HSBC fears world recession with no lifeboats left

The world authorities have run out of ammunition as rates remain stuck at zero. They have no margin for error as economy falters

By Ambrose Evans-Pritchard

5:00PM BST 24 May 2015


Photo: ALAMY
 
 
The world economy is disturbingly close to stall speed. The United Nations has cut its global growth forecast for this year to 2.8pc, the latest of the multinational bodies to retreat.
 
We are not yet in the danger zone but this pace is only slightly above the 2.5pc rate that used to be regarded as a recession for the international system as a whole.
 
It leaves a thin safety buffer against any economic shock - most potently if China abandons its crawling dollar peg and resorts to 'beggar-thy-neighbour' policies, transmitting a further deflationary shock across the global economy.

 

The longer this soggy patch drags on, the greater the risk that the six-year old global recovery will sputter out. While expansions do not die of old age, they do become more vulnerable to all kinds of pathologies.
 
A sweep of historic data by Warwick University found compelling evidence that economies are more likely to stall as they age, what is known as "positive duration dependence". The business cycle becomes stretched. Inventories build up and companies defer spending, tipping over at a certain point into a self-feeding downturn.

Stephen King from HSBC warns that the global authorities have alarmingly few tools to combat the next crunch, given that interest rates are already zero across most of the developed world, debts levels are at or near record highs, and there is little scope for fiscal stimulus.

"The world economy is sailing across the ocean without any lifeboats to use in case of emergency," he said.




In a grim report - "The World Economy's Titanic Problem" - he says the US Federal Reserve has had to cut rates by over 500 basis points to right the ship in each of the recessions since the early 1970s. "That kind of traditional stimulus is now completely ruled out. Meanwhile, budget deficits are still uncomfortably large," he said.

The authorities are normally able to replenish their ammunition as recovery gathers steam. This time they are faced with a chronic low-growth malaise - partly due to a global 'savings glut', and increasingly to a slow ageing crisis across most of the Northern hemisphere. The Fed keeps having to defer its first rate rise as expectations fall short.



Each of the past four US recoveries has been weaker than the last one. The average growth rate has fallen from 4.5pc in the early 1980s to nearer 2pc this time. The US fiscal deficit has dropped to 2.8pc but is expected to climb again as pension and health care costs bite, even if the economy does well.

The US cannot easily launch a fresh New Deal. Public debt was just 38pc on GDP when Franklin Roosevelt took power in 1933, and there were few contingent liabilities hanging over future US finances.

"Fiscal stimulus – a novel idea at the time – may have been controversial, but the chances of it working to boost economic activity were quite high given the healthy starting position. Today, it is much more difficult to make the same argument," he said.



The great hope - and most likely outcome - is that the recent monetary expansion in the US and the eurozone starts to gain traction later this year. Broad 'M3' money data - a one-year advance indicator - has been growing briskly on both sides of the Atlantic. But nobody knows for sure whether the normal monetary mechanisms are working.

JP Morgan estimates that the US economy contracted at an rate of 1.1pc in the first quarter, far worse than originally supposed.

The instant tracking indicator of the Atlanta Fed – GDPnow – shows little sign that America is shaking off its mystery virus. Growth was just 0.7pc (annualised) in mid-May. It is becoming harder to argue the relapse is a winter blip or caused by temporary gridlock at California ports.



Over 100,000 lay-offs across the oil and gas belt seem to have taken their toll. The Fed thought the windfall gain of cheaper energy for everybody else would weigh more in the balance, but this time Americans have chosen to salt away the money.

Net saving jumped by $125bn to $728bn in the first quarter. There was no pick-up in April. Retail sales were flat.

It is now more likely than not that US economy has dropped through the Fed's stall-speed threshold of two consecutive quarters below 2pc growth. Exactly how far below is unclear. The Fed uses its own growth measure - gross domestic income (GDI) - and this data has not yet been published.

The stall speed concept is soft science but not to be ignored. "Output tends to transition to a slow-growth phase at the end of expansions," said a Fed research paper.



Much now depends on China, where the economy is starting to look "Japanese". Dario Perkins from Lombard Street Research says the Chinese economy is in a much deeper downturn than admitted so far by the authorities. It probably contracted outright in the first quarter.

Electricity use has turned negative. Rail freight has been falling at near double-digit rates.

What began as a deliberate move by Beijing to choke off a credit bubble has taken on a life of its own, evolving into a primordial balance-sheet purge.



It was inevitable that China's investment bubble would lead to vast inventory of unsold property. The country produced more cement between 2011 and 2013 than the US in the 20th Century -

Mr Perkins said China is now in a “classic debt deflation spiral” as excess capacity holds down prices. Factory gate inflation is now minus 4.6pc. This in turn is tightening the noose further by pushing up real borrowing costs.

The Chinese authorities have so far resisted the temptation to flood the system with fresh stimulus, fearing that this would store up even greater trouble.



They have taken steps to offset a clampdown on local government spending and avert a “fiscal cliff” that might otherwise have occurred. They have loosened policy for banks just enough to offset the contractionary effects of capital flight. But they have not yet come to the rescue.

This matters enormously. Andrew Roberts from RBS says China accounted for 85pc of all global growth in 2012, 54pc in 2013, and 30pc in 2014. This is likely to fall to 24pc this year. “If there is only one statistic that you need to know in the world right now, this is it,” he said.

The effects are being felt across Asia. Japan keeps disappointing. Its exports to China have fallen 15pc over the last year. Korea is flirting with recession.


Russia, Brazil, Argentina, and Venezuela are all contracting sharply, casualties of the China-driven commodity bust. The UN says the growth rate for the emerging market nexus (ex-China) has dropped to 2.3pc from an average of 6.5pc in the glory years of 2004-2007.

Europe is doing better but it is hardly a boom. The eurozone is contributing little to global demand. The region has displaced China and to become the world's "saver of last resort" - or its biggest black hole in the view of critics - exploiting the weaker euro to rack up a current account surplus of $358bn.

