Merkel Opens the Gates

By John Mauldin

Sep 19, 2015


“The European Project has very little economic and political capital left to defend it if anything goes wrong now. As Mr Juncker says, the bell tolls.”

– Ambrose Evans-Pritchard


Perhaps I should issue a storm warning for this letter. Maybe it’s because I had major gum surgery on my entire lower jaw this week and am in a bit of discomfort, but as I read the news coming through my inbox, it’s not helping my mood. This week’s letter will focus on the immigration crisis in Europe – after I muse on what I think is the very disturbing aftermath of this week’s Federal Reserve meeting.

It wasn’t a shock that the Federal Reserve did not raise rates. Even the most inside of insiders said the odds were at most 50-50. Those Wall Street Journal reporters who have an “inside ear” at the Federal Reserve all indicated there would be no rate increase. The IMF and the World Bank were pounding the table, declaring that it was inappropriate to raise rates now, and although most FOMC members give lip service to the fact that Federal Reserve policy is to be based solely on domestic considerations, global concerns may well have played a role in their decision.

What surprised me was the aggressively dovish stance taken by Yellen in her press conference and in the press release. It would have been one thing to come out and say, “We’re not going to raise rates at this meeting, but conditions are getting better, so get ready,” so that the market could have a little certainty. The statement we got instead, combined with early data from the quarter, is making me rethink my entire view on the timing of an interest rate increase.

My immediate reaction upon reading the press release was almost perfectly echoed by my good friend Peter Boockvar of the Lindsey Group):

The Fed punts AGAIN on a new set of excuses, and I'm sorry to many

The Fed punted AGAIN and thus are inviting us to the daily obsession of when they eventually will hike for another 6 weeks. While the economic commentary on the US was not much different than the last statement, they added “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” They see the risks to the outlook for economic activity and the labor market as nearly balanced but [are] “monitoring developments abroad.” Jeff Lacker is the only one that stood out from the crowd with a dissent and the desire to raise 25 bps.

Bottom line, the problem now is not when the Fed will raise rates or not, it is the paralyzing discussion about when they will eventually raise rates. We get to do this all over again as the Committee continues to day trade every data point not only in the US but now globally. They are the center of uncertainty and the multitude of excuses over the past few years has reached a tipping point that I don’t believe the stock market will continue to embrace. China has been slowing for 5 years and commodity prices have been falling for 4 years, and the Fed has now discovered them as risks to their outlook. Are we going to now price in the greater chance of a rate hike if China’s PMIs start to improve, if retail sales tail higher?

The Fed is implicitly acknowledging again that their policy action over the past 5 years of putting the US economy on a sustainable growth path has been a failure and now if their international concerns become more pronounced, they will also admit to the world that they have no tools to deal with it. I think today’s decision was a bad one. The dollar rally should be over and I’m bullish on precious metals (again) as I don’t understand at all what the bear case is in it anymore. Other commodities should benefit too from the weak dollar.… Therefore be cautious, the Fed did more damage to its credibility today.

Lastly and sorry to speak from my soap box to those who don’t care to hear it but, I’m sorry to the retirees that have saved their whole lives. I’m sorry to the generation of young people that don’t know what the benefits of saving [are]. I’m sorry to the free markets that best allocate capital. I’m sorry to pension funds that can’t grow assets to match their liabilities. I’m sorry to the successful companies that are competing against those that are only still alive because of cheap credit. I’m sorry to the US banking system, [which] has been hoping for higher interest rates for years. I’m sorry to those industries that have seen a pile of capital (aka, energy sector) enter their industry and have been or will see the consequences of too much capacity. I’m sorry to investors who continue to be bullied into making decisions they wouldn’t have made otherwise. I’m sorry for the bubbles that continue to be blown. Again, I’m sorry to those who don’t want to hear this.

What he said.

Granted, the global economy is slowing down. But Stan Fischer (Fed vice-chairman) gave an extremely strong speech not all that long ago, saying that the US Federal Reserve was focused only on domestic concerns. We just printed what might be the highest GDP number for the second quarter that we are likely to get for some time. Nobody is happy with the way the unemployment number is working out, but 5.1% and falling isn’t shabby. This is a slow-growth recovery that probably typifies the New Normal, so to expect to find an economy hitting on all cylinders before you normalize rates is not realistic.

This Fed, massively dominated by academic Keynesians, has demonstrated that the conditions for normalizing rates are far more stringent than many of us had been led to believe from the speeches of the FOMC members themselves. This is a Federal Reserve with hundreds of staff economists who create numerous models to guide their actions. The fact that none of these models have been anywhere close to right for decades should give us pause. Indeed, in her press interview Yellen admitted that the models don’t appear to be working.

We have a Federal Reserve that doesn’t trust its models and is running US monetary policy on its understanding of a flawed academic theory.

