Markets Insight

August 31, 2015 10:13 am
Central bank monetary arsenal is increasingly ineffective
Structural forces limiting growth and inflation are not being addressed
“Don’t fight the Fed” is a key commandment for every trader on Wall Street. Underlying it is the assumption that central bankers rule financial markets and can move prices, wiping out anything in their way. The recent Chinese stock market rout and the global sell-off that followed have called this dogma into question.

In an attempt to boost confidence and prop up share prices, Chinese authorities cut interest rates and bank reserve requirements, eased regulation on broker accounts and bought stocks.
But despite the extraordinary effort, they lost control. Markets have now stabilised, yet one question remains: are central bankers running out of ammunition and credibility?

Several signs suggest loose monetary policy is increasingly proving ineffective, and central banks are failing to generate enough cyclical upswing to win against the structural forces constraining growth and inflation. Monetary stimulus alone cannot fix debt overhangs, low productivity, persistent unemployment, stagnant demographics and a lack of reforms and fiscal stimulus.

In the US and UK, where quantitative easing is deemed most successful and interest rates are expected to be lifted sooner than anywhere else, wage growth remains weak despite rising GDP growth and falling unemployment. Companies and households, which reduced excess debt during the crisis, are starting to borrow again. Nearly a quarter of mortgage borrowers in Britain are taking on loans of four times their gross income, despite the red flags raised by the Bank of England. In both countries the recovery appears deeply uneven, as financial centres like London or New York pull further ahead of other areas.

The eurozone faces more complex challenges. The rebound generated by the European Central Bank’s QE programme in the first quarter is losing momentum and inflation expectations are almost back to where they were before QE was announced.

The transmission of credit to small and medium-sized firms remains impaired. Banks are still deleveraging, and with €1tn of non-performing loans on their balance sheets, or more than 10 per cent of GDP, they are hardly able to lend.
The good news is that policymakers are moving in the right direction by cleaning up banks, harmonising regulation and deepening capital markets. But this will take years. Meanwhile, fiscal stimulus remains insufficient and the Juncker plan for investment is still in its infancy.

China’s situation is perhaps the most alarming. Chinese authorities have implemented the most aggressive multi-pronged stimulus plan globally. Yet, reform efforts aimed at transforming China’s growth model to a more balanced mix of consumption and production remain unclear.
On the one hand, the government has tightened regulation on shadow banks and local governments, both key drivers of excess investment in real estate. On the other hand, easy policy is fuelling even larger debt overhangs: corporate, household and local government debt has doubled since 2007 to more than 200 per cent of GDP.

Banks that were cleaned up and recapitalised are now seeing bad debts rising again, as property prices keep falling in peripheral cities. While authorities still have dry powder available to soften the landing, a failure to reduce excess industrial capacity and address debt overhangs may result in deflationary pressures and larger economic losses down the road.

What should central bankers do? Many are calling for the Federal Reserve to delay its planned 2015 interest rate lift-off. The reality is that, like other central banks, the Fed does not have much choice.
Raising rates this year may safeguard its credibility, but inflation is falling and the chances of a policy mistake are rising. This makes any path to normalisation limited and shortlived.
Monetary stimulus kick-started a recovery in the US and the UK and bought the eurozone time to implement reforms. But it is not sufficient for a durable recovery. The solution is a co-ordinated government effort to address the structural constraints to growth and inflation. Without this, policymakers will keep using the same ineffective monetary anaesthetic against future crises.

A prolonged loop of loose policy carries dangerous side-effects for the economy and for society: potential asset bubbles, over-allocation of resources to leverage-heavy industries and rising inequality. Central bankers increasingly appear to be parading in the emperor’s new clothes.

Alberto Gallo is head of macro credit research at RBS

08/31/2015 05:51 PM

Dark Germany, Bright Germany

Which Side Will Prevail Under Strain of Refugees?

Photo Gallery: Bright Germany, Dark Germany                      
Germany is experiencing an unprecedented influx of immigrants who will fundamentally change the country. They represent a burden, but also a chance to create a New Germany, one that is more cosmopolitan and generous. By SPIEGEL Staff

Anger is in the air. Angela Merkel has come to Heidenau and the locals are lined up to see her.

But it is anything but a friendly welcome: It is a crowd full of hate. Some call out: "Traitor to Your People!" Others yell "We Are the Pack," a reference to Deputy Chancellor Sigmar Gabriel's strong condemnation of right-wing, anti-refugee demonstrators.

It is the pride of idiots. After the chancellor disappears into the former building supplies store, where 400 refugees have found shelter, the residents of the small Saxony town begin talking about the outsiders who have become their temporary neighbors.

"Did you see the young men? Full of hormones and with nothing sensible to do. They can't help but get dumb ideas," says one tanned pensioner wearing a bike helmet. A woman nods and says she no longer allows her granddaughter to walk past the building supplies store alone.

A policeman with foreign features is standing in front of the villagers wearing a firearm and a baton, but his face is friendly. Eventually, he joins the discussion. "I was born in Germany in 1980, but my parents are from Afghanistan," he says. "They came to escape the war with the Russians." His German is flawless. The emblem of the Lower Saxony police force is displayed prominently on his breast. The Saxons around him listen closely. And are amazed.

"My father was a teacher in Afghanistan and my mother worked in the technical field," the policeman says. "But of course they could no longer practice their professions here." The young man speaks calmly, but insistently, looking at the people behind the police barricade directly in the eyes. He declines to give his name -- not out of fear, but because he doesn't want to speak of his political viewpoints while in uniform. The man with the Afghan parents has completely internalized Germany's civil servant principles.

The Heidenau residents say nothing; their enmity goes silent for a short moment. For the first time all day.

Germany, in this late summer of 2015, can be a confusing place. There are migrants in uniform who have to protect the chancellor, herself from East Germany, from an eastern German mob.

The attacks on refugee hostels in Germany have reached a shocking level this year. By July 6, there were fully 199 of them, and the attacks have shown no signs of stopping. At the same time, though, Germans seem more willing to help than ever before. They visit refugee hostels, bringing along clothes and toys. They cook together with the Syrians and Sudanese. They invite migrant boys to join the football teams where their own children play.

Which Germany will prevail? The Germany of racist chants from the roadside? The Germany of rioters and drunken rock-throwers? "Dark Germany," as President Joachim Gauck calls it?

Or will it be the new, bright Germany, represented by the young policeman with his roots in Afghanistan? Will Western Europe ultimately prefer to allow the refugees to die in trucks rather than to open the door to the desperate? Or will Germany rejoice in helping and in allowing the refugees to take part in the unbelievable prosperity that the republic has enjoyed in recent decades?

Germany has always harbored its illusions about migrants. In the 1960s, it was said that the workers brought in from Italy and Turkey were only guests in the country, helping hands on the assembly lines of Bosch and Daimler. Then, when they stayed and their children sat next to German kids in schools and Turkish vegetable stands sprung up on every street corner, the overwhelming majority of German policymakers continued to refuse to identify Germany as a country of immigration.

Is a new lie now being told today? Germany's political leadership still hasn't made up its mind and seems simultaneously tentative and courageous. It is hard to know in which direction it will end up going. German Interior Minister Thomas de Maizière long acted as though the problems were merely administrative in nature.

But there are rays of hope. After days of silence, the chancellor visited the refugee hostel in Heidenau that were the target of right-wing protests last weekend. Her deputy chancellor, Gabriel, had earlier this year voiced understanding for the xenophobic protests of the Pegida movement, known by its full name as Patriotic Europeans against the Islamization of the Occident. This time around, though, he didn't mince words. The protesters, he said, were "a pack, a mob" that "should be locked up."