It is far from clear whether Europe can act as an engine of world recovery. The composite purchasing managers index (PMI) for services and manufacturing slipped in May, and new orders fell. Oxford Economics thinks the “sugar rush” from quantitative easing may be wearing off.

HSBC's Mr King says the global authorities face awful choices if the world economy hits the reefs in its current condition. The last resort may have to be "helicopter money", a radically different form of QE that injects money directly into the veins of economy by funding government spending.

It is a Rubicon that no central bank wishes to cross, though the Bank of Japan is already in up to the knees.

The imperative is to avoid any premature tightening or policy error that could crystallize the danger.

As Mr King puts it acidly. "Many – including the owner of the Titanic – thought it was unsinkable: its designer, however, was quick to point out that 'She is made of iron, sir, I assure you she can'."


A Net Assessment of Europe

 

Last week I began this series with a Net Assessment of the World, in which I focused on the growing destabilization of the Eurasian land mass. This week I continue the series, which will ultimately analyze each region in detail, with an analysis of Europe. I start here, rather than in the Middle East, because while the increasing successes of the Islamic State are significant, the region itself is secondary to Europe in the broader perspective. The Middle East matters, but Europe is as economically productive as the United States and, for the past 500 years, has been the force that has reshaped the world. The Middle East matters a great deal; European crises can destabilize the world. What happens between Greece and Germany, for example, can have consequences in multiple directions. Therefore, since we have to start somewhere, let me start with Europe.

Europe is undergoing two interconnected crises. The first is the crisis of the European Union.

The bloc began as a system of economic integration, but it was also intended to be more than that: It was to be an institution that would create Europeans. The national distinctions between European nations is real and has proved destabilizing, since Europe has been filled with nations with diverging interests and historical grudges. The EU project did not intend to abolish these nations; the distinctions and tensions were too deep. Rather it was intended to overlay national identities with a European identity. There would be nations and they would retain ultimate sovereignty, but the citizens of these nations would increasingly come to see themselves as Europeans. That European identity would both create a common culture and diminish the particularity of states. The inducement to all of Europe was prosperity and peace. The European Union would create ongoing prosperity, which would eliminate the danger of conflict. The challenge to Europe in this sense was that prosperity is at best cyclical, and it is regional. Europe is struggling with integration because without general prosperity, the seduction of Europeans away from the parochial allure of nations will fail. Therefore, the crisis of the European Union, focused on the European Peninsula, is one of the destabilizing forces. 

I use the term European Peninsula to denote the region that lies to the west of a line drawn from St. Petersburg to Rostov-on-Don, becoming increasingly narrow until it reaches Iberia and the Atlantic Ocean. France, Germany and Italy are on the peninsula, with its river systems of the Danube and Rhine. To the line’s east is Russia. Whereas the peninsula is intimately connected with the oceans and is therefore engaged in global trade, Russia is landlocked. It is very much land constrained, with its distant ports on the Pacific, the Turkish straits its only outlet to the Mediterranean, and its Baltic and Arctic access hampered by ice and weather. On the peninsula, particularly as you move west, no one is more than a few hundred miles from the sea. Russia, reliant upon land transportation, which is more difficult and expensive than maritime trade, tends to be substantially poorer than the peninsula.
 
The second crisis rests in the strategic structure of Europe and is less tractable than the first. Leaving aside the outlying islands and other peninsulas that make up Europe, the Continent’s primordial issue is the relationship between the largely unified but poorer mainland, dominated by Russia, and the wealthier but much more fragmented peninsula. Between Russia and the peninsula lies a borderland that at times as has been under the control of Russia or a peninsular power or, more often, divided.

This borderland is occasionally independent and sovereign, but this is rare. More often, even in sovereignty, it is embedded in the spheres of influence of other countries. The borderland has two tiers: the first and furthest east is Belarus, Ukraine and portions of the Balkans, while the second consists of Poland, the Czech Republic, Slovakia, Hungary, Romania and Bulgaria.

After World War II, Russia’s power extended to the second tier and beyond. After the collapse of the Soviet Union, these countries became sovereign, and the influence of the peninsula moved eastward as two peninsular institutions, the European Union and NATO, absorbed the second tier. As this happened, and the Baltics were included with the second tier, Belarus and particularly Ukraine became the dividing line and buffer.

Two things must be noted here. First, it was the existence of the European Union that gave the peninsula a framework for eastward expansion. NATO, in many ways, became moribund as it lost its rationale after the Cold War. However, in the years after Soviet collapse, the European Union was dynamic and seemed destined to unite the peninsula. As Soviet power collapsed and European power seemed to expand, the European Union provided a united framework for expansion and an attractive option for newly sovereign nations in the borderland.

Second, Russia was in a state of systemic shock in the 1990s. It was a period of chaos, characterized by the complete loss of both controls and plans. It was almost as though Russia was unconscious.

From the European and American points of view, this was the new normal in Russia. In fact, it was inevitable that this was merely a transitory state. The single institution that historically had held Russia together was the secret police. In a poor country with minimal communications and transportation, the ability of the center to control the periphery is limited. The institution of an efficient security system would be indispensable if Russia were to avoid fragmentation. From the Czars onward, this is what held Russia together. It followed that when the first shock of collapse passed, the security apparatus would reassert itself and stabilize Russia. It was not the personality of Vladimir Putin that mattered; if not for him, another leader would have emerged and halted the disintegration of the Russian economy and polity.

This process inevitably led Russia to restructure itself, within the limits of its diminished power.

The effort included an attempt to both stabilize the country’s economy and reassert its geopolitical interests, first in the Caucasus and then in Ukraine. Without a buffer in the eastern peninsula, Russia lacks strategic depth, and it has only been this strategic depth that has saved it from peninsular invasions in the past. Therefore, any attempt to stabilize Russia would necessitate a look westward to the borderlands, where the second tier was completely lost and even the Baltics had become part of the peninsular system, and an interpretation of eastern expansion as an existential threat to Russia.

