today pointing to rates well above 1%. Why now use new, untested theories to justify zero?

Policy makers purport to be looking for signs of financial excesses. At present, private companies are being valued at $10 billion with no revenues. Corporations are borrowing $600 billion a year to buy back stocks at record prices. Leveraged loans, “covenant-lite” loans with loose loan requirements, and the high-yield bond market are well above their 2007 record size.

Even if policy makers judge that these levels are not excessive, since when do we need to see the seeds of the next crisis for an extremely accommodative policy stance to be reduced? Because excesses are seen best only ex post, policy should be cautious ex ante.

The two real culprits of the Fed’s constant moving of the goal posts are the prevailing “Bernanke doctrine” and the growing sense of unlimited power of monetary policy. In a famous speech to the American Economic Association in January 2010, then Federal Reserve Chairman Ben Bernanke postulated that the Fed had no significant impact on the housing bubble or on the increase in financial leverage and that monetary policy was too blunt a tool to be used to smooth asset cycles. After emphasizing for years that low rates have the ability to boost asset prices, under what criteria can the Fed insist that it had no influence on the boom preceding the financial crisis?

In the last six years and despite growing financial regulation, global debt (public and private) has increased by $57 trillion, three times faster than the growth of world GDP. Low real interest rates are likely responsible, at least in part, for this growth. So even if the causality between rates and asset prices is hard to discern academically, it seems unwise to assume that the current policy stance has no expected, future costs. Even if we are not on the verge of another crisis, the public debate should take account of the potential consequences of current policies.

After the severe stress generated by the Great Recession, was the cost not sufficient to warrant the pre-emptive use of a blunt tool like monetary policy? Given the relationship between interest rates and asset prices, the deflationary scare post-2008 could well have been mitigated by less expansionary policies in the early 2000s.

QE has ushered in a new sense of power by central banks. Yet monetary policy has limitations. It is mostly well-suited to filling in temporary shortfalls in demand. Except for exceptional conditions, it borrows growth from the future.

The Fed seems all-too-convinced that this is a trade-off worth making. With unemployment at 10%, history was likely on their side. At a 5.5% unemployment rate, it fails the test of history and common sense. May the risk-reward of too early versus too late prevailing in policy circles be backward?

Mr. Broda is a managing director at Duquesne Capital Management. Mr. Druckenmiller was the founder of Duquesne Capital and is the CEO of the Duquesne Family Office.

Why Russia Will Send More Troops to Central Asia

April 11, 2015 | 12:59 GMT

Russia is making a concerted effort to increase its military and security presence throughout Central Asia, just not for the reasons it would have you think. Though the Kremlin is concerned with the threat of spillover violence from Islamist militancy in Afghanistan — its purported motive for deploying more troops — it is far more alarmed by what it sees as Chinese and Western encroachment into lands over which it has long held sway. It is this concern that will shape Moscow's behavior in Central Asia in the years to come.


Central Asia has played an important role in the projection of Russian military power since the Russian Empire's expansion in the 18th and 19th centuries. During this period, Russia established military outposts as it competed with the British Empire for influence in the region.

By the mid-19th century, Russia had brought modern-day Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan and Tajikistan into its empire. In the early 20th century, the countries were incorporated into the Soviet Union.

After the collapse of the Soviet Union, Russia retained a military presence in Central Asia and played a major role in regional conflicts, such as the 1992-1997 Tajik civil war. Today Russia still has military bases in Kyrgyzstan and Tajikistan. Kazakhstan is a member of the Collective Security Treaty Organization, a military bloc dominated by Moscow. And while Uzbekistan and Turkmenistan are not members of the bloc, they do have important security and military ties with Russia through arms purchases.

Concerns of Militancy

Russia's long-standing influence in Central Asian military affairs frames several of the country's recent moves. On April 2, the base commander of Russia's 201st military base in Tajikistan said Russia would increase the number of troops stationed there from 5,900 to 9,000 over the next five years and add more military equipment through 2020. Then on April 3 an unnamed source in the General Staff of the Russian armed forces told Kommersant that Russia was prepared to grant Tajikistan $1.2 billion in military aid over the next few years. Russian military specialists were reportedly dispatched to Turkmenistan's border with Afghanistan on March 24 as well. Turkmen officials have yet to confirm this, but local media report that Ashgabat requested Russian assistance to protect the Afghan border.