But how long will this consensus, this alliance of reason, hold up? That's just one of the many questions that must now be addressed. As many as 800,000 refugees and migrants may arrive in Germany this year, according to Interior Ministry forecasts. And even if we don't really know how things will develop in coming years, one thing is certain: The numbers aren't likely to drop appreciably. The civil war in Syria grinds on, there is no end in sight to terror in Iraq, and the situation in Eritrea isn't likely to improve any time soon, to name just a few significant drivers of migration.

It is also certain that the newcomers will change our country. Germans have only recently become used to the idea that they live in a country of immigration and now, the next illusion is being destroyed: that there is such a thing as controlled immigration. It isn't just the best minds that are coming to us; it is people fleeing Assad's barrel bombs and Islamic State brutality.

They are running for their lives, whether they are illustrious or illiterate.

The good news is that most Germans don't have a problem with this. Sixty percent are of the opinion that the country can absorb the huge numbers of refugees currently arriving. And a new form of civility is developing, one that isn't just being driven by pricks of conscience and the weight of the past. Rather, it is fueled by the joy of doing good. But how long will it last?

During the World Cup in 2006, Germany presented itself as a joyful country. Finally the world liked the Germans. But it was an easily earned affection. A bit of good weather and a few people waving flags for football instead of for fascism was enough.

Now, though, the situation is a different one. The refugees are going to be a burden on the country; that much is clear. They will move into apartments that are already in short supply in some cities. They will present a challenge to teachers, because children who speak no German will enter the school system. This will not be the kind of summer fairy tale that 2006 was.

This new Germany will demand a fair amount from its citizens. But it also represents an opportunity. The refugees are mostly young, whereas Germany is rapidly aging. At the moment, the vast wave of desperate newcomers is dividing the European Union, but it also presents a chance for the community to find a new identity. It could also provide further proof that German democracy works even in moments of great difficulty and challenge.

But what must be done for the positive to prevail? And how might the country -- the destination of dreams for hundreds of thousands, if not millions, of refugees -- be changed?


Günther Schulze has two mobile phones. One rings every couple of minutes while the other receives an unbroken stream of emails. A woman has a mattress to donate, 200 centimenters by 90 centimeters, but it has to be picked up. Another is collecting school bags: "How many do you need?"

A third writes in with the information that the publishing house he works for has just made its online Arabic-German dictionary available free of charge. Schulze says he could spend the whole day writing answers. And he would like to send thank you notes to everybody. But he is starting to worry that, if he did, he would no longer have enough time to take care of his real work.

One year ago, the Willkommensbündnis für Flüchtlinge (or Welcoming Alliance for Refugees) was established in the upper middle-class Berlin quarter of Steglitz-Zehlendorf. Some 300,000 people live in the district along with, as of recently, a few hundred refugees divided up among five shelters. More than 1,000 people support the initiative with 300 people volunteering their time to help the newcomers with bureaucratic formalities or to collect donated clothing for them.

It is just one example of a new grassroots movement of a kind never before seen in Germany.

"At the beginning of the 1990s, there was a wave of people willing to help the refugees who were coming to the country to escape the war in Yugoslavia," says Olaf Kleist, a research fellow at the Refugee Studies Center at Oxford University. "But it wasn't nearly this big or this broad."

It is a movement from the center of German society. But it is one not focused inward, but outward, toward those who are now arriving in the country. "It is a clear indication that the German society is prepared to change. It is becoming more curious and open to novelty," Kleist says.

Gaby Engelmann, for example, became involved because she found the protests against a refugee hostel in the Berlin quarter of Hellersdorf to be so insufferable. She got in touch with the Willkommensbündnis and initially helped by distributing clothing before another helper asked her to accompany a refugee on a visit to the authorities. Her calendar entry for that February day read "10:00 a.m. Syrian." Today, she sees that Syrian almost every day. "My son has taken to calling him 'half-brother,'" the 69-year-old says. She has accompanied him to various agencies and to the health insurance company. She demanded a credit rating for him from the German agency responsible and even called the German Embassy in Beirut so that his family might join him more quickly.

"I suddenly feel happy," Engelmann says. "I am becoming acquainted with other cultures, I have improved my English and I have many new friends."

The readiness to help is particularly large among pensioners like Schulze and Engelmann. They have plenty of time and many of those in their age group are looking for something to give their lives meaning after all those years in the labor market. They see Germany as an island of prosperity and feel morally obliged to help.

Such good intentions will permanently change Germany. Helpers, and society at large, are changed by their interactions with the refugees. Contact with people from other cultures becomes more normal and tolerance rises as a result. A new view is created of the foreigners coming to the country: a view free of prejudice, but also free of illusions.

But volunteer work cannot completely supplant the state. Günther Schulze, founder of the Willkommensbündnis, sometimes feels abandoned. If citizen initiatives are going to take on tasks that should really be fulfilled by the state, then they should at least get financial support for doing so, Schulze demands. Sometimes, it would also help if the bureaucrats were a little less zealous in their work. One thing refugees can be sure of as soon as they have found their first apartment in Germany: As absurd as it may sound, one of their first pieces of mail will be a letter demanding their contribution to Germany's public broadcasting system.


Something is changing. Alexander Gauland can feel it when he goes to his local bar in Potsdam.

People stop at his table to chat; some even want to sit down with him. They say things like: "It's good that you are tackling the issue of asylum-seekers." He has even had perfect strangers yell to him during his evening swim in a nearby lake: "Keep it up!"

Alexander Gauland, 74, is deputy head of the Alternative for Germany (AfD). The party began as an anti-euro organization, but Gauland was one of the first to nudge it towards being anti-foreigner as well, even if he would never say it quite like that.

"We will certainly continue to be needed," Gauland says, when asked if his party has a bright future ahead of it. "The Germans won't accept 1.5 million refugees. The mood will change.

When it does, you can only hope that people will vote for us instead of for the NPD," he adds, referring to the neo-Nazi National Democratic Party of Germany. Gauland sells himself as a savior of political honesty.

The AfD, he says, isn't afraid of talking about uncomfortable truths. If that is populist, he says, then he is happy to be given that label.

In the coming weeks, Gauland will demand that young Germans be given specialist training instead of taking in "foreign, unqualified people." He will demand that guards and police be better protected against violent conflicts among asylum-seekers. And, Gauland would "suspend the right to asylum if the refugee problem can't be solved in another way."

Gauland is at pains to appear the Prussian gentleman, an educated man in tweed who quotes the 19th century German author Theodor Fontane and greets women by kissing their hand.

But in the last Brandenburg state election, he won 12 percent of the vote -- on the strength of his campaign against a refugee hostel. He took part in the anti-Muslim demonstrations in Dresden organized by the xenophobic Pegida organization and professed to seeing only "completely normal citizens" there.

After a planned refugee hostel went up in flames in Nauen recently, Gauland blamed the politicians -- for not taking the worries of the populace seriously.

Is history repeating itself? In the 1990s, right-wing extremist parties were able to profit from the fear of an "asylum glut." In 1992, the right-wing nationalist party DVU landed in the Schleswig-Holstein state parliament with 6.3 percent of the vote and the nationalist-conservative Republicans got 10.9 percent in a state vote in Baden-Württemberg. That year, some 438,000 asylum-seekers arrived in Germany. This year, almost double that amount is expected.

But times have changed. Germans have become more cosmopolitan and their understanding for misery in the world, and for the motivations driving the refugees, has grown as a result.

Furthermore, many frustrated voters don't end up joining forces with the right wing. They simply don't vote at all.

Nevertheless, the refugee crisis is likely to influence the political decisions taken by many voters.