The European Union’s position was that the Continent’s growing integration was completely benign. That might well have been the subjective intention of the Europeans, but the Russians saw something they had never seen before: integrated institutions, with ambitions among some members to become a federation of nation-states that might go well beyond economics. There had been sufficiently ample discussion of European defense systems and federation to cause concern in Moscow. Without buffers, a united Europe with a shifted intent might well pose an existential threat to Russia. This was particularly the case because the United States held a vague alliance with the Europeans and shared the fear of Russia’s power re-emerging.

Russia's Resurgence and Europe's Crisis

In 2008, two critical things happened. First, and less important, was the Russian war with Georgia that demonstrated—more than reality might require—the re-emergence of Russia as a significant and capable regional power. Second, and more important, the economic crisis triggered by the American sub-prime mortgage crisis led to the gradual fragmentation of European unity, causing a massive divergence of interests. The eastern movement of European influence, supported by the United States, continued in spite of the crisis. The Russians were forced to counter and were less concerned about the consequences. 

The European crisis was simple, at its core. Germany had the fourth-largest economy in the world. It derived over 50 percent of its income from exports, half of which went to the European free trade zone. In addition, using its substantial influence, the euro maximized the interest of the European economy as a whole. Given the size of the German economy, it is only a slight overstatement to assert that its economic needs defined Europe’s economy. The euro helped stabilize and sustain German growth, as did the regulations created by Brussels. This limited entrepreneurial behavior in countries where low wages ought to have been the impetus for growth. Instead, these countries became opportunities for German investment.

All of this was bearable before 2008, because since EU members signed the Treaty of Maastricht in 1992, which led to a common currency, they had seen a period of extraordinary prosperity. A rising tide floats all ships. But in 2008, a routine financial crisis (from the standpoint of a century) tore apart the fabric of the peninsula. During any economic crisis, the most important question is who shall bear the burden, the creditors or debtors? Broadly speaking, Europe split along these lines. Germany was the peninsula’s major creditor. Southern Europe was its major debtor. Leaving aside the moral posturing over who committed what injustice against whom, the Germans insisted on austerity.

International institutions, including the International Monetary Fund, aligned with Germany.

The interests of the European Peninsula diverged into four parts: those of Germanic Europe (Germany, Austria and, to some extent, the Czech Republic); Mediterranean Europe; the eastern frontier of the European Union; and the rest of northern Europe.

Germany has an overwhelming interest in the European Union and its free trade zone. It is an inherently weak nation, as are all countries that are dependent on exports. Germany's well-being depends on its ability to sell its products. If blocked by an economic downturn among its customers or political impediments to exports, Germany faces a declining economy that can create domestic social crises. Germany must do everything it can to discipline the European Union without motivating its members to leave. (The issue is not leaving the euro, but placing limits on German exports.) Thus Germanic Europe is walking a fine line. It is an economic engine of Europe, but also extremely insecure. Given the fragmentation in the European Union, it must reach out to others, particularly Russia, for alternatives. Russia is not an alternative in itself, but in a bad situation it could be part of a solution if Germany could craft one. This is, of course, a worst-case scenario, but the worst case is often the reality in Europe in the long run.

Southern Europe is seeking a path that will allow it to escape catastrophic austerity in a Europe that seems unable to generate significant economic growth. If that does not save Southern European nations, they must decide, in simplest terms, whether they are better off defaulting on debt than paying it. While Germany is currently inclined not to force them to this point, it is emerging on its own. This is the fundamental reality of Europe: Germany wants to save the free trade zone, but without absorbing Europe’s bad debts. Southern Europe needs to shift its burden and will eventually reconsider the viability of free trade, though it has not yet done so.

Just as there are limits on agricultural trade, why not create the same environment that the Germans enjoyed in the 1950s, when they were able to protect themselves from American industrial exports, thereby growing their industry with minimal competition?

Central and Eastern European countries are in a complex position with the European Union, since they are generally members that are not in the eurozone. But for most of them, the question of Russia’s power and intentions is more important than the Greek crisis. For the east, there is an awareness that Europe never did progress to a common foreign and defense policy and that the European Union cannot defend them against Russia. They are also aware that NATO cannot defend them, except with American involvement, which is coming in very measured and slow increases.

Then there is the fourth part of Europe, particularly France, which is supposed to be Germany’s equal in the European Union but has fallen behind in recent decades, as it did in the 19th century. France is as much part of Southern Europe as Greece, along with high unemployment in the south. And along with the Southern Europeans, who are facing problems in the Mediterranean and North Africa alongside their economic woes, France is not drawn east, nor is it comfortable with German policies, but it is being drawn in multiple directions on economic and strategic issues.

A Continent Divided

A continent drawn in multiple directions is the best description of the European Union, and one that gives the Russians some relief. The collapse of oil prices and Russia’s inability to turn oil income into a diverse and sustainable economy are inherently limiting factors on Russia’s power. In Ukraine, the Russians are experiencing the twin problems of a failure of intelligence and the limits of their military forces. Their intelligence failed to detect or manage events in Ukraine, from anticipating the fall of the government to understanding that there would be no general uprising in eastern Ukraine.

Russia’s military never invaded anything, albeit that Russia controlled and, to some degree, still controls warring militias. Russia was present in Crimea by treaty, and its minimal forces and operations in the east revealed both its aggressive intent and the limits of its power. The Russians did not do well in that campaign, nor in my view could they mount a successful invasion of Ukraine as a whole, given their limits on logistics and other capabilities.

But the Russians were saved by the fragmentation of the peninsula. The eastern Europeans wanted some definitive action from Europe. None came. Sanctions created pain, but they did not define Russia’s strategic policy. Thus, to the extent that the borderland has a patron, it is not Europe but the United States. The Germans have no desire to fundamentally alienate Russia over Ukraine. The French are torn in multiple directions and the Southern Europeans have no interest in non-EU issues aside from Muslim immigration. (This latter challenge, which solves problems of labor shortages but creates problems of immigration and some risk of terrorism, is important and a topic to which I will return in the future. Muslim immigration, however, does not threaten Europe's fundamental architecture, the elucidation of which is the purpose of a net assessment.)

