The Liquidity Time Bomb

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Nouriel Roubini

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MAY 31, 2015

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NEW YORK – A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.

 

Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the United States, quadrupling relative to the pre-crisis period. This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).

 

And yet investors have reason to be concerned. Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly. Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed Chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.

 

Likewise, in October 2014, US Treasury yields plummeted by almost 40 basis points in minutes, which statisticians argue should occur only once in three billion years. The latest episode came just last month, when, in the space of a few days, ten-year German bond yields went from five basis points to almost 80.

 

These events have fueled fears that, even very deep and liquid markets – such as US stocks and government bonds in the US and Germany – may not be liquid enough. So what accounts for the combination of macro liquidity and market illiquidity?

 

For starters, in equity markets, high-frequency traders (HFTs), who use algorithmic computer programs to follow market trends, account for a larger share of transactions. This creates, no surprise, herding behavior. Indeed, trading in the US nowadays is concentrated at the beginning and the last hour of the trading day, when HFTs are most active; for the rest of the day, markets are illiquid, with few transactions.

 

A second cause lies in the fact that fixed-income assets – such as government, corporate, and emerging-market bonds – are not traded in more liquid exchanges, as stocks are. Instead, they are traded mostly over the counter in illiquid markets.

 

Third, not only is fixed income more illiquid, but now most of these instruments – which have grown enormously in number, owing to the mushrooming issuance of private and public debts before and after the financial crisis – are held in open-ended funds that allow investors to exit overnight. Imagine a bank that invests in illiquid assets but allows depositors to redeem their cash overnight: if a run on these funds occurs, the need to sell the illiquid assets can push their price very low very fast, in what is effectively a fire sale.

 

Fourth, before the 2008 crisis, banks were market makers in fixed-income instruments. They held large inventories of these assets, thus providing liquidity and smoothing excess price volatility. But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market-making activity. So, in times of surprise that move bond prices and yields, the banks are not present to act as stabilizers.

 

In short, though central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action.

 

As a result, when surprises occur – for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up – the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast. Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales.

 

This combination of macro liquidity and market illiquidity is a time bomb. So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases.

 

This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.

 

 

Read more at http://www.project-syndicate.org/commentary/liquidity-market-volatility-flash-crash-by-nouriel-roubini-2015-05#9dhHOxYXmyrjHBeK.99
 

China’s stockmarket bubble

A goring concern

The economic dangers of China’s manic bull market

May 30th 2015
Shanghái
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THE slowdown in China’s property market has been cruel to makers of wooden flooring. After double-digit growth for much of the past decade, sales have slumped. Kemian Wood Industry, which used to boast of the quality of its composite floorboards, took radical steps to deal with the downturn. It switched its focus to online gaming and changed its name. After its rechristening as Zeus Entertainment in early March, its share price doubled in short order. This past week, though, its transition plan hit a snag. CCTV, the state broadcaster, accused it of being one of a series of companies that are “fabricating themes and telling stories” to inflate their share prices.

Zeus Entertainment denies the allegations. But the wider trend is clear. At least 80 listed Chinese firms changed names in the first five months of this year. A hotel group rebranded itself as a high-speed rail company, a fireworks maker as a peer-to-peer lender and a ceramics specialist as a clean-energy group. Their reinventions as high-tech companies appear to have less to do with the gradual rebalancing of China’s economy than with the mania sweeping its stockmarket.

The Shenzhen Composite Index, which is full of tech companies, has nearly tripled over the past year. Even frothier is ChiNext, a board for startups that is now valued at 140 times last year’s earnings (see chart 1). A multiple of 50 would already be very optimistic for even the whizziest firms. ChiNext is supposed to be China’s answer to NASDAQ. It does indeed closely resemble NASDAQ—but as it was in 1999, just before the dotcom bubble went pop. There is no telling when the Chinese frenzy will end, but a sharp correction seems inevitable. Such a reversal would cast a long shadow over China’s economy.
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As in any bubbly market, there is a debate about just how inflated Chinese stock prices are. The average price-earnings (PE) ratio on the Shanghai Stock Exchange, home to the country’s biggest firms, is 23—lofty but not much higher than America’s S&P 500 share index. That, however, is a skewed picture. Banks have the heaviest weighting on the Shanghai exchange and they have been largely left behind by the rally. (That is a warning sign in itself since bank shares tend to track the broader economy.) The median share in Shanghai now has a PE of 75.