"The fears in the 1990s were similar to those of today," says Matthias Jung, head of the leading German polling agency Forschungsgruppe Wahlen. "It's just that the economic situation was much worse back then. There wasn't only the irrational fear of too many foreigners, but also the rational fear of unemployment." Many people, particularly in former East Germany, lost their jobs in the months and years after reunification. The right-wing at the time handed out leaflets reading: "Today, they are standing at your machine. Tomorrow, they'll be sleeping with your Christine."

More than 20 years later, the economic situation is better and fear of foreigners is less of a factor.

"Many voters doubt the abilities of policymakers," Jung says. They have the impression, he continues, that ministers, agencies and parliamentarians are helpless in the face of the inflow of refugees.

Which is why it is imperative that the burden of that inflow be more fairly distributed. That isn't populism. It is a dictate of rationality. In the first seven months of this year, 44 percent of the migrants arriving in Germany came from the Balkans. Their reasons for coming may be totally legitimate, but their home countries are free of both war and totalitarianism. The asylum applications of these people must be processed more rapidly. And they have to leave the country more quickly.

At the same time, with some 87 percent of them being accepted anyway, the asylum applications of Syrians could also be sped up. Since 2001, an EU guideline demands that help, free of bureaucracy, be offered to civil war refugees. But still today, the guideline would seem to exist only on paper.


On Monday, European Commission Vice President Frans Timmermans and European Commissioner for Migration Dimitris Avramopulos will leave the sterile hallways of their Brussels offices to take a personal look at the misery of the refugees in the port city of Calais, in northern France. The unofficial camps surrounding Calais have become a symbol for the failure of Europe's refugee policies.

"Is this Europe?" asks Ali, and gestures at a hovel made of plastic sheeting. Using a couple of twigs and a ball of paper, he lights a small fire between three rocks to cook some rice. Ali is a 29-year-old from the crisis region of Darfur in Sudan and is an engineer. On the way to northern France, he crossed the desert to Libya and then paid traffickers several thousand euros to bring him across the Mediterranean.

Here, on the English Channel, he is almost 5,000 kilometers from home and he still hasn't reached his goal. Like many of the more than 3,000 people in the "Jungle," as the camp is known, he wants to get to Great Britain. "I have friends in London," he says.

Every evening, Ali and his friends head out looking for a hole in the security fence protecting the Calais ferry port and the entrance to the Eurotunnel, like some gigantic prison. Every night, French police patrols with their dogs try to prevent the refugees from continuing on their dangerous journey. It has become a daily routine in the heart of Europe -- a routine that regularly results in injuries and even death.

Illegal camps like the "Jungle" shouldn't actually exist. Europe, an "area of freedom, security and justice without internal frontiers," according to the Lisbon Treaty, has joint standards pertaining to the housing of refugees. But the European rules have become fragile as a result of the hundreds of thousands of migrants crossing the borders into the EU.

Thus far, Europe has responded to the crisis with organized irresponsibility. Italy and Greece allow asylum-seekers to continue their journeys, despite the Dublin Regulation, which requires that refugees apply for asylum where they first enter the EU. It is a system that has allowed countries like Germany and France to ignore the true dimensions of the problem for years.

But there are plenty of other indications as well that the EU migration system is collapsing.

Hungary and Bulgaria, for example, are building border fences and Slovakia has said it only wants to accept Christian refugees, and not Muslims. Austria's government announced that it would cease processing new asylum applications. Great Britain intends to pass strict laws against illegal immigration.

Chancellor Merkel is concerned that the refugee crisis has the potential to destroy the European idea.

What, after all, are the wonderful ideals worth when all Europe is talking about is how to keep the desperate and rejected away? Recently, German Interior Minister de Maizière called into question one of the great achievements of united Europe: border-free travel in the Schengen area. As though such efforts would stop refugees like Ali.

The fire in Ali's hovel finally burns hot and the water on his cast-iron pot comes to a boil. The tent's plastic sheeting flaps as a column of black vehicles speeds down the pot-holed road nearby. They are officials who have come in advance of the approaching visits of senior European and French politicians.

It is often said that Europe grows in times of crisis. But that isn't how things currently look. On the contrary. It almost seems as though the refugee emergency is bringing out the worst in Europe: xenophobia, isolationism and the eternal argument about who is responsible. But the late summer of 2015 also offers the possibility of reflection. The refugees present Europe with the opportunity to show that it takes seriously the values spelled out in its treaties.

A good start would be an agreement by all member states on a fair refugee distribution plan so that countries like Italy and Greece, Germany and Sweden, are not forced to carry the lion's share of the weight. But the mutual distrust among Europe's heads of government has already become too great for such an agreement. Another necessity is the development of a common asylum policy. Even though the EU long ago agreed on a joint asylum system, the rules are applied differently in each country, which is one reason why Germany is such a popular destination country.

Europe's long-term goal, though, has to be that of fighting the causes of migration. Of course Europe won't be able to quickly impose peace on Syria or to transform Eritrea into a democracy. But at the moment, EU member states aren't even trying to look beyond the borders of Europe. EU countries agreed 10 years ago to increase their development aid to 0.7 percent of their gross domestic products.

But hardly any member states have achieved that goal.

Instead, the EU is planning new incentives to encourage African countries of origin to take back the refugees that Europe rejects. At the EU-Africa summit in Malta in November, the European Commission intends to offer €1 billion more for an EU-Africa trust fund -- but the money will only be provided in exchange for cooperation.


Is it naïve to tell the story of Bnana Darwish? Of course not all children from refugee families are such luminous examples as she is -- educated, cultivated, hungry for opportunity.

Darwish's father worked in Syria as a teacher of the Muslim religion and as a teacher trainer while her mother is a translator of English. At the end of 2012, the Darwish family had to flee from Damascus to Beirut due to the civil war. In spring 2014, they arrived in Baden-Württemberg as part of the contingent of Syrian refugees that Germany had agreed in 2013 to accept from Lebanon.

Bnana, 25, now lives in a house there with her father and four siblings. Her mother remained in Lebanon. Bnana's youngest brother is going to a college-prep high school and she herself got a scholarship, sponsored by the state and by the German-American Exchange Service (DAAD), to begin studying architecture at the University of Stuttgart in October.

It would be an exaggeration to proclaim Germany an integration success story because of Darwish, but it is still a positive example. One of the primary causes of the "parallel societies" that have developed in Germany is the lack of education. Immigrants who came to Germany in the 1960s and '70s tended to have limited education. The problem was made worse by Germany's refusal to provide training to the "guest workers." The country erroneously believed that the workers would leave again once they were no longer needed.

Now, Germany has a double opportunity. Not all of those currently coming are uneducated, particularly from countries like Syria, where the middle- and upper-classes are fleeing as well.

A study by the Nuremberg-based Institute for Employment Research found that 13 percent of new arrivals in 2013 had a university degree, with almost one in four having at least a high school diploma.

Still, the largest group of newcomers, some 58 percent, has no occupational training whatsoever. If the country wants to avoid the mistakes made in the past, these people must quickly be given training. That will be one of the largest tasks in the coming years.

Already, some politicians are complaining that schools don't have the capability to accept more refugee children. "Capacity has been reached," wrote Erfurt Mayor Andreas Bausewein this week, for example, in an open letter to the chancellor and to the governor of his state of Thuringia.

And the situation is indeed a serious one. The statistical office in the state of Baden-Württemberg just recently discarded its forecasts for the number of schoolchildren it expects to enroll during the next 10 years. Instead of a decline, the statisticians now expect to see significantly more pupils in the state's elementary schools. Similar adjustments are being made by other states in Germany, with Hamburg enrolling more school children for the coming school year than it has since 1983.