The Net Assessment of Europe is that the Continent’s basic geographical split remains in place, and Russia still holds the weaker position. However, its relative strength has increased with the rise of divergent interests within the European Union, and its primary concern regarding the Continent is not Europe but the United States. Therefore, the crisis in the European Union will define the broader situation in Russia, and that fundamental crisis appears insoluble within the current framework of discussion. The discussion will move from debt and repayment to the creation of a sustainable European Union in which Germany may not get to export all it wants but must accept limits on its prosperity relative to its partners. Since politics makes that unlikely, the fragmentation of the peninsula will increase, and with it, Russia’s relative power will rise, drawing in the United States.
 

The People's Money

Here Comes the Yuan

Demand for the Chinese currency is set to rise in years to come, which will have long-term impacts

By Wei Gu

May 21, 2015 7:32 a.m. ET

To enlarge graph click here


Investors and economists may follow every twist and turn of China’s financial overhaul, but Beijing takes the long view. In time, the country’s markets and economy will open up.

So the question isn’t whether the yuan will be included this year in the International Monetary Fund’s Special Drawing Rights—a collection of global currencies that forms a special reserve asset—or when exactly the Chinese stock market will join major global indexes. These things are coming. The question is what the long-term impacts will be as investors pour money into China, increasing demand for the Chinese currency for years to come.

Currently, the investment world massively underweights yuan assets. The world’s central banks and sovereign-wealth funds have invested an estimated $70 billion to $120 billion in renminbi-denominated assets, according to Standard Chartered STAN 0.24 % —just 0.6% to 1% of world reserves. Foreigners own 1.2% of China’s stock market and 2.3% of its bond market, according to the People’s Bank of China.

Those are tiny shares, given the size of China’s economy and its capital markets. China is the world’s second-largest economy, accounting for 12% of the world’s economic output. Its onshore bond market is the fourth-largest in the world after those of the U.S., Japan and France. China’s stock-market capitalization accounts for 12% of the world’s total, according to World Federation of Exchanges, trailing only that of the U.S.

Foreign net purchases of China’s bonds and equities this year should reach 500 billion to 700 billion yuan (about $80 billion to $110 billion), according to Standard Chartered. The yuan’s inclusion in the IMF’s Special Drawing Rights, whenever that occurs, won’t force foreigners to buy Chinese assets—but it will confer a sort of blessing of the currency, and so encourage investors to raise their exposure.

If inclusion comes this year, cumulative foreign net purchases of China’s bonds and equities could reach 5.5 trillion to 6.2 trillion yuan by 2020, Standard Chartered analysts forecast. Even if inclusion were deferred to 2020, purchases could still reach 3.9 trillion to 4.5 trillion yuan in the next five years. Either way, the trend these analysts see is clear: Within four years, foreigners’ holdings of yuan bonds will exceed their current holdings of bonds in any other single emerging market. Standard Chartered expects a persistent rise in global diversification into yuan assets over the next decade.

The incentives are there for fund managers. First, China’s three-year treasurys yield around 3.5%, versus 1% for their U.S. counterparts and negative yields for those from Switzerland.

China’s low government debt means the quality of its sovereign credit is actually higher than that of many countries, including the U.S. Investors could also be drawn to China’s roaring stock market, which has doubled in a year—gains that non-Chinese investors have largely missed.

Second, China’s capital markets are more liquid now, making them more attractive than those of other emerging economies. Bond trading has grown rapidly, with volume reaching $57 trillion in 2014. The Shanghai-Hong Kong Stock Connect is making it easier for foreign investors to buy Chinese shares. At an estimated $40.5 billion, daily spot turnover for onshore and offshore yuan is still much lower than for the major global currencies, but the bid-offer spread is comparable, according to Standard Chartered.

Smaller emerging economies are likely to be losers as global investors put more cash into China. The net $44 billion increase in foreign holdings of Chinese onshore bonds in 2014 alone is equal to 24% of the total local-currency bond market in Indonesia and 40% of the market in the Philippines. The Chinese government’s low debt gives it more room to issue bonds for foreigners to buy.

All of this assumes that China’s leaders successfully overhaul the economy and keep growth strong.

It’s no certainty. Already cash is flowing rapidly out of the country. The long-term inflows should more than offset those outflows, but financial or political instability could change that.
                                                          
Buying Beijing ducks in their namesake city; China’s currency is looking to go global. Photo: Tomohiro Ohsumi/Bloomberg News

What is clearer is that the yuan, which is strictly controlled by China’s central bank, is unlikely to rise strongly even if foreign cash flows in. The IMF sees the yuan as close to fairly valued, and the Bank for International Settlements calls the yuan the most overvalued of the world’s major currencies, because of China’s shrinking trade surplus.

For now, Beijing appears to want a stable currency. Given the economic slowdown, letting the yuan appreciate would make Chinese exports more expensive, a bad move during an economic slowdown. Driving the yuan down could help the economy but would cause howls of protest from China’s trading partners.

But that’s in the short term. Over time, there’s little doubt that lots of foreign cash will flow into Chinese financial assets. The impact on China and the rest of the world will be significant.

Yellen Puts The 'Dollar' Back On Suicide Watch

by: Joseph Calhoun            
             

By Jeffrey P. Snider


Volatility in UST trading declined a bit in the past few days, as treasury yields became far more settled intraday. While that breaks the exact duplication Monday and Tuesday this week traced from Monday and Tuesday last week, the past two weeks overall remain remarkably similar. And for all the noise, the ups and downs along the way, treasury yields haven't much changed. That observation applies as far back as May 6, which means that for all the mess there isn't any more clarity.