Chen Jiahe of Cinda Securities, a brokerage, calculates that nearly 85% of listed companies have higher valuations today than at the height of China’s stock bubble in 2007—which ended in a big bust. Global investors are not buying into the mania: the shares of companies listed in both Hong Kong and Shanghai are now 30% more expensive in the latter.

Examples of excess abound. A pet-food company trades on 221 times earnings, a sauna-maker on 285 and a manufacturer of fans on 732. Chinese stocks have long had a tenuous relationship with economic reality, but the current rally has gone to new extremes. Growth in the first quarter fell to 7% year on year, the weakest figure since 2009. And monthly data suggest that the slowdown has deepened in the second quarter. But stocks are still racing ahead (see chart 3). Almost 8m brokerage accounts were opened in the first quarter of 2015 alone (see chart 4).

A shift to monetary easing and fiscal stimulus—and expectations of more to come—help explain why the rally began. But the longer it continues, the more it looks like irrational exuberance.
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One common view about the bull run is that the government is behind it, and could bring it to a halt if it chose, just like flipping a switch. The truth is that even the Communist Party, though powerful, struggles to steer the stockmarket along its desired path. Official media did talk up shares as “cheap” in the early days of the rally, but the government had tried for years without success to breathe life into the previously torpid market, cutting stock-trading taxes and freezing new listings to limit the supply of shares. In recent weeks the balance of official rhetoric has started to turn against the market, highlighting the growing risks. The report by CCTV about companies “telling stories” followed a vow by the securities regulator to crack down on market manipulation. “It’s like crying wolf. Because there have been repeat warnings but few serious consequences, investors pay even less attention,” says Shao Yu of Orient Securities, a brokerage.

If the bubble does burst, it would undoubtedly hurt the Chinese economy. Leverage has played a big part in the rally: margin financing for share purchases has increased five-fold over the past year to more than 2 trillion yuan ($325 billion; see chart 2). Debt has also worked its way into the market through other channels such as “umbrella trusts”, which used to allow banks to lend to wealthy investors without encumbering their balance-sheets. Credit Suisse estimates that 6-9% of China’s market capitalisation is funded by credit, nearly five times the average in the rich world.

The presence of so much leverage means that the eventual correction is likely to be sharp as investors race to repay loans. This is new territory for China. When its last bubble burst in 2007, the government had yet to allow margin financing. “Now, the odds are that it will inflict a much bigger loss on households,” says Helen Qiao of Morgan Stanley, a bank.

Nevertheless, the immediate damage from a crash should be manageable for China. The free-float capitalisation of the stockmarket is just about 40% of GDP; in rich countries it is typically more than 100%. ChiNext accounts for less than a tenth of GDP. Moreover, the rally has been less helpful for the economy than often imagined. A sustained slowdown in retail sales indicates that there has been little positive wealth effect from rising share prices. Some households may have even held off from buying things to put more into the market. The corollary is that a market tumble need not spell too much gloom, at least in the short term.

The longer-term repercussions of the mania are more worrisome. After the 2007 crash, investors lost faith in China’s stockmarket for years. Equity issuance slowed to a crawl. Companies had little choice but to tap banks for funding, one of the reasons why Chinese debt levels soared from 150% of GDP in 2008 to more than 250% today. Many hoped that the current rally would put China’s financial system on a better footing by allowing companies to raise more cash through equities and reduce their reliance on debt. This is only beginning: share issuance is stronger this year but still accounts for just 4% of corporate financing. If the rally turns to rout, it would undermine that shift.

“Regulators want a slow bull market,” says Larry Hu of Macquarie Securities. Instead, they have a raging beast.

Defiant Tsipras threatens to detonate European crisis rather than yield to creditor "monstrosity"

The Greek prime minister has accused Europe's leaders of 'issuing absurd demands'

By Ambrose Evans-Pritchard

7:39PM BST 31 May 2015




Greek premier Alexis Tsipras has accused Europe's creditor powers of issuing "absurd demands" and come close to warning that his far-Left government will detonate a pan-European political and strategic crisis if pushed any further.