Still, it would be wrong to exclude refugees from the school system. If Germany wants today to avoid laying the groundwork for tomorrow's problems, then refugee children must be quickly allocated slots in German daycare facilities. Their right to a spot from the age of one is already written into German law, but in practice, municipalities often fail to create sufficient capacity.

Furthermore, the German school system needs thousands of new teachers to deal with the refugees. In the coming years, that effort will likely cost hundreds of millions of euros. Still, it would be money well invested. The German labor market, after all, is healthy.

"It is erroneous to believe that refugees could take jobs away from people," says Holger Bonin, labor market expert at the Center for European Economic Research. Hotels, restaurants, care homes and farmers: All are searching for workers.

But asylum laws still place hurdles in the way. To integrate refugees into the labor market more quickly, it is high time to eliminate laws that give German and EU citizens priority for job openings.

It is a highly bureaucratic form of discrimination that helps nobody. In practice, Germans don't want the kind of jobs -- in gastronomy, or harvesting asparagus -- that refugees are looking for anyway.

Furthermore, refugees in on-the-job training programs must be given the right to remain in Germany for at least three years after the completion of their apprenticeships. The reason? Many employers don't see the value in training refugees if there is a risk they might have to leave the country as soon as they are finished.


Oliver Junk's climb to nationwide fame began on Nov. 19, 2014. That was the night that Junk, the mayor of the central German town of Goslar, held a speech with a surprising conclusion, at least for a conservative Christian Democrat like himself. "We can only survive with immigration," he said. "Migration is good for us!"

Junk said that shrinking towns like Goslar could "also profit from refugees." They could be helpful as workers, would lower the population's average age and enrich the town culturally. Between 2002 and 2013, Goslar lost 4,000 residents, almost a 10th of the population. Currently, the city needs at least 200 immigrants per year to prevent the population from shrinking further.

The idea of using refugees to help solve Germany's demographic problems seems plausible. Were refugees to be settled in rural areas that are suffering from population decline, it could help combat the trend of people moving from the country to the cities -- "the constant internal migration from the periphery to the centers," as Reiner Klingholz, director of the Berlin Institute for Population and Development, calls it.

But Klingholz has difficulty believing in the idea of saving Germany's rural areas with refugees. The problem is massive, particularly in eastern Germany. But the reason is the lack of jobs in such areas. "People go where they can find work," Klingholz says, adding that it is also true of refugees.

In addition, large cities like Berlin or Cologne already have networks of people from many of the countries from which refugees are currently fleeing. They can offer newcomers both help and familiarity. By contrast, small towns in Mecklenburg-Western Pomerania, for example, are full of xenophobia and prejudice. The pattern is the same elsewhere, with immigrants preferring to settle in metropolitan areas. Even in a country like the United States, which has traditionally accepted vast numbers of refugees, newcomers tend to avoid places like the rural Midwest.

Refugees are also unlikely to have much of an effect on Germany's aging society. Migrants do tend to have more children than German women, but the difference isn't huge: 1.6 children per woman versus 1.3. Demographics expert Herwig Birg says that up to 2 million immigrants would have to arrive every year in order to reverse the country's aging trends.

Back in Goslar, three-quarters of a year has passed since Junk's speech and nothing has changed. A political leader in the region, from the center-left Social Democrats, is blocking Junk's plans because, he says, Goslar is unable to integrate more refugees. Junk admits to being "a bit frustrated."


Esra Kücük was nine years old when racists set fire to accommodations for immigrants in both Rostock and Mölln. It was 1992. Kücük knew of the attacks primarily from stories her relatives told. They had little connection to her own life -- at least not until this summer.

Kücük, 32, is the founder and leader of the Young Islam Conference (JIK), a Berlin-based NGO that has for years successfully championed the interests of young Muslims in Germany.

JIK has chapters in several German states and its members have been invited to meet with officials in the office of the German president and the Foreign Ministry.

Currently, the organization is dealing with almost daily reports of new attacks on refugees in Germany. During the first six months of this year, the Federal Criminal Police Office (BKA) recorded 199 attacks on asylum-seeker accommodations, almost three times more than during the same period last year. Kücük frequently gets calls from immigrants who fear for their lives. "We're seriously asking ourselves if the 1990s have returned," she says.

But Germany is far from the 1990s. In contrast to the attacks in Rostock, leading German politicians have been far more decisive in condemning racist activities. German society has also changed. In western Germany, one in three primary school children comes from a family with an immigrant background. Germans have also become accustomed to senior government officials like Aydan Ozgüz, a minister of state in Merkel's Chancellery who is also Germany's commissioner for migration, refugees and integration, as well as famous film directors like Fatih Akin, who became known around the world for his film "Head On" about Turkish-Germans. It doesn't get any more conservative or traditional than the world-famous Oberammergau Passion Play, which is staged only once a decade. The 2020 performance will be directed by Abdullah Kenan Karaca, the son of Turkish immigrants. "Immigration has become part of normality in Germany," says Kücük.

Kücük grew up in Hamburg as the child of Turkish guest workers. At her high school, she was one of the only ones who was the child of immigrants. She remembers teachers asking her if she had been married off. Neighbors would ask when the family finally planned to return to Turkey.

At the same time, her own life continued to develop. Kücük got high scores on her high-school exit exams and studied politics at universities in Münster and Frankfurt. She later rose to become a manager of a major German foundation. Just like the police officer from Lower-Saxony with Afghan roots, she's the embodiment of the new Germany -- an immigrant who has made it.

It's a rainy August afternoon and Kücük is sitting in a hotel lobby in Hamburg, where she is participating in an international conference of young leaders. The guests from Brazil, India and the United States ask her what's wrong with Germany. Are the Nazis returning to power?

Kücük makes a swiping gesture on her iPhone. The news about right-wing extremist rioting in Heidenau or Freital alarms her, she says, before adding: "I have never experienced hatred like that."

There's never been as much hate, but also never as much helpfulness -- it's a simple formula that accurately sums up the new Germany. The silent majority falls between these two poles.

"Those who have always griped are griping even louder now. And those who always had a positive attitude are now getting active and helping," says Joachim Eisenkolb, the mayor of Elchingen, a town located along the Danube River near Ulm. The town has become a model for the integration of refugees in Germany. He says the majority of people in the town are "sympathetically neutral" to the refugees.

The major task for German politicians now is to ensure that this sympathetically neutral majority doesn't defect into the camp of the gripers. But two things are necessary in order to guarantee this happens: boundaries and honesty.

Politicians need to establish boundaries to ensure that Germany isn't overwhelmed, and that people's openness and helpfulness isn't overstrained. And they need to talk openly about the costs that Germans will soon be facing. After all, integration doesn't happen for free -- there are costs, both financially and socially.

The coexistence of hundreds of thousands of Arab and African Muslims -- in addition to the millions of Turks and people of Turkish origin already living here -- will test the limits of German tolerance.

The country will again debate whether headscarves should be allowed in government workplaces, whether girls should be required to take co-educational swimming classes, whether minarets can be as high as church steeples and how loud the muezzins can conduct their calls to prayer. But this is a test that German society can, indeed must, endure.

If, fearing the wrath of voters, politicians duck uncomfortable truths, the hatred will spread and the public will lose faith in politics. Essentially, what Germany is confronted with is a double integration process: that of refugees who are coming to Germany and that of Germans who no longer feel they are a part of their own country. The only way societal cohesion in this new Germany can be guaranteed is if both of these groups are carried along as the country moves forward.

Mayor Eisenkolb is still optimistic. "Germany already managed to do this twice -- after World War II, when many refugees came, and again when the wave of guest workers arrived. "So, yeah, I'm sure we'll manage to do this again," he says. But he also laments that the political framework is lacking for dealing with the refugees. The top structures are absent. "I don't have the power to steer opinions," he says.