(click to enlarge)ABOOK May 2015 Dollar Turn 5s10s Nominal

Far be it for USTs to be trading sideways alone, it seems as if oil prices (front end) have fallen into the same. Adding oil to the discussion immediately frames this as relating to the state of the "dollar" in more recent weeks, which looks to be in sharp contrast to the period between March 18 (FOMC) and May 6. Nominal rates were rising rather steadily in those nearly two months right alongside oil prices.

ABOOK May 2015 Dollar Turn Oil

The eurodollar curve has also gone limp, as eurodollar futures trading has found an extremely narrow range also since May 6. This, too, marks a defined shift from the March 18 to May 6 period, meaning that UST credit, oil prices and eurodollar futures all likely share the same inflection.

ABOOK May 2015 Dollar Turn EurodollarsABOOK May 2015 Dollar Turn Eurodollars2

We can also add "inflation" breakevens, at least as far as a potential change dating to May 6.

Breakevens had been rising rather steadily since January 15, which I still think was an indication of hedging for (against?) the next QE.

ABOOK May 2015 Dollar Turn Breakevens

These rates and prices are a broad enough survey, especially as unified by May 6, to at least entertain the suggestion about whether the "dollar" pause that began on March 18 has ended. T
hat may be taking it too far at this moment, since there aren't any actual and sustained moves in a countertrend, so it may be more reasonable to instead assume a at the very least a pause to the pause.

I think that notion is given further credibility by UST trading Wednesday in response to the FOMC statement; there really wasn't any response. The same goes for eurodollars which seemed unperturbed by the almost dispirited desperation that the FOMC was trying to forward as a reasoned basis for whatever they might do. That, then, places far more emphasis on what might have occurred on May 6 to make such a unified impact in global money and credit markets.

That was the day that Janet Yellen made her belated wish that stock prices weren't so winsome.

She referred specifically to "potential dangers" due to "quite high" equity valuations, as well as reminding everyone of 2013's "reach for yield" critique; i.e., asset bubbles. In terms of the idea that the FOMC may have changed its mind about ending ZIRP this is another factor that may have been missing to that point. I believe it was taken on March 18 that the FOMC then was projecting a change of heart based on "shocking" and "unexpected" economic weakness.

Therefore, it was some initial hope that the economy alone would dispel the nervous urgency of Yellen et al to just get it over with.

However, Yellen's curiously rather direct focus on the asset bubbles alters that dynamic, maybe significantly. There was always background noise in Bernanke's last year (reach for yield) that the largest dangers were getting to be financial imbalances. The worry was that at some point it may not matter so much the economy as the Fed might find itself in the Chinese position where bubbles became the larger priority (by far) regardless of economic weakness. So Yellen's May 6 monkey wrench might have brought that possibility back to the forefront, at least as far as some initial consideration.

Obviously, it hasn't been taken as fixed income gospel yet, thus the sideways action lasting now a little over two weeks. This week's FOMC statement did nothing at all to clear up any perceivable favor one way or the other. The utter mess of rationalizations could actually be taken as supporting both versions, hawkish and dovish; the continued allusion and even "official" recognition of some stark economic weakness and very little of organic trends to offset it, but also that the Fed may be excusing all that as still consistent in their view with the ending of ZIRP.

ABOOK May 2015 Dollar Turn FrancABOOK May 2015 Dollar Turn Real(click to enlarge)

It isn't completely clear either from other "dollar" proxies as to where bank balance sheets globally might be progressing. Again, there isn't any sustained trend here to offer a more compelling interpretation, but enough of a muddle in which to accommodate the possibility of resumption toward tightening. Gold, for example, has been trading mostly sideways dating all the way back to late March. The Brazilian real devalued starting on April 28, and the Swiss franc at least stopped its ascendant run on May 6.

So these "dollar" and credit markets may not yet know what to do regarding Yellen's version of "conundrum", but it seems as if her introduction of complications has led to at least contemplation about it, tipping the scales, ever so slightly, back toward financial suicide.


FED CONFRONTS AN ECONOMY
 PLAGUED BY MISMEASUREMENT


Samuel Corum/Anadolu Agency/Getty Images

A note from Goldman Sachs economist Jan Hatzius this weekend touches on a theme that seems to be getting a lot of play of late in the world of central banking: Mismeasurement.

Do we really know the world economists are trying to describe to us on a daily basis? And if we don’t, are central bankers in any position to feed this world appropriate amounts of money and interest?

Goldman’s note raises questions about measurement of productivity, growth and inflation.

“Structural changes in the US economy may have resulted in a statistical understatement of real (economic) growth,” Mr. Hatzius argues.

The data, he says, might not be picking up changes in the economy resulting from the rapid spread of advanced software and digital content. Inflation statistics, moreover, might not grasp the leaps in quality of, say, the camera on your iPhone. My camera, for instance, can capture my dog catching a ball in slow motion, which is very cool and something I’ve never been able to do before. Mr. Hatzius argues inflation, growth and productivity statistics have been understated because the data don’t pick up the consequences of this technological change.

“Confident pronouncements that the standard of living is growing much more slowly than in the past should be taken with a grain of salt,” he says. Mr. Hatzius, often a dove when it comes to monetary policy, adds further that overstated inflation means the Fed can keep interest rates low.

In other corners right now, economists are debating whether seasonal adjustments in data tend to bias down growth estimates for the first quarter. In addition – in the search for better measures of growth — San Francisco Fed President John Williams and economists at the Philadelphia Fed are touting a new measure of output called “GDP Plus,” which tracks not just growth in output of goods and services, but also the incomes Americans earn from that output.

Given the doubts about growth and productivity statistics in particular, in can be argued – and I suspect it will be among Fed officials in the months ahead – that the central bank needs to be most focused right now on what is its congressionally required mandate. That is not growth. It is inflation and employment.

Is inflation rising at the modest pace officials want and the job market improving? On this front, the data are not all that discouraging. The consumer price index, released by the Labor Department Friday, showed some signs of pickup. Meantime the jobless rate, at 5.4% in April, continues to fall and hiring continues.