^{Alexis Tsipras made his thoughts known in a piece for Le Monde, the French newspaper}


"If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”," he said.

The words originally come from John Donne's Meditation XVII, with its poignant reminder that the arrogant can be blind to their own demise. "Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him," it reads.

Mr Tsipras's article is a thinly-disguised warning that Greece may choose to default on roughly €330bn of debt in the biggest sovereign default ever, and pull out of the euro, rather than breech its key red lines.

The debts are mostly to European official creditors and the European Central Bank. The situation has become critical after depositors withdrew €800m from Greek banks in two days at the end of last week, heightening fears that capital controls may be imminent.

Mr Tsipras's choice of words also implies that Greece may turn its back on the Western security system, presumably by shifting into the orbit of Russia and China.

The article comes as Panagiotis Lafanzanis, the energy minister and head of Syriza's powerful Left Platform, returns from Moscow after securing a provisional deal with Gazprom to build part of the "Turkish Stream" gas pipeline through Greece.  

The Russian energy minister, Alexander Novak, said over the weekend that the project has been agreed in principle. " We are now discussing technical details," he said.

Greek officials have told The Telegraph that Russia is offering up to €2bn in up-front credit to sweeten the arrangement, though it will not be a state-to-state transaction.


^{Mr Tsipras visited the Kremlin in April, where he met with Vladimir Putin}

Mr Lafanzanis said Greece is taking further steps to join the so-called BRICS bank, a multilateral lender created by Russia, Brazil, China, and South Africa. He hinted that this may unlock some form of "financial support" for Greece very quickly.

It is unclear whether the tough language from Athens is yet more brinkmanship as the Greek crisis comes to a head in June, or whether the Syriza movement is no longer counting on any substantive shift by the creditor bloc, and has resolved to go down fighting whatever the consequences.

It follows days of impassioned debates with the party, with a growing number of MPs berating Mr Tsipras for drawing out the agony by raiding local government and pension funds. The policy is leaving Greece even more vulnerable if it is forced out of EMU in the end.

The Left Platform has called for a full "counter-attack" against the EU powers, laying out its inflexible terms in a new document. It demands a default on the debt and the "immediate nationalization of the banks with all necessary accompanying measures".

"What the ruling circles of the EU, the ECB and the IMF are ruthlessly and consistently aiming for in the last four months, is to strangle the economy, to milk the last euro from the country´s reserves and to push a vulnerable government into full submission and exemplary humiliation," it said.

Mr Tsipras was more diplomatic, but only slightly so. He said the creditor bloc was determined to "make an example out of Greece" so that no other country would be tempted to defy the austerity regime.

The Greek prime minister disputed claims by the EU-IMF 'institutions" that Syriza had failed to deliver on reforms, accusing that the inspectors of turning a "blind eye" to corrupt practices under the previous government when it served their interests.

The clash on labour rights is pivotal to the confrontation. Syriza has agreed to work with the International Labour Organisation on flexible work practices but says it will not abandon its core demands for full collective bargaining protection.

The arguments are likely to exasperate EU and IMF officials, who deny adamantly that they are pushing an ideological line or attempting to erode progressive labour laws.

Mr Tsipras appeared to acknowledge that there is little or no chance of reaching a deal with the official negotiators and technocrats. The matter has moved to a higher level and is at this point entirely political.

"The decision is now not in the hands of the institutions, which in any case are not elected and are not accountable to the people, but rather in the hands of Europe’s leaders," he said.

Greece, Argentina, and the Middle-Income Trap

Andrés Velasco

MAY 30, 2015
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Free exchange

A weighting game

Pacific trade talks expose the limits of economic modelling

May 30th 2015
    

THE Trans-Pacific Partnership (TPP), a putative trade agreement, would ease commerce between America, Japan and ten other countries that between them account for two-fifths of global GDP. But how beneficial would it be to these economies? Advocates claim it would boost their output by nearly $300 billion in a decade. Critics say it would make little or no difference.