So far, the vast majority of Germans have shown themselves to be immune from right-wing populism. Alexander Gauland and his Alternative for Germany party is struggling to remain above the 5 percent mark in polls and it is anything but certain that it will clear the hurdle for seats in parliament in the next general election two years from now. But even if it does, it won't necessarily pose a significant threat. Right-wing populist parties are a part of the political spectrum across Europe. That's certainly not something people should welcome, but even if AfD does get seats, it won't pose a threat to democracy. Germany would be able to withstand it.

A failure of integration, on the other hand, is something Germany can ill afford. That's also a fact politicians need to address openly. It may well be that asylum-seekers from Syria and Eritrea go back to their homelands in a few years if peace and stability is restored. But it is just as possible that many of them will remain in Germany for years or decades to come. It is thus imperative that the government foster their integration. Successful integration policies offer the most successful means of combating racism. At the same time, failed integration can have two consequences: It can provide fertile ground for xenophobia and it can exacerbate security problems. So far at least, Germany has been largely spared from Islamic terrorism, but that may not be the case in the future.

It would already be helpful if those willing to assist refugees weren't hamstrung by the pitfalls of German bureaucracy. Just about every helper you talk to has stories to share about how solutions and support are hindered by some regulation or other. In the town of Jugenheim in the state of Rhineland-Palatinate, for example, refugees were asked to provide their Syrian birth certificates before they could receive the cards necessary to access to Germany's national healthcare system. "Why don't you just make a call to Aleppo," the friendly health insurance employee recommended, without realizing that the city is completely bombed out.

"An application is required for everything," says one volunteer -- for lunch at all-day schools, for the costs of extra-curricular activities. Even a visit to the doctor requires that a form be filled out the first time. It feels like everything has to have that exaggerated Germans sense of order. That's something that will have to change in the new Germany, too. The arrival of the refugees will force quicker, more pragmatic and unconventional solutions. Things simply won't work any other way. Indeed, a bit of chaos is something that we, as Germans, actually ought to hope for.

By Melanie Amann, Jan Friedmann, Christiane Hoffmann, Horand Knaup, Martin Knobbe, Peter Müller, Conny Neumann, René Pfister, Maximilian Popp, Cornelia Schmergal, Christoph Schult and Michael Sontheimer

IMF warns against rate rises by leading economies

Chris Giles in London

The seal of the International Monetary Fund is seen on a headquarters building in Washington, DC on July 5, 2015. The euro was dropping against the dollar after early results of the Greece bailout referendum suggested the country rejected fresh austerity demands from EU-IMF creditors. AFP PHOTO/MANDEL NGANMANDEL NGAN/AFP/Getty Images
The IMF urged the world’s leading central banks on Thursday to refrain from raising interest rates in a bid to boost spending in the global economy when risks to growth were mounting.
The fund’s message to the most powerful central bankers and finance ministers travelling to Ankara for a Group of 20 meeting at the weekend is that the performance of the majority of economies is again falling short of expectations at the beginning of the year.
The IMF is calling for action to prevent growth rates from faltering and to raise the medium term performance of the world’s largest economies from the current “moderate” level.
The Federal Reserve, which is considering raising US interest rates this month, was not alone in the line of the fund’s fire. In an agenda-setting note to G20 finance ministers and central bank governors, the IMF said that an expected boost from lower oil prices had failed to materialise and with low inflation in all advanced economies, “monetary policy must stay accommodative to prevent real interest rates from rising prematurely”.
Ahead of Friday’s official figures on US jobs, the fund called on the Fed to “remain data-dependent” and not take hasty action “with little evidence of meaningful wage and price pressures so far”. Christine Lagarde said in June the Fed should not raise interest rates until next year.
It suggested the ECB should also expand its programme of quantitative easing in which it creates euros to pump into the economy through the purchase of government bonds. “The program should be extended if there is not sufficient improvement in inflation consistent with meeting medium-term price stability objectives,” it said in a clear message ahead of the ECB’s monetary policy meeting on Thursday.
And the IMF called on the Bank of Japan to stand ready for further easing.

The warnings from the fund will create a difficult backdrop to the G20 finance ministers’ meeting this weekend, which was supposed to have been a quiet affair, but has taken on greater significance amid financial market volatility and fears that a slowing China will derail the global economy.
The IMF made it clear that its existing forecasts expecting improved performance in the second half of 2015 were now out of date for the majority of the world’s largest economies. Growth had already fallen short of its predictions in the US, eurozone, Japan and most poorer economies.
One positive message was that although all eyes are now fixed on China, it believes growth in the first half of 2015 was “broadly in line with previous forecasts”, and although investment had slowed, “consumption growth remained steady”.

More important than its update on trends so far this year, the IMF warned that risks to the health of the global economy had risen and “a simultaneous materialisation of some of these risks would imply a much weaker outlook”.

The risks were higher in poorer countries, particularly those more exposed to commodity price weakness, those with significant US dollar-denominated debts and those most dependent on Chinese demand for their exports.
To boost the resilience of economies to heightened risks, the IMF urged governments to press ahead with reforms that would boost medium-term economic performance.

“After six years of demand weakness, the likelihood of damage to potential output is increasingly a concern,” it said, putting emphasis on reforms such as efforts to boost participation in the labour market that both increase demand and medium-term growth.

One of the problems for the G20 finance ministers is that their record in sticking to commitments made at meetings such as that in Ankara is at best patchy. The G20 information centre, based at the University of Toronto, calculated that countries had complied with only 63 per cent of the commitments their leaders made at the Brisbane summit last November.

Migration Beyond Crisis Mode

Ana Palacio

MADRID – Over the past seven years, Europe has been in crisis mode almost without interruption. From Ukraine to Greece, events have led the continent from the frying pan to the fire and back again, with all of the attendant summitry, declarations, and brinkmanship. Now, it is a migration crisis – one that is unlikely to be resolved in the foreseeable future – that is commanding the European Union’s attention. But, if Europe is to respond effectively, it must move beyond crisis mode to understand both what it is facing and what it wants to achieve.

It is indisputable that migration deserves the EU’s focus. Not only are migrant flows into Europe shattering records from one month to the next; migrants’ primary entry points are changing as well. Meanwhile, the already-hazy lines between asylum-seekers, refugees, displaced persons, and purely economic migrants are becoming increasingly difficult to distinguish at all.

The dangerous conditions of the migrants’ journey constitute a serious humanitarian crisis. Since the beginning of this year, roughly 2,500 people have died attempting to cross the Mediterranean, to say nothing of gruesome scenes like the recent discovery of 71 decomposing bodies in an abandoned truck in Austria. Thousands more languish in makeshift camps with little or no support.

To make matters worse, there has been a steady stream of migration-related violence across Europe, from an arson attack on a planned refugee shelter in Germany to police brutality against migrants in Macedonia and Hungary. The port of Calais has become a chokepoint of the crisis, with migrants desperately trying to force their way onto trucks and trains bound for the United Kingdom.

The situation screams “emergency” – and has triggered a response by the EU. Most notably, the EU has tripled the budget of Operation Triton, designed to strengthen border security; launched an EU-wide naval operation against human smugglers and traffickers in the Mediterranean (EUNAVFOR Med); and allocated additional funds to overwhelmed frontline member countries.

Some individual member countries have also acted. Most notably, Germany, despite facing the arrival of a predicted 800,000 asylum-seekers this year, has suspended implementation of the EU’s Dublin Regulation, which would have led to the deportation of thousands of Syrian refugees.