Officially, these developments are tied to growing concern over violence spilling over from Afghanistan into Central Asia. It is a legitimate fear for many Central Asian governments as NATO and the United States draw down their forces in Afghanistan. Regional governments have voiced discomfort with the increased militant presence in northern Afghanistan, including the Taliban and the Islamic State.

Russia has echoed this fear. Russian President Vladimir Putin's special representative for Afghanistan alleged that Islamic State fighters in the north are training thousands of militants near the Tajikistan and Turkmenistan borders. Collective Security Treaty Organization summits have focused on the issue, and Tajikistan urged the bloc to do more to counter the threat at the April 1-2 Dushanbe summit.

Despite a definite uptick in militant attacks in northern Afghanistan, no concrete evidence has emerged of attacks over the border in Central Asian states. Central Asia's last major wave of regionwide militancy was 1999-2001, when the Islamic Movement of Uzbekistan conducted attacks in the Fergana Valley in Tajikistan, Kyrgyzstan and Uzbekistan. The U.S. intervention in Afghanistan following 9/11, however, wiped out much of the group. Surviving elements then dispersed throughout the Afghanistan-Pakistan border area.

Since then, Uzbekistan, Tajikistan and Kazakhstan have seen some attacks by Islamist militants. But many were related to political dynamics, not the movement in Afghanistan. A spillover of Afghan militancy is possible, but so far the threat is minimal.

More Pertinent Factors

Because Islamist spillover from northern Afghanistan is still a relatively minor threat, Russia's push into Central Asia may have other motivations. Moscow is engaged in a tense standoff with the West over Ukraine, just one theater in the competition for influence along the former Soviet periphery.

Central Asia is another key region in this contest. The region possesses sizable oil and natural gas resources that are attractive to the European Union as it seeks to diversify energy supplies and end its dependence on Russia. Europe has already pursued Turkmenistan to join the Trans-Caspian pipeline Project.

The United States has also been active in Central Asia, particularly from a security standpoint. The United States no longer uses Central Asian military bases that had been logistical centers for operations in Afghanistan, such as the Kant Air Base in Kyrgyzstan or the Karshi-Khanabad Air Base in Uzbekistan. These bases, however, have left a regional legacy.

Washington maintains some security operations that include counternarcotics training with Kyrgyzstan and Tajikistan.

The United States has also expressed interest in increasing its commitment. The commander of U.S. Central Command, Gen. Lloyd Austin, said the United States was willing to provide military equipment and technology to support Turkmenistan's efforts to secure its border with Afghanistan.

The United States also announced in January that it would grant over 200 Mine Resistant Ambush Protected vehicles to Uzbekistan previously used in the U.S. Northern Distribution Network in Afghanistan. Such gestures point to a U.S. desire to develop more cooperative security relationships with Central Asian states.

Moscow's military and security expansion efforts stem partly from its concern about these gestures. But Russia has not limited itself to deploying military personnel. Moscow has expanded the scope and membership of its Eurasian Union to include broader cooperation on issues including border controls. Kazakhstan is already a member, and Kyrgyzstan will soon join. Russia increased the number of exercises held by Collective Security Treaty Organization members. It also called on Uzbekistan and Turkmenistan to cooperate more with the security bloc, though both have been hesitant.

However, Moscow's ability to solidify its position in Central Asia will be limited. Russia has a weak economy. Already, many Central Asian migrants who once worked in Russia have left, causing a decline in Russian remittances to the region. The West, and particularly the United States, will continue to have influence in the region. China, too, will continue to make economic and energy inroads.

Meanwhile, instability in the region will probably increase. Kazakhstan and Uzbekistan both have potential succession crises in the offing. Moreover, demographic growth and competition over water resources are likely to threaten the region's security. Russia will see its position in Central Asia tested in the coming years. Islamist militancy is just one concern among many for Moscow and Central Asian governments.