The disagreement reflects the difficulty of gauging the impact of free-trade agreements. Almost all economists accept the benefits of free trade as laid out in the early 1800s by David Ricardo.

Countries do well when they focus on what they are relatively good at producing. But Ricardo looked at only two countries making two products, at a time when few non-tariff barriers such as safety standards existed. This renders his elegant model about as useful for analysing contemporary free-trade deals as a horse and carriage are for predicting the trajectory of an aircraft.

Instead, most economists use what is known as computable general equilibrium (CGE) analysis.

CGE models are built on top of a database that seeks to describe economies in full, factoring in incomes, profits and more. Researchers line things up so that the model yields the same output as a real benchmark year. Once that is achieved, they “shock” the model, adjusting trade barriers to see how outcomes shift, both immediately and over time.

There is much to recommend CGE. It is the only trade model broad enough to encompass services, investment and regulations, all of which lie at heart of the TPP debate. It also generates predictions that policymakers want: which sectors will do well and how incomes will change. But CGE has big drawbacks. First, it is dependent on data, which can be very patchy in some areas. Second, faulty assumptions can quickly lead forecasts astray.

Studies of TPP illustrate these strengths and weaknesses. The most influential, by Peter Petri, Michael Plummer and Fan Zhai, for the East-West Centre, a research institute, forecasts that the deal would raise the GDP of the 12 signatories by $285 billion, or 0.9%, by 2025. It is their numbers that America’s government cites when it says TPP will make the country $77 billion richer. Their model tries to avoid some of the common failings of CGE. Their assumptions are transparent, include a range of scenarios and are often conservative—for example, they expect only slow and partial implementation. That makes the results more credible.

Yet subjective elements of the model have a huge impact. The authors use a new approach to predict that more firms will become exporters as the costs of trade decrease. That may be an improvement over previous theories, which assumed a constant number of exporters, but this one tweak greatly changes results: it makes the benefits some 70% bigger, according to a study for Canada’s C.D. Howe Institute by Dan Ciuriak and Jingliang Xiao.

Some assumptions are also debatable. The researchers calculate that increased protection of intellectual property (IP) is beneficial for all countries. A review of studies of TPP funded by the British government, by Badri Narayanan, Mr Ciuriak and Harsha Vardhana Singh, questions that.
Stronger protection for IP should spur more investment by producers. But it can also raise costs for consumers beyond what is necessary to encourage innovation and slow the spread of technology to developing nations.

That also points to one of the many blind spots in CGE models. Most use figures from Purdue University’s Global Trade Analysis Project, the best database available. But since it was initially developed for agriculture, it is skewed. It has separate categories for raw milk and dairy products, but lumps pharmaceuticals into one overarching category for chemicals—a problem for models since TPP deals extensively with drugmakers’ IP. Given the uncertainty, Messrs Ciuriak and Xiao exclude any impact from enhanced protection of IP. They also use a more conventional model for exports.

They calculate that TPP will raise the GDP of the 12 countries by just $74 billion by 2035, a mere 0.21% higher than baseline forecasts. Others see an even smaller impact. In a paper for the Asian Development Bank Institute, Inkyo Cheong forecasts that America’s GDP will be entirely unchanged by TPP.

Why bother?

 

That raises the question of whether TPP is worth pursuing at all. As complex as the CGE studies are, they are just models, peering into the future through a haze of assumptions. It is thus important to buttress them with studies of completed deals. The Asia-Pacific region is an ideal laboratory because it went from five free-trade agreements in 1990 to more than 200 in 2015. A new Asia-Pacific Economic Cooperation study finds that, in the five years after an agreement, participants’ exports increased on average by nearly 50% relative to the five prior years. The researchers then control for factors such as GDP and distance, isolating free-trade deals as a variable. Those with the biggest impact share certain features: they have more members, bring together developed and developing economies, and aim at non-tariff barriers as well as tariffs.

This suggests that the gains to be had from freeing trade, even if diminishing, are far from exhausted. But that does not necessarily make TPP the right way forward. Almost all studies agree that its principal limitation is size: it is not big enough. Specifically, the exclusion of China is costly. The Petri study concludes that a more inclusive Pacific free-trade deal with weaker rules on state-owned firms and intellectual property would lift income gains for the original 12 TPP members, including America, to $760 billion—more than double the boost from TPP. Such precise CGE forecasts ought to be taken with a pinch of salt. But the moral is clear enough. The objective should be to bring more countries into the tent, not to push for overly strict rules.