But these measures, though helpful, are far from adequate. In fact, they are examples of crisis-mode policymaking, which tends to favor impressive-seeming stopgap measures (not to mention lofty declarations that can verge on hollowness or hyperbole), instead of real solutions. By allowing EU leaders to avoid acknowledging the long-term nature of the migrant challenge, this approach weakens their motivation to take collective action. And, indeed, a reluctance to cooperate was on display at last month’s meeting of the EU’s Justice and Home Affairs Council, where representatives failed to produce an arrangement on how to distribute the paltry 40,000 refugees that the European Council agreed to accept in June.

The fact is that the pressure of migration is here to stay. After all, the factors driving hundreds of thousands of people to risk everything to get to Europe are nowhere near being resolved. Iraq and Syria remain mired in violence and chaos; Eritrea is in the grip of a repressive regime; and Libya has become a collapsed state. Add to that weak or non-existent governance in much of Africa (and the concomitant security threats and bleak economic prospects), and it is difficult to imagine how the tide of migrants will be slowed.

The chance of a better life – or any life at all – is all but irresistible to the people trapped in these areas. No matter how strong the EU’s external borders are – though, of course, better monitoring and patrolling measures are needed – the flow of migrants will continue to overwhelm their capacity, endangering the openness that is so fundamental to European unification, beginning with the Schengen acquis, which guarantees freedom of movement, without border controls, among 26 EU countries.

If Europe is to adapt to the migrant challenge, and design realistic and productive solutions that heed European Commission President Jean-Claude Juncker’s call for “collective courage,” it must target the root causes and enablers of the current migration wave. Specifically, the EU must support governance reform, economic development, and the establishment of basic human security in the countries that migrants are fleeing.

At the same time, efforts are needed to strengthen deterrence near and en route to Europe’s borders, through partnerships with major source and transit countries. Legal channels of migration should be opened for those who either deserve protection under international law or possess skills that could benefit European societies. For migrants who reach EU territory, are not entitled to international legal protection, and lack such vital skills, repatriation regimes must be established. All of this will require an update of the legal categorizations of migrants, as well as burden-sharing within the EU, which is glaringly absent at the moment.

The EU cannot simply wait out the current migration crisis by implementing piecemeal and panicked measures in the hope that the problem will eventually resolve itself. What is needed is careful consideration of how best to balance humanitarian imperatives with security concerns, domestic social welfare with international legal obligations, and member countries’ duties to one another with their responsibilities to their own citizens. Only then can leaders design the kind of thoughtful, comprehensive, and forward-looking strategy that the migrant crisis – and, indeed, the EU’s own survival – demands.


The Commoditization of Everything

By: Captain Hook

Central planning is the culprit. It transplants concepts such as for 'the good of the people', and 'good of the state', from those associated with a republic based on political freedom and liberty.

Commonly referred to as 'socialism', throughout history centrally planned regimes have been born out of democracies as lifecycle changes take hold, and touted as progress by those in charge of, and benefiting from, the planning. Humans, being what they are, which is easily corruptible, quickly turn such circumstances for their own benefit at the public's expense, who don't mind because they are bribed with handouts as well. My recent work on how the US, and Western world, have arrived at an accelerating state of decrepitude via the fascist state, which is the next phase transition of dynamic political change, can be seen here, which brings us to the place necessary to understand today's topic.

Within the context of the above, it's important one comprehend how the state views you. They want you to be an obedient a consumer, taxpayer, and worker - a commodity - in support of the state, and in turn, the larger bureaucracy. (i.e. including the rentier class, oligarchs, etc.) Better minds from simpler times would view modern day man with a sympathetic eye, but never-the-less, still brand us idiots because of how easily we allow ourselves to be manipulated these days.

It's a time of 'bread and circuses'; a time of deceit, distraction, and dumbed down; a time where the public is wrong-headedly willing to sell its freedom for 'economic necessity'; collectively making it an epoch where liberty has been commodisized as well. It's up for sale to the highest bidder. It's the commoditization of the moral code and everything else in turn. And the public doesn't care how spoils are delivered.

It's the commoditization of everything.

The commoditization of the stock market has never been more obvious than through the looking glass of corporate buybacks, which are set to soar once again. Stocks are now rising for one reason and one reason only - corporate greed.

Or should I say the greed of corporate executives to pad their own pay packets. That's a more accurate appraisal of what is occurring in watching corporate profits shrink, but because shares are being bought back at a faster rate than this slippage, per share earnings are rising via this ruse. And as long as this lunacy continues, increasing degrees of moral hazard will flourish by de-risking the stock market (commoditizing it), until the bubble gets too big to manage once the interest rate cycle turns.

And it will turn; make no mistake about it. At some point the junk in the Fed's portfolio will blow-up and it will be forced to print money on an accelerating basis to replace the air escaping its own bubble (forcing rates higher). This is a certainty if history is a good guide.

But again, for now the public doesn't care how spoils are delivered, as long as they keep coming. Once the bubbles pop however, and the economy turns sour, people will stop eating, and things will change very quickly. This will lead to dictatorship in the next phase transition of the political lifecycle, which is why Donald Trump has a better chance at winning the Presidency next year than the status quo, or anyone else for that matter, may think. (i.e. even though he's a nut bar.) People have been dumbed down and have become lazy, depending increasingly on the State. So they sure as hell don't want to go back to a democracy because this would be hard and involves sacrifice, which would get in the way of uncontrolled consumerism.

That's why they opt for a 'sugar daddy' - because they know they are getting taken by the fascists in Washington now - but their loyalties are still up for sale as long as some version of the status quo (payoffs) is left in tact.

This is the most radical solution the public is willing to take at this point - until they see the Donald trump their liberties worse. But this is discussion for down the road, something we should give more serious thought as the election approaches next year. (i.e. because much can change between now and then.) In the meantime we must worry about more pressing items, such as how all this is affecting the financial markets (and economy), where again, as alluded to above, essentially because the bureaucracy's price managers (central authorities, corporate buybacks, etc.), a de facto price setting commoditization has occurred here as well, we now have the tail waging the dog (the markets have become the economy), with the potential for disastrous outcomes when mean reversions are forced back into the equation.

This is essentially what happened this past week with the retaliatory devaluation of the Yuan, where China was sending a message to the West (US); it's better to allow us to integrate as a 'Western partner' than maintain present policy. (i.e. even if we intend to 'take over' eventually.)

If not, we will be forced to take drastic action like the devaluation last week that sent financial markets into disarray. This is of course no surprise to us because we know the global decentralization process is accelerating now, not the other way around, and not that this is a well understood condition even amongst (supposed) high level planners in these countries that think they can control far too many things with no consequences. This is the 'big lesson' that will be learned as a result of all the interventionist Tom Foolery in the end, not that 'officialdom' would ever admit it. Keynes should be rolling over in his grave watching us literally destroying our economies for the benefit of so few. It doesn't have to be this way.

And if stocks and bonds do in fact crash in rolling bubble popping parties as process continues to unfold, things will change. The status quo will become increasingly challenged, and ultimately fail in favor of a better system. This is essentially already occurring internally within market mechanisms that are not visible to the naked eye, but never the still exist in 'true sentiment' measures. Here, we prefer to focus on open interest put / call ratios where they tend to reflect true sentiment conditions because traders / hedgers are holding overnight (think structured trades) because of 'conviction'. Of course this does not prevent the machines from carrying out their programming, which is set by the bankers, and is designed to exploit trader / hedger insecurities. (i.e. if put / call ratios are high and rising - prices will rise due to a short squeeze no matter the fundamentals.) This is a large part of the reason why stocks keep rising despite deteriorating fundamentals, this, and the all liquidity measures of course.