In a world where there is much they don’t know, that set of facts keeps Fed officials hopeful they are getting the economy back to something they’d like to call normal. And that means they remain inclined to move interest rates away from the very abnormal level of zero.

-By Jon Hilsenrath


What if Putin is Telling the Truth?

F. William Engdahl  

15.05.15



On April 26 Russia’s main national TV station, Rossiya 1, featured President Vladimir Putin in a documentary to the Russian people on the events of the recent period including the annexation of Crimea, the US coup d’etat in Ukraine, and the general state of relations with the United States and the EU. His words were frank. And in the middle of his remarks the Russian former KGB chief dropped a political bombshell that was known by Russian intelligence two decades ago.
 
Putin stated bluntly that in his view the West would only be content in having a Russia weak, suffering and begging from the West, something clearly the Russian character is not disposed to. Then a short way into his remarks, the Russian President stated for the first time publicly something that Russian intelligence has known for almost two decades but kept silent until now, most probably in hopes of an era of better normalized Russia-US relations.
 
Putin stated that the terror in Chechnya and in the Russian Caucasus in the early 1990’s was actively backed by the CIA and western Intelligence services to deliberately weaken Russia. He noted that the Russian FSB foreign intelligence had documentation of the US covert role without giving details.
 
What Putin, an intelligence professional of the highest order, only hinted at in his remarks, I have documented in detail from non-Russian sources. The report has enormous implications to reveal to the world the long-standing hidden agenda of influential circles in Washington to destroy Russia as a functioning sovereign state, an agenda which includes the neo-nazi coup d’etat in Ukraine and severe financial sanction warfare against Moscow. The following is drawn on my book, “The Lost Hegemon” to be published soon…
 
CIA’s Chechen Wars
 
Not long after the CIA and Saudi Intelligence-financed Mujahideen had devastated Afghanistan at the end of the 1980’s, forcing the exit of the Soviet Army in 1989, and the dissolution of the Soviet Union itself some months later, the CIA began to look at possible places in the collapsing Soviet Union where their trained “Afghan Arabs” could be redeployed to further destabilize Russian influence over the post-Soviet Eurasian space.
 
They were called Afghan Arabs because they had been recruited from ultraconservative Wahhabite Sunni Muslims from Saudi Arabia, the Arab Emirates, Kuwait, and elsewhere in the Arab world where the ultra-strict Wahhabite Islam was practiced. They were brought to Afghanistan in the early 1980’s by a Saudi CIA recruit who had been sent to Afghanistan named Osama bin Laden.
 
With the former Soviet Union in total chaos and disarray, George H.W. Bush’s Administration decided to “kick ‘em when they’re down,” a sad error. Washington redeployed their Afghan veteran terrorists to bring chaos and destabilize all of Central Asia, even into the Russian Federation itself, then in a deep and traumatic crisis during the economic collapse of the Yeltsin era.
 
In the early 1990s, Dick Cheney’s company, Halliburton, had surveyed the offshore oil potentials of Azerbaijan, Kazakhstan, and the entire Caspian Sea Basin. They estimated the region to be “another Saudi Arabia” worth several trillion dollars on today’s market. The US and UK were determined to keep that oil bonanza from Russian control by all means. The first target of Washington was to stage a coup in Azerbaijan against elected president Abulfaz Elchibey to install a President more friendly to a US-controlled Baku–Tbilisi–Ceyhan (BTC) oil pipeline, “the world’s most political pipeline,” bringing Baku oil from Azerbaijan through Georgia to Turkey and the Mediterranean.
 
At that time, the only existing oil pipeline from Baku was a Soviet era Russian pipeline that ran through the Chechen capital, Grozny, taking Baku oil north via Russia’s Dagestan province, and across Chechenya to the Black Sea Russian port of Novorossiysk. The pipeline was the only competition and major obstacle to the very costly alternative route of Washington and the British and US oil majors.
 
President Bush Sr. gave his old friends at CIA the mandate to destroy that Russian Chechen pipeline and create such chaos in the Caucasus that no Western or Russian company would consider using the Grozny Russian oil pipeline.
 
Graham E. Fuller, an old colleague of Bush and former Deputy Director of the CIA National Council on Intelligence had been a key architect of the CIA Mujahideen strategy. Fuller described the CIA strategy in the Caucasus in the early 1990s: “The policy of guiding the evolution of Islam and of helping them against our adversaries worked marvelously well in Afghanistan against the Red Army. The same doctrines can still be used to destabilize what remains of Russian power.”6
 
The CIA used a dirty tricks veteran, General Richard Secord, for the operation. Secord created a CIA front company, MEGA Oil. Secord had been convicted in the 1980s for his central role in the CIA’s Iran-Contra illegal arms and drugs operations.
 
In 1991 Secord, former Deputy Assistant Secretary of Defense, landed in Baku and set up the CIA front company, MEGA Oil. He was a veteran of the CIA covert opium operations in Laos during the Vietnam War. In Azerbaijan, he setup an airline to secretly fly hundreds of bin Laden’s al-Qaeda Mujahideen from Afghanistan into Azerbaijan. By 1993, MEGA Oil had recruited and armed 2,000 Mujahideen, converting Baku into a base for Caucasus-wide Mujahideen terrorist operations.
 
General Secord’s covert Mujahideen operation in the Caucasus initiated the military coup that toppled elected president Abulfaz Elchibey that year and installed Heydar Aliyev, a more pliable US puppet. A secret Turkish intelligence report leaked to the Sunday Times of London confirmed that “two petrol giants, BP and Amoco, British and American respectively, which together form the AIOC (Azerbaijan International Oil Consortium), are behind the coup d’état.”
 
Saudi Intelligence head, Turki al-Faisal, arranged that his agent, Osama bin Laden, whom he had sent to Afghanistan at the start of the Afghan war in the early 1980s, would use his Afghan organization Maktab al-Khidamat (MAK) to recruit “Afghan Arabs” for what was rapidly becoming a global Jihad. Bin Laden’s mercenaries were used as shock troops by the Pentagon and CIA to coordinate and support Muslim offensives not only Azerbaijan but also in Chechnya and, later, Bosnia.
 