Gold And Silver - Charts Only

By: Michael Noonan

Sun, May 31, 2015
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Inflation Is Sending Some Mixed Signals. What Will The Fed Do Now?

by: Jeffrey Laverty            
             

Summary

• Inflation is sending us a few mixed signals.
• Core CPI shows one thing while the Implicit Price Deflator reveals something quite different.
• Does the Fed move ahead regardless of where inflation may be?

It's no secret that Dr. Janet Yellen is facing what could very well be the most important decision of her career. The Fed funds rate has been pegged to a zero bound rate of between zero and 25 basis points since December 16, 2008. And not surprisingly, the pressures are mounting for the Fed to just do "something".

As one would expect, investor opinions differ widely on what the Fed will do or even should do.

Some investors would argue that the economy is not ready to support a higher interest rate environment. Others would remind us that the stronger US dollar has created a problem for all of the internationally diversified companies who have reported some very disappointing results for the first quarter. And of course, because longer-term interest rates around the world remain at historical lows, long-term rates in the U.S. may not perform the way the Fed would like to see. What's more? There are many investors out there (including us) who simply wish the Fed would just get us off of the zero bound rate policy. We're no longer in a crisis, nor are we in a recession. There is modest growth in the economy, and it makes no sense to remain with the 0- bound interest rate policy.

While all of the debating continues on, we believe that there is also some confusion about what the level of inflation really is at this point. Aside from the usual skeptics who claim that the traditional inflation metrics are deeply flawed, recent data seems to be sending some mixed signals between the three primary measures of inflation.


Figure 1 - Headline CPI Inflation

(click to enlarge)

The headline numbers for the Consumer Price Index have always been treated like an "orphan" index. It contains all of the factors which economists at the Bureau of Labor Statistics believe to be the most relevant, and the weightings of the various components are designed to reflect the appropriate mix of consumer spending habits. Indeed, housing accounts for the largest weighting at 41.4% of the index.

Transportation and Food, meanwhile, represent 16.4% and 13.9%, respectively. We also note that total energy use represents 9.0% of the total CPI weightings including 5% for motor fuels and 4% for home energy expenditures. What's more? Both of these weightings are incorporated in the housing segment. Overall, we think it's a pretty fair representation of the typical consumer's monthly budget, and therefore, headline CPI inflation deserves to be monitored as closely as any other inflation barometer.

The catch here is that food and energy prices (which account for nearly 23% of the CPI) are far more volatile than the other 77% of the CPI. As a result, investors have been conditioned to ignore the headline number even though it contains some very useful information. Indeed, 0^ inflation for the past four months seems quite relevant to us.


Figure 2 - Core CPI Inflation

(click to enlarge)

Within the investor class, the Core CPI represents the most widely followed measure of inflation.

Because the BLS also likes to exclude the volatile food and energy components, we get to see a more stable picture of inflation trends. Whether this is a more accurate representation of price inflation is a matter of debate. Many investors, in fact, are sharply critical of this particular index. They argue that Core CPI is a perfectly acceptable measure of inflation as long as you don't need to eat, drive a car or heat your home. Nevertheless, most people rely on the Core CPI and generally accept its various shortcomings.

If we look closely at the last 12 to 18 months of data, there seems to be a stabilization of sorts in and around 1.6% to 1.8%. However, there is little to suggest that Core CPI is on its way to 2%.

If Core CPI was the Fed's primary measure of inflation, then we would start handicapping the odds for a hike in Fed Funds for later this year. However, as the Fed constantly reminds us, they are data driven. So naturally, the Fed looks at every inflation indicator that it can find.


Figure 3 - The Implicit Price Deflator

(click to enlarge)

While most investors continue to track the Core CPI as if it were the only inflation indicator that matters, the Fed has long preferred the Implicit Price Deflator (IPD). This indicator, which is produced by the Bureau of Economic analysis, actually incorporates all goods and services, unlike the CPI which only includes a basket of goods and services. With a comprehensive view of inflation, it is little wonder the Fed takes the IPD rather seriously.