Again however, because of either psychological or financial exhaustion, put / call ratios eventually top out and start falling, where once they are below unity, they can no longer cause unjustified price appreciation. And again, the problem is all this bubble blowing Tom Foolery has now brought us into a very dangerous place, where despite the appearance of stability on the surface due to rising stock and bond prices, behind the scenes our commoditized façade is an accident waiting to happen. All that needs to happen is a sentiment change - a true sentiment change - possibly married to a rapid loss of liquidity, could cause stocks to crash - believe it or not. As you can see here, already we have key ratios controlling trade in the Dow, Transports, NDX, MNX, and XLF either at or below unity, meaning all we need is for the institutional traders / hedgers that play the bigger contracts (SPX, OEX) and speculating public not yet bankrupted by all this (SPY and QQQ) to join the party and this support mechanism will be gone. (See Figure 1)

Figure 1

That's when 'solvency' will matter. And that's when you can expect to see the Dow / Gold Ratio (DGR) turn lower once again, because as the money leaves stocks some of it (the smart money) will looking for a safe parking spot in gold with bonds having to contend with their own bubbles. As you can see above, all we need to see a push in the DGR to the 17.5 area (see Figure 1) and the reaction off of 2011 could be complete, even though it might need to extend further (see Figure 2) depending on how much pain it takes to make stubborn traders stop buying puts.

Again however, once this process begins, look out below, especially if married to contracting liquidity conditions, which is of course fait accompli already. Traders simply don't want to admit it because this would end many lucrative jobs that will not be possible to replace, banishing increasing numbers to the salt mines of an exploding welfare state. (i.e. which is also a bubble that will in turn pop.) (See Figure 2)

Figure 2

Of course why should they admit it, because they are buying insurance against such an occurrence - right? In fact, buying insurance is the most institutionalized, structuralized, and again, commoditized elements, of the financialization of our financial markets today - its consumerism for status quo techno-junkies - and the life blood of modern day price management practices in Western financial markets. What the West has done is truly miraculous in this regard, financializing the commodity markets and commoditizing the financial markets all in one 'foul swoop' (back in the day with the explosion in futures and derivatives sales because of the '87 crash), so it's perhaps fitting a round trip brings us back to the point where derivatives finally accomplish the signal that was transmitted way back then.

Again, and like the DGR, one more push higher in the S&P 500 (SPX) corresponding to another commodity smash led by silver, the status quo's favorite 'whipping boy', because paper market speculators are stupid (always buying calls) and the market (think ETF's and COMEX) is so small (easily controllable), should do the trick. (See Figure 3)

Figure 3

Technical Note: the Franco Nevada (FNV) / Amex Gold Bugs Index (HUI) Ratio shown in Figure 3 supports the view the precious metals sector still as more pain ahead, with the 'best fit' Fibonacci resonance signature still not achieved. Traders seek out the safety of royalty trusts during slow growth periods, which is when growth companies, as represented by HUI, tend to correct previous gains. This is why the ratio continues to rise.

Because that's what it's all about for the status quo ladies and gentlemen, keeping commodity prices suppressed (using financialization), allowing for more forms of financialization to evolve (think HFT, derivatives, etc.) in order to continue the build out and concentration of power in Wall Street, Washington, hedge funds, conglomerates, bureaucrats - and especially the oligarchs - in the neofuedal / neofacsist modern day state. Of course while it's true low commodity prices that allow continued temporary spending increases in the financialized economy; eventually this lunacy will catch up to greedy and foolish status quo seekers, because hollowed out economies, economies lacking regenerative capabilities (found in healthy environments where the capital stock and manufacturing employment are increasing), will eventually show their true colors - with Detroit (or Greece) a classic example of this understanding at work.

Moving onto some market talk to finish things up this week. For the broads, we have a similar set-up to last month, where a weak start spurred a strong finish. As alluded to above, squeezing stocks into options expiry (this coming Friday) is becoming increasingly difficult for price managers, meaning it's more efficient (cheaper) to push prices higher at month's end because this must be done anyway to pad equity pay packets. And this is of course exactly what we need to see in the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio to complete the larger degree impulse, a strong monthly close into the 220 area. In order to get stocks to finish stronger, price managers will need to hammer the VIX lower below 12, and then below 11 (next month), in order to accomplish this. The falling open interest put / call ratio on VXX (seen here) will enable such an outcome.

Looking past September / October time window, where apparently too many are still expecting a crash, you've got a divergence in not just the New York Composite (NYA), but in a growing number of key indexes, not the least of which include the Transports, and now the Russell 2000, which is forming a head and shoulders pattern. It's important to recognize that this pattern can trace out with the SPX and NASDAQ going to new highs. And even the mighty Dow itself is having a great deal of trouble generating a bid with speculators afraid to buy puts on it, evidenced in open interest put / call ratios either at or below unity on the DIA and DJX respectfully (seen here). So a post fall crash scenario is more likely because of this setup, with the early part of next year a possible kickoff point. Stocks could continue to grind higher between now and then.

As for the precious metal measures we are monitoring, as delineated at the beginning of this bounce, while $15 has been breached on silver (doesn't matter because its volatile), the levels to watch for are $1130 on gold, and 125 on the Amex Gold Bugs Index (HUI), where weekly closes above these marks would signal something more than just a short-term reaction is occurring. Such outcomes are not anticipated, however stranger things have happened - that's for sure. If this were to occur, what this would mean is the rallies in the Dow / Gold Ratio (DGR) and SPX / SLV Ratio would be put on hold, meaning the blow-offs in these ratios, and stocks, would be postponed, if not negated, as well.

Again however, with put / call ratios still somewhat supportive of stocks, and bearish for precious metals (below unity), such an outcome is not possible on a lasting basis as long as the machines still run the show.

It's as simple as that.

All the other factors you read about - the money printing, physical shortages, yada yada yada - they don't matter right now - not until true sentiment becomes properly aligned. Like the status quo boys on Wall Street, such talk does not serve the interests of the gold promoters, essentially making them the status quo of the precious metals sector, aiding the corporate plunder of companies like Barrick - which is now on life support. But hey, they all go on the same junkets - so it's 'party on dude' - right.

This is why you will never see them acknowledge me - because I talk about reality and the truth, which is not part of the status quo narrative. (i.e. always optimistic, buying every dip, and bullish.)

In fact, it's so bad now, these companies will never recover. No matter how much gold and silver go up, heavily indebted large producers may never trade at previous highs. Sure, if gold goes to $5,000, the HUI might go back to 600, and beyond, but it's highly questionable Barrick, or its ilk, will ever see the old highs. This is why security selection will be of the utmost importance in the coming rally, and why we will be providing a list of candidates for accumulation once the time to buy gets closer.

Should You Worry That the Stock Market Just Formed a “Death Cross”?

The world economy appears to be stalling…

Yesterday, we got news that South Korea’s exports dropped 14.7% since last August...their largest decline since the financial crisis. It’s far worse than the 5.9% drop economists were expecting.

South Korea’s exports are important because they’re considered a “canary in the coalmine” for the global economy. South Korea is a major exporter to the largest economies in the world including China, the US, and Japan. South Korea also releases its export numbers much earlier than other major countries. That’s why a bad reading for South Korean exports is often the first sign that the global economy is in trouble.

The ugly news slammed stocks around the world. Chinese stocks dropped 1.3%…Japanese stocks dropped 3.8%…and the major indexes in Germany, the United Kingdom, France, and Spain all lost at least 2%.

• These big drops came one day after the worst month for global stocks in over three years…

Regular Casey readers know last month’s selloff hit every major stock market on the planet. China’s Shanghai index lost 12%...Japan’s Nikkei lost 7.4%…and Europe’s STOXX 600 lost 8.5%.

The MSCI All-Country Index, a broad measure of the global stock market, fell 6.8%...its worst month since 2012.