Bin Laden brought in another Saudi, Ibn al-Khattab, to become Commander, or Emir of Jihadist Mujahideen in Chechnya (sic!) together with Chechen warlord Shamil Basayev. No matter that Ibn al-Khattab was a Saudi Arab who spoke barely a word of Chechen, let alone, Russian. He knew what Russian soldiers looked like and how to kill them.
 
Chechnya then was traditionally a predominantly Sufi society, a mild apolitical branch of Islam. Yet the increasing infiltration of the well-financed and well-trained US-sponsored Mujahideen terrorists preaching Jihad or Holy War against Russians transformed the initially reformist Chechen resistance movement. They spread al-Qaeda’s hardline Islamist ideology across the Caucasus. Under Secord’s guidance, Mujahideen terrorist operations had also quickly extended into neighboring Dagestan and Chechnya, turning Baku into a shipping point for Afghan heroin to the Chechen mafia.
 
From the mid-1990s, bin Laden paid Chechen guerrilla leaders Shamil Basayev and Omar ibn al-Khattab the handsome sum of several million dollars per month, a King’s fortune in economically desolate Chechnya in the 1990s, enabling them to sideline the moderate Chechen majority.21 US intelligence remained deeply involved in the Chechen conflict until the end of the 1990s. According to Yossef Bodansky, then Director of the US Congressional Task Force on Terrorism and Unconventional Warfare, Washington was actively involved in “yet another anti-Russian jihad, seeking to support and empower the most virulent anti-Western Islamist forces.”
 
Bodansky revealed the entire CIA Caucasus strategy in detail in his report, stating that US Government officials participated in,
“a formal meeting in Azerbaijan in December 1999 in which specific programs for the training and equipping of Mujahideen from the Caucasus, Central/South Asia and the Arab world were discussed and agreed upon, culminating in Washington’s tacit encouragement of both Muslim allies (mainly Turkey, Jordan and Saudi Arabia) and US ‘private security companies’. . . to assist the Chechens and their Islamist allies to surge in the spring of 2000 and sustain the ensuing Jihad for a long time…Islamist Jihad in the Caucasus as a way to deprive Russia of a viable pipeline route through spiraling violence and terrorism.”
The most intense phase of the Chechen wars wound down in 2000 only after heavy Russian military action defeated the Islamists. It was a pyrrhic victory, costing a massive toll in human life and destruction of entire cities. The exact death toll from the CIA-instigated Chechen conflict is unknown. Unofficial estimates ranged from 25,000 to 50,000 dead or missing, mostly civilians. Russian casualties were near 11,000 according to the Committee of Soldiers’ Mothers.
 
The Anglo-American oil majors and the CIA’s operatives were happy. They had what they wanted: their Baku–Tbilisi–Ceyhan oil pipeline, bypassing Russia’s Grozny pipeline.
 
The Chechen Jihadists, under the Islamic command of Shamil Basayev, continued guerrilla attacks in and outside Chechnya. The CIA had refocused into the Caucasus.
 
Basayev’s Saudi Connection
 
Basayev was a key part of the CIA’s Global Jihad. In 1992, he met Saudi terrorist Ibn al-Khattag in Azerbaijan. From Azerbaijan, Ibn al-Khattab brought Basayev to Afghanistan to meet al-Khattab’s ally, fellow-Saudi Osama bin Laden. Ibn al-Khattab’s role was to recruit Chechen Muslims willing to wage Jihad against Russian forces in Chechnya on behalf of the covert CIA strategy of destabilizing post-Soviet Russia and securing British-US control over Caspian energy.
 
Once back in Chechnya, Basayev and al-Khattab created the International Islamic Brigade (IIB) with Saudi Intelligence money, approved by the CIA and coordinated through the liaison of Saudi Washington Ambassador and Bush family intimate Prince Bandar bin Sultan. Bandar, Saudi Washington Ambassador for more than two decades, was so intimate with the Bush family that George W. Bush referred to the playboy Saudi Ambassador as “Bandar Bush,” a kind of honorary family member.
 
Basayev and al-Khattab imported fighters from the Saudi fanatical Wahhabite strain of Sunni Islam into Chechnya. Ibn al-Khattab commanded what were called the “Arab Mujahideen in Chechnya,” his own private army of Arabs, Turks, and other foreign fighters. He was also commissioned to set up paramilitary training camps in the Caucasus Mountains of Chechnya that trained Chechens and Muslims from the North Caucasian Russian republics and from Central Asia.
 
The Saudi and CIA-financed Islamic International Brigade was responsible not only for terror in Chechnya. They carried out the October 2002 Moscow Dubrovka Theatre hostage seizure and the gruesome September 2004 Beslan school massacre. In 2010, the UN Security Council published the following report on al-Khattab and Basayev’s International Islamic Brigade:
Islamic International Brigade (IIB) was listed on 4 March 2003. . . as being associated with Al-Qaida, Usama bin Laden or the Taliban for “participating in the financing, planning, facilitating, preparing or perpetrating of acts or activities by, in conjunction with, under the name of, on behalf or in support of” Al-Qaida. . . The Islamic International Brigade (IIB) was founded and led by Shamil Salmanovich Basayev (deceased) and is linked to the Riyadus-Salikhin Reconnaissance and Sabotage Battalion of Chechen Martyrs (RSRSBCM). . . and the Special Purpose Islamic Regiment (SPIR). . . 
On the evening of 23 October 2002, members of IIB, RSRSBCM and SPIR operated jointly to seize over 800 hostages at Moscow’s Podshipnikov Zavod (Dubrovka) Theater. 
In October 1999, emissaries of Basayev and Al-Khattab traveled to Usama bin Laden’s home base in the Afghan province of Kandahar, where Bin Laden agreed to provide substantial military assistance and financial aid, including by making arrangements to send to Chechnya several hundred fighters to fight against Russian troops and perpetrate acts of terrorism. Later that year, Bin Laden sent substantial amounts of money to Basayev, Movsar Barayev (leader of SPIR) and Al-Khattab, which was to be used exclusively for training gunmen, recruiting mercenaries and buying ammunition.
The Afghan-Caucasus Al Qaeda “terrorist railway,” financed by Saudi intelligence, had two goals. One was a Saudi goal to spread fanatical Wahhabite Jihad into the Central Asian region of the former Soviet Union. The second was the CIA’s agenda of destabilizing a then-collapsing post-Soviet Russian Federation.
 