As we illustrate in Figure 3, the Implicit Price Deflator took a dive in the first quarter of 2015, falling to a level of only 0.88% versus the 1.25% reading for Q4 2014. To be sure, as a comprehensive indicator, the IPD incorporates some exposure to both food and energy. But when Headline CPI has stabilized over the past four months, it's quite puzzling that the IPD would come under such pressure at this juncture.

So at this stage of the cycle, there seems to be some real confusion about where inflation really stands. Headline CPI data tells us that inflation has been near zero for the past several months.

Core CPI data, meanwhile, tells us that inflation is beginning to stabilize in a range of 1.6% to 1.8%. The Implicit Price Deflator, on the other hand, suggests that inflation has not stabilized at all. And because the IPD is every bit as important to the inflation discussion, it's not clear to us right now why the recent data has not raised more than a few eyebrows. Either way, we do not believe that Dr. Yellen & Co. would simply ignore the Implicit Price Deflator just because it's sending a different message.

We believe that Janet Yellen really wants to lift the Fed Funds rate up and off of the zero-bound range. However, a number of confusing signals out there continue to stymie the Fed's decision making process. The Dollar is too strong. Or the economy is too weak. Greece is threatening to default. And of course China's economy is slowing down. And now the long-trusted Implicit Price Deflator is declining while the Core CPI may be stabilizing. From the Fed's perspective it's just too confusing.

Even if the Fed raises rates later in 2015, we seriously doubt that they would then embark upon a 2-year campaign of constant rate increases. We think the Fed is far more likely to raise rates in a slow and deliberate manner. Every Fed move will likely be analyzed in excruciating detail, and they won't raise rates again until they are confident the capital markets can withstand the tightening of monetary policy. Dr. Yellen & Co. is not looking to "normalize" equity valuations.

Nor is the Fed looking to invert the yield curve. We think the Fed's mission here is to figure out what constitutes the "New Normal" for a stable interest rate environment.

The Bottom Line

It's a sure bet that the markets will sell off the moment a Fed rate hike is announced. Equities will take a hit and global bond yields will rise. And when all is said and done, people will eventually realize that the entire debate surrounding the Fed's initial rate increase has been little more than a ridiculous distraction. Our Leading Indicators continue to suggest that the economy is more likely than not to maintain some forward momentum. The Fed is going to remain extremely accommodative for the foreseeable future. Building permit data continues to improve, albeit at a glacial pace.

Manufacturing data from the ISM also continues to provide positive indications for new orders.

Even the late-cycle indicator of commercial loan growth is on the right track.

We like equities here. And we'll like them even more when the next correction comes along. If Greece manages to remain solvent we'll have plenty of other catalysts to watch for, including the Fed's initial rate hike. As if anyone needs reminding, we remain in a Secular Bull Market which provides investors with all the confidence they need to "buy on the dips".

From a technical perspective, recent Bloomberg data tells us that just over 50% of all NYSE listed stocks are trading at or above their 200 day moving averages. This tells us that the ongoing new highs in the market are real, and that the market is not being held up by only a few over-priced momentum stocks. Even though people like to complain about the lofty valuations, the market remains fairly well supported right now.

Evolution’s New Frontiers
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 .Tomoko Ohta
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 .MAY 27, 2015

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May 31, 2015 5:19 pm

American socialism’s day in the sun

Edward Luce

Popularity of the more radical Democrat Sanders is dragging Clinton to left in presidential race

 

 

©Matt Kenyon

 

 

Leftwing politicians are in electoral retreat across most of the western world. The one exception is the United States. At 15 per cent in the Democratic polls, Bernie Sanders, the senator from Vermont, is riding higher than any US socialist since Eugene Debs ran for the White House a century ago.
 

The fact that Mr Sanders has very little chance of unseating Hillary Clinton is beside the point.

His popularity is dragging her leftward. If he flames out, other left-wingers, such as Martin O’Malley, the former governor of Maryland who entered the race at the weekend, are ready to pick up the baton.