US stocks also fell hard. The S&P 500 lost 6.3% in August. And the Dow Jones Industrial Average fell 6.6%. It was the Dow’s worst month since May 2010, and its worst August in 17 years.

• Bearish signs are popping up everywhere…

Last month’s crash dropped the S&P 500 below an important long-term trend line.

A long-term trend line shows the general direction the market is heading. Many professional traders use it to separate normal market gyrations from something bigger. Think of it as a “line in the sand.”

The market is constantly going up and down…but as long as we’re above the long-term trend line, the dominant trend is still “up.” But when a selloff knocks the stock market below its long-term trend line, it’s a sign the trend might be changing from up to down.

As you can see from the chart below, there have been a few “normal” selloffs since 2011. On Friday, however, the S&P dropped below its long-term trend line for the first time in about 4 years.

• The broken trend line isn’t the only bearish sign we see right now...

US stocks are also very expensive.

Robert Shiller is an economics professor at Yale University and a widely respected market observer. Shiller is best known for creating the CAPE (Cyclically Adjusted Price Earnings) ratio. It’s a cousin of the popular price-to-earnings (P/E) ratio.

The P/E ratio divides the price of an index or stock by its earnings-per-share (EPS) for the past year. A high ratio means stocks are expensive. A low ratio means stocks are cheap.

The CAPE ratio is the price/earnings ratio with one adjustment. Instead of using just one year of earnings, it incorporates earnings from the past 10 years. This smooths out the effects of booms and recessions and gives us a useful long-term view of a stock or market.

Right now, the S&P’s CAPE ratio is 24.6…about 48% more expensive than its average since 1881.

• US stocks have only been more expensive a handful of times…

Shiller explained why he’s worried in a recent New York Times op-ed:

The average CAPE ratio between 1881 and 2015 in the United States is 17; in July, it reached 27. Levels higher than that have occurred very few times, including the years surrounding the stock market peaks of 1929, 2000 and 2007. In all three of these instances, the stock market eventually collapsed.

For the S&P’s CAPE ratio to decline to its historical average, the S&P would have to drop to around 1,300. That would be a disastrous 34% plunge from today’s prices.

To be clear, this doesn’t mean a crash is imminent. Like any metric, the CAPE ratio isn’t perfect. CAPE is helpful for spotting long-term trends, but it can’t “time” the market.

But the high CAPE ratio is one more reason you should be extra cautious about investing in US stocks right now.

• It also means you should take steps to prepare…

As we write on Tuesday afternoon, stock markets around the world are in a free fall. The S&P 500 dropped another 3% today.

On top of that, the current bull market in US stocks is now one of the longest in history. It’s already two years longer than the average bull market since World War II.

And as we’ve explained, according to the CAPE ratio, US stocks are overpriced.

We can’t tell you for sure when the next financial crisis will hit. No one can.

But we do urge you to prepare. What’s happening right now shows how fragile the markets are. You shouldn’t ignore the mounting evidence that our financial markets just aren’t healthy.

Chart of the Day

The S&P 500 just made a “death cross.”

The death cross is a bearish chart pattern that’s supposed to predict stock market crashes. It happens when the 50-day moving average of the S&P 500 crosses under the 200-day moving average.

Investing website The Irrelevant Investor recently looked into the history of the death cross to see if it’s really a useful indicator…

Over the last 50 years, a death cross has formed before each of the S&P 500’s ten worst years, according to The Irrelevant Investor. So the death cross is a useful indicator that something bad might happen.

However, of the 26 death crosses in the past fifty years, 73% were false positives where the stock market didn’t go on to lose even 10%.

The verdict: don’t completely ignore the death cross. It’s definitely a bad sign…especially since there's so much other evidence mounting that the stock market is extremely fragile right now.

However, we would pump the brakes on declaring that a death cross means a crash is imminent.

Buy the Dip? Hell No! Sell the Rip Instead

Tony Sagami

Are you worried about the stock market? You should be; at least according to your local Starbucks barista.

Starbucks CEO Howard Schultz told his 190,000 employees in his daily “Message from Howard” email communication: “Today’s financial market volatility, combined with great political uncertainty both at home and abroad, will undoubtedly have an effect on consumer confidence and … our customers are likely to experience an increased level of anxiety and concern. Let’s be very sensitive to the pressures our customers may be feeling.”

You can’t make this stuff up!

Hey, maybe I shouldn’t be too harsh on Mr. Schultz, because the stock market is in a lot of trouble… and not for the reasons the mass media and Wall Street experts are telling you.

The know-it-alls on CNBC are pointing their fingers at the Chinese stock market meltdown as the reason for our stock market turmoil, but that is just the catalyst… not the root problem.

The source of the meltdown is deeper, more problematic, and more painful. What I’m talking about is that the Federal Reserve—from Greenspan to Bernanke, to Yellen—thought they possessed Wizard of Oz powers to fix whatever ails the economy with their menu of monetary tools.

In 2000, the Fed thought it could solve the bursting of the dot-com bubble with massive interest rate cuts and repeated that playbook again for the 2008-09 Financial Crisis.

And when they ran out of room by cutting interest rates to zero, they trotted out Operation Twist and QE 1, 2, and 3.

Those three rounds of QE added about $3.7 trillion to the Federal Reserve’s balance sheet since 2008, which now totals a mind-boggling $4.5 trillion.

The problem is not China; the problem is Janet Yellen and her Federal Reserve buddies.

The Fed—beginning with the original monetary Mr. Magoo of Alan Greenspan—created a bubble, then rolled out more of the same to deal with the bursting of the bubble, and like the shampoo bottle says: Rinse, Lather, Repeat.

Zero interest rates plus QE1, QE2, and QE3 created a massive misallocation of capital that has affected everything from home supply, ocean-going freighters, the US dollar, and wages, and pushed stock prices to a bigger-than-ever bubble.

The recent weakness is the painful process of deflating that bubble, but the Federal Reserve refuses to learn from its mistakes. It won’t be long until we hear about QE4 and/or a delay to the overpromised interest rate liftoff.

Former US Treasury Secretary Larry Summers had this to say yesterday: “A reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives; price stability, full employment and financial stability.”

Honestly, I don’t know what the Federal Reserve will do next. Heck, I bet they don’t know what to do either… but they will do something.

Central bankers are arrogant know-it-alls who think they can fix the world’s financial problems with a couple of pulls of a monetary lever.

So pull they will.

And so the stock market damage will continue, albeit with some powerful up moves along the way.

Bulls, whether in a Spanish bull-fighting arena or roaming the floor of the NYSE, are a tough animal to kill. They won’t surrender until they make a few more desperate attempts to push the market higher.

Look at what happened last Tuesday after the 588-point Monday meltdown. The Dow Jones Industrial Average shot up by as much as 441 points before ending the day with a 204-point loss.

My point is that you’re going to see a lot of powerful up moves in the coming months… but I’m telling you, these are nothing more than bear market traps to lure you into buying at the wrong time.

The stock market is falling into a bear market, and that means big swings both up and down, similar to 2000–2003.

The Federal Reserve, along with the rest of the world’s central bankers, has puffed stock valuations into an epic bubble, and the stock market has a long, long ways yet to fall… just not in a straight line.

That’s heart attack material for both buy-hold-and-pray and buy-the-dip investors, but it is a goldmine if you adapt your strategy.

Instead of buying the dip, the right strategy going forward is SELL THE RIP.

When the stock market gives you a big rally, the right move will be to sell into strength.

And if you have some risk capital, that will be the time to load up on inverse ETFs and put options, like my Rational Bear subscribers did in July.

The biggest short-selling opportunity of our lifetimes is knocking on your door.