Beslan
 
On September 1, 2004, armed terrorists from Basayev and al-Khattab’s IIB took more than 1,100 people as hostages in a siege that included 777 children, and forced them into School Number One (SNO) in Beslan in North Ossetia, the autonomous republic in the North Caucasus of the Russian Federation near to the Georgia border.
 
On the third day of the hostage crisis, as explosions were heard inside the school, FSB and other elite Russian troops stormed the building. In the end, at least 334 hostages were killed, including 186 children, with a significant number of people injured and reported missing. It became clear afterward that the Russian forces had handled the intervention poorly.
 
The Washington propaganda machine, from Radio Free Europe to The New York Times and CNN, wasted no time demonizing Putin and Russia for their bad handling of the Beslan crisis rather than focus on the links of Basayev to Al Qaeda and Saudi intelligence. That would have brought the world’s attention to the intimate relations between the family of then US President George W. Bush and the Saudi billionaire bin Laden family.
 
On September 1, 2001, just ten days before the day of the World Trade Center and Pentagon attacks, Saudi Intelligence head US-educated Prince Turki bin Faisal Al Saud, who had directed Saudi Intelligence since 1977, including through the entire Osama bin Laden Mujahideen operation in Afghanistan and into the Caucasus, abruptly and inexplicably resigned, just days after having accepted a new term as intelligence head from his King. He gave no explanation. He was quickly reposted to London, away from Washington.
 
The record of the bin Laden-Bush family intimate ties was buried, in fact entirely deleted on “national security” (sic!) grounds in the official US Commission Report on 911. The Saudi background of fourteen of the nineteen alleged 911 terrorists in New York and Washington was also deleted from the US Government’s final 911 Commission report, released only in July 2004 by the Bush Administration, almost three years after the events.
 
Basayev claimed credit for having sent the terrorists to Beslan. His demands had included the complete independence of Chechnya from Russia, something that would have given Washington and the Pentagon an enormous strategic dagger in the southern underbelly of the Russian Federation.
 
By late 2004, in the aftermath of the tragic Beslan drama, President Vladimir Putin reportedly ordered a secret search and destroy mission by Russian intelligence to hunt and kill key leaders of the Caucasus Mujahideen of Basayev. Al-Khattab had been killed in 2002. The Russian security forces soon discovered that most of the Chechen Afghan Arab terrorists had fled. They had gotten safe haven in Turkey, a NATO member; in Azerbaijan, by then almost a NATO Member; or in Germany, a NATO Member; or in Dubai–one of the closest US Allies in the Arab States, and Qatar-another very close US ally. In other words, the Chechen terrorists were given NATO safe haven.
 
 
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.

Are We in Another Credit Bubble? And Is It Different than Before?

By: Elliott Wave International

Sunday, May 24, 2015


Part 1 of our FREE report on the recent build-up in credit includes a chart of U.S. corporate debt issuance since 1998 you don't want to miss

Whatever your politics, creed or nationality -- we can all agree that a huge catalyst for the 2008-9 global financial meltdown was the universal binge of bad credit.

A huge part of that bad-debt pile were the "don't-ask-don't-tell" high-yield bonds -- a.k.a. junk bonds -- which were used to fund a lot of things, including corporate takeovers.

You might still remember how, at the time, few saw any reason to question the upside potential of these lower-grade yet higher-yielding loan instruments. Here, the following articles from 2007 recapture the scene:
"We're in the thick of a period when debt is a good thing rather than a bad thing, at least in the corporate world. And the riskier the debt, the more investors want it.  
There is a self-sustaining cycle at work here. The global economy has been so strong in recent years that few companies, even those loaded with debt, have had trouble paying their obligations." (LA TIMES) 
"We say it isn't politically correct to call them junk bonds anymore. There's not a lot of downside risk because money managers burned in the dotcom era learned their less and portfolios aren't as risky as 10 years ago." (Associated Press)
The ensuing credit implosion systematically restored the political correctness of the word "junk," as high-yielding bonds plummeted in the worst debt crisis since the Great Depression.

Which brings us to the trillion-dollar question: What about now? Or, expanded in a handy bullet-point format, the same question may be phrased like this:
  • Has the world's leading economy learned its lesson?
  • Is the thirst for yield less than the need for caution?
  • Is the credit health of the United States different than before?
  • Is it different this time?
Well, the following chart from Elliott Wave International's May 2015 Elliott Wave Financial Forecast shows you that -- yes! The credit bubble underway in the United States today is different than the one that triggered the 2008-9 crisis.

It's bigger.
US Corporate Debt Issuance
"While the total value of investment-grade bond issuance surpassed $1 trillion in each of the last three years, the junk bond total more than doubled from the prior high in 2006 to more than $300 billion. 
"'Back in 2006/2007, 28% of debt being issued was B-rated,' says hedge-fund manager Stanley Druckenmiller. Today 71% of the debt that's been issued in the last two years is B-rated. So, not only have we issued a lot more debt, we're doing so with much [lower standards]. 
"The quantity and quality of bond issuance over the last three years signals the potential for a credit washout that is even more severe than that of 2008/2009."

Our new, May Financial Forecast goes on to explain why it is so with an equally shocking chart of U.S. consumer credit since 1980.

You can see that second chart in part 1 of our brand-new, 3-part report titled
"Credit Insanity: The Biggest Debt Bomb in History and the Fuse is Lit."