Elizabeth Warren, the populist Massachusetts senator, will continue to prod Mrs Clinton from outside the field. The more Mrs Clinton adopts their language, the harder it will be for her to reclaim the centre ground next year. Yet she is only following the crowd. A surprisingly large chunk of Democrats are happy to break the US taboo against socialism.

 

To most students of US politics, the phrase American socialism is an oxymoron — like clean coal or the Bolivian navy. A century ago, Werner Sombart, a German scholar, asked “Why is there no socialism in America?” It was a question that confounded Marxists. As the most advanced capitalistic society, the US was most ripe for a proletarian revolution, according to their teleology.

Yet the US refused to live up to its role. Europe’s finest intellectuals would have done better to have listened to the Irish immigrant in 1893 who on landing at Boston docks proclaimed: “If there’s a government here, I’m agin it.” They might also have read the first three words of the US constitution: “We the people”. For all the crimes committed against Native and black Americans, the US republic came into being without an aristocracy or feudal serfdom. It was born a middle class country with equality of opportunity as its creed. That made it a radically different place to the old world it had left behind.

 

Such differences are no longer obvious. No one, including Mr Sanders, is talking about nationalising chunks of the US economy. Yet his policies are radical by American standards. He wants a single-payer healthcare system, along the lines of Canada, or the UK. He would abolish tuition fees for instate higher education. He would drive big money out of US politics, redistribute income, mandate paid holidays and increase social security benefits. He would also break up the “too big to fail” Wall Street banks. “Are we prepared to take on the enormous political and economic power of the billionaire class,” asks Mr Sanders, “or do we continue to slide into . . . oligarchy?”

 

A highly energised minority of Democrats are responding to his message. Mr Sanders raised $1.5m from small donors within 24 hours of his launch in early May. Although Mr Sanders is trailing far behind Mrs Clinton, his support exceeds that of almost any candidate in the Republican field. Is it a temporary protest vote? Or should Mrs Clinton’s donors start to worry?

 

The answer to the first question will come when Democrats hold their first presidential debate.

As a plain talker with an authentic personality, the septuagenarian Mr Sanders could strike an unflattering contrast to Mrs Clinton. Because Mrs Clinton is so strongly associated with dynasty and wealth — the Clintons earned more than $25m in speaking fees since the beginning of 2014 — she will feel all the more need to appropriate Mr Sanders’s rhetoric. But that will risk making her seem even less authentic. A majority of the US public already says they find Mrs Clinton untrustworthy. Mr Sanders will not become the 45th president of the US.

But he could fatally wound Mrs Clinton’s chances. So, too, could Mrs Warren.

 

The answer to the second question is yes — Mr Sanders is no flash in the pan. Socialism found no audience in the US because most Americans felt they were middle class. High rates of social mobility gave most people the sense that their society was exceptional — and rightly so. As Richard Hofstadter, the US historian, said: “It has been our fate as a nation not to have ideologies but to be one.”

That is now in question. As recently as 2008, 63 per cent of Americans identified as upper middle or middle class. That has fallen to 51 per cent. Meanwhile, the share of Americans who self-identify as “working and lower class”, according to Gallup, has risen from 35 per cent to 48 per cent since 2008.

 

Perhaps fittingly, the share of Americans who identify as upper class is 1 per cent. That number hasn’t changed. But the belief that they are rigging the system is now mainstream.

 

To be clear, I am not forecasting a red dawn in the US. It is hard to imagine even a small portion of Mr Sanders’s agenda being enacted. But the rise of the Democratic left is every bit as real as the Tea Party’s surge among Republicans. Until recently, political scientists talked of “asymmetric polarisation” — meaning Republicans were moving more to the right than Democrats were moving left. Now Democrats are catching up. Meanwhile, more and more Americans profess intolerance for other people’s political beliefs. Elections are generally won in the centre. But it is smaller than it used to be. By US traditions, next year’s election is likely to present an unusually stark clash of ideologies.

Whatever else he does from here, Mr Sanders has already ensured that.

The Virtues of Corruption

After fruitless attempts to work against patronage systems in Iraq and Afghanistan, the U.S. ended up bankrolling the patrons.

By Mark Moyar

May 31, 2015 4:32 p.m. ET