 By: Gary Tanashian
Wednesday, April 15, 2015

There is so much data flying around out there. From the Credit data we reviewed yesterday to weakening manufacturing and exports to employment up nicely one month and down big the next, to frisky consumers (the economy's 'back end', putting it nicely) out there confidently living it up.

Big pictures help us let it all simmer and take out the noise. Here is a big picture for you... and it is an unchanged story; America has eaten its financial seed corn (replacing it with the soft meal known as credit) and financial market analysis is now in the hands of data freaks parsing and quantifying every little twitch on short time frames to draw conclusions and extrapolations based on little more than a black hole (that would be debt).

Here is the 10 year yield (blue shaded area) pinned down for decades by our 'Continuum' indicator, the monthly EMA 100 along with the 2 year yield (orange).

10yr & 2yr yields from WSJ
Larger Image - 10yr & 2yr yields from WSJ

Don't get me wrong, playing to the short-term data and not fighting what is vs. what we think we know has worked well in the current phase. But that is interim stuff. The chart above says so. 2 year yields have been rising! Oh my, they must be serious about normalizing monetary policy!!

Ha ha ha... we have been eating the national seed corn over the decades, all the way down to 0% today; and now they are normalizing policy?
"Why, sometimes I've believed as many as six impossible things before breakfast." -Alice in Wonderland
I live in America, so naturally I am more America-centric in my criticism. But our friends in Europe, Japan, China, Canada, Australia... they have all hopped aboard to one degree or another and by one method or another.

Constant doom-saying by the doom sayers does no good, because we are talking big pictures here.

These things creep along literally for decades. Indeed, doom-saying to stimulate peoples' fear instincts has caused a lot of pain over the last few years for the people who acted on the advice of the Sons of Martin Weiss.

But it does not change the fact that the US is near zero yields and relies on the engineering of debt to manufacture its boom cycles.

Here at Boom ZERO (™, ©) one might wonder where the future path leads. Secular Stagnation, as seems to be the new faddish reason to be bullish? I could see that as long as people continue to suspend disbelief (which again, can take decades). Hyperinflation? I don't think so. At least not in any form that commodity bulls will be able to pitch. Deflationary resolution? Well, deflation is and has been trying to address systemic excesses for decades.

I'll take C, Alex... deflation. This is fought every step of the way by (inflationary) policy makers now stuck at ZERO and trying desperately to put some ammo back in the Inflation Gun. It is too late.

Taking out all the brainy egg heads (Keynesian and Austrian alike), short-term data crunchers and trading captains who think they can predict what is upcoming for other people to follow, what if just maybe, there is no predictable answer because we are pinned to the mat (ZERO rates) in a system that has never been at this juncture with this particular combination of inputs?

Tell me again why it's called Notes From the Rabbit Hole? Why is the other site called 'but it is what it is' (biiwii)? Another good one from Alice in Wonderland:
"How puzzling all these changes are! I'm never sure what I'm going to be, from one minute to another."
What is so wrong with that concept? In this kind of a system, you stand too strong for any one thing (i.e. putting your capital where your idealistic self is) you can get blown up in a heartbeat. Changes always come, but you have to be patient (measured in years), play the game and yet realize at all times what the big picture says.

April 18, 2015 6:57 pm

Draghi warns of ‘uncharted waters’ if Greece crisis deteriorates

Sam Fleming and Chris Giles in Washington

Janet Yellen, chair of the U.S. Federal Reserve, center, talks to Mario Draghi, president of the European Central Bank (ECB), before the IMF governors' group photo at the International Monetary Fund (IMF) and World Bank Group Spring Meetings in Washington, D.C., U.S., on Saturday, April 18, 2015. IMF Managing Director Christine Lagarde warned this week that she wouldn't let Greece skip a debt payment to the lender, shutting down a potential avenue to buy the Greek government some financial leeway. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Janet Yellen; Mario Draghi©Bloomberg

Mario Draghi said the euro area was better equipped than it had been in the past to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.

The European Central Bank president called for the resumption of detailed discussions aimed at resolving the country’s debt woes and urged the Greek authorities to bring forward proposals that ensured fairness, growth, fiscal stability, financial stability.

Asked about the risks of contagion from a new flare-up in Greece, he said: “we have enough instruments at this point in time . . . which although they have been designed for other purposes would certainly be used at a crisis time if needed.”

The two tools he referred to were the ECB’s so-called outright monetary transactions, which have never been used, and Quantitative Easing, which the ECB launched in January. He added: “we are better equipped than we were in 2012, 2011 and 2010.”

However Mr Draghi added: “Having said that, we are certainly entering into uncharted waters if the crisis were to precipitate, and it is very premature to make any speculation about it.”

The ECB president was speaking following meetings in Washington that have been overshadowed by renewed fears about the risk of a Greek debt default and possible exit from the euro.

US Treasury secretary Jack Lew warned on Friday that a full-blown crisis in Greece would cast a new shadow of uncertainty over the European and global economies, as he put pressure on Athens to come forward urgently with detailed reforms to its economy.
Mr Lew said that while financial exposures to Greece had changed significantly since the turmoil of 2012, it was impossible to know how markets would respond to a default.

There is mounting frustration among Greece’s partners over faltering attempts to sort out its financial woes. Pierre Moscovici, the European commissioner for economic and financial affairs, has set the mid-May meeting of eurozone finance ministers as the decisive moment for Greece to agree a new set of economic reforms or face possible default.

Greece is being urged to speed up technical discussions on a list of reforms it has submitted that, if agreed, would unlock €7.2bn in loans from Greece’s eurozone partners. Without this funding, Greece is likely to run out of money and default either to the IMF in May or June, or to the European Central Bank later in the summer when large numbers of bonds held by the central bank mature.

Expressing confidence in the euro’s continued stability, Mr Draghi said on Saturday it was “pointless” to go short on the single currency — challenging anyone who disagreed to do it.

The ECB president said that “good steps” had been taken but that there was a need for the restoration of policy dialogue so that “specific proposals can be made and quantified and exactly assessed.”

Delegates to the IMF’s spring meetings have expressed deep concern that Greece’s senior ministers are not taking the technical talks seriously and are in no mood to release the money without substantive progress.

Christine Lagarde, head of the International Monetary Fund, earlier this week said her advice was for Athens to take on the “tedious” technical work of designing reforms to the Greek economy and a credible implementation plan rather than hope for a grand political bargain.

Yanis Varoufakis, the Greek finance minister, said this week that Greece was willing to give ground in its negotiations but that “we are going to compromise, compromise, compromise without being compromised”.

Year 2000 All Over Again - How Will You Play It This Time?

By: Chris Vermeulen

Thursday, April 16, 2015

Recently business and financial guru Mark Cuban wrote an article about why this tech bubble is going to be worse than the tech bubble of 2000. This made me take another look at the long term charts again, but instead of looking up the NASDAQ or the tech sector I decided to check out gold mining stocks, gold price and the Dollar index.

From looking at the price action among the precious metals sector and the dollar it looks and feels like these markets are very close to repeating what happened in the year 2000.

The chart below is a monthly chart looking all the way back to 1996. I have color coded areas of the chart that represent weak and strong times for the price of gold.

Gold Bugs Index Monthly Chart

Key Points:
  1. The US Dollar is trading roughly at the same level and trending higher as it was in 2000.
  2. Rising dollar is neutral/negative on commodity prices and resource stocks like gold miners.
  3. Gold price struggled as the dollar rose in value.
  4. Gold stocks fell sharply during the last year of their bear market.
  5. Gold stocks bottomed before physical gold by several months.

Concluding Thoughts on Dollar, Miners, & Gold Price:

In short, I feel most of the downside damage has already been done to the price of gold. Gold stocks on the other hand could still get roughed up for a few more months before finding a bottom.

Money is likely to continue rolling into the dollar as a safe haven and this will keep gold and silver prices relatively flat. But once the dollar starts to show signs of increased volatility (top) similar to 2000 - 2001 money will find its way into other currencies and precious metals as the new trade and safe haven.