We’ve discussed in this space why these models don’t work; it’s because they’re based on a theory of economic organization that is fundamentally flawed and doesn’t reflect the complexity of the billions of economic reactions by participants in the marketplace every day. The only way the Fed can build a model to describe such complexity is to assume away the real world – to impute market motives and relationships based on their imperfect, academic understanding of how the world works.

Where are we? It is likely that before the December meeting we are going to see third-quarter GDP come in markedly lower than second-quarter GDP. If we are now focused on the global economy, as the press release suggested, that is also likely to be weaker. Inflation, at least the way the Fed measures it, is unlikely to be an issue. In this environment, will they raise rates? I now find that doubtful unless we get some remarkably boffo data points – which would be a surprise.

Going into 2016, a presidential election year, unless the US and global economies surprise to the upside, do we think we will see rate increases? It is now quite possible, it seems to me, that the next significant move by the Federal Reserve will be to initiate QE4 when the economy once again weakens or dips into recession. Remember, there is always another recession. The business cycle has not been repealed by leaving rates at the zero bound! Yes, I know that the Fed’s own research shows that QE was ineffective, but that will be one of only two weapons they still have in their arsenal. The other is negative rates, and I doubt they will start out with negative rates unless we get more than a garden-variety recession.

As Peter noted above in his final paragraph, the Federal Reserve has changed the fundamental equations of how investors, savers, and businessmen interact with each other. The Fed is distorting the essentials of the market. It is one thing to acknowledge that rates are likely to remain lower because we are in a disinflationary/deflationary world and will be for some time; it is another thing altogether to leave rates at the zero bound. One can make the case for lower rates and QE at the beginning of the Great Recession, but we have now created an environment where market participants may need to assume that rates could be at the zero bound for much longer than any of us ever dreamed. The longer the Fed postpones normalization, the more difficult the return to normal markets is going to be.

As an aside, I still think the Japanese yen is going to get weaker against the dollar long-term. My personal trade was done with a 10-year option; but I have to tell you that if I was sitting in front of a dozen screens on a trading desk today, I would be covering all of my long dollar bets and dipping my toes into some short dollar trades. Thank the gods, I am not a trader, because that would be a hard trade for me to put on.

The Demographic Realities of the European Immigration
 
Crisis

I called my good friend and geopolitical strategist George Friedman a few days ago and found him wandering the streets of Vienna, but we still managed to spend some time talking about the immigration crisis that is sweeping across Europe. I jotted down a few notes from him:

This is not simply about migrants. It is one more thing that shows Europe does not work and cannot make decisions.… What we are seeing before our eyes is the collapse of the European project. There is nothing meaningful when we say “EU.” It was an institution that functioned for a while, but countries are no longer paying any attention to Brussels.

Once again we are seeing divisions at the heart of Europe based upon economic and demographic realities. As I wrote in my book Endgame, the productivity and wage differentials between Germany and the European periphery have created massive trade imbalances. Normally these are solved through adjustments in the currencies of the countries involved, but the Eurozone locked in such imbalances, leaving as the only solution a deflationary collapse in wages. This has of course also drastically increased unemployment in the peripheral nations.

Those problems, coupled with the massive debt run-up in the peripheral countries, has opened up a yawning divide in Europe. Greece is only the first country to totter at the edge of the abyss. And yet Germany remains a profound believer in maintaining austerity until true reforms have been implemented. No debt relief without reforms is their mantra.

For Europe, the Grexit and refugee issues are two manifestations of an underlying and much more problematic challenge. The continent’s various unification measures are in danger of coming unraveled.

Avoiding Grexit was relatively easy. Yes, the fights were ugly, but it was a simple matter to sweep everything back under the rug. Sweeping a few million immigrants (you don’t think they’ll stop coming, do you?) under the rug is a much greater challenge.

How Europe handles the refugee crisis is potentially far more important than the Grexit issue. Some bad decisions could lead to serious problems in not too many years. This is a major development.

And the immigration crisis highlights another deep divide.

A New East-West Rift

German Chancellor Angela Merkel says the country will accept 800,000 refugees this year. Even considering Germany’s size, that is a very generous number that has earned Merkel praise from humanitarians everywhere. At the same time, European Commission president Jean-Claude Juncker wants to impose quotas for refugees and immigrants upon the entire European Union. He has come up with the idea of “shared responsibility” to push this new doctrine.

This is all well and good for nations like Germany that need immigrants, but much of Europe is really not in need of new workers, given their present severe unemployment problems. Not to mention that in those countries budgets are already strained and taking on the task of housing tens of thousands of immigrants and refugees is not cheap.

Some of Germany’s neighbors are not pleased. In particular, the formerly communist Eastern European states resent the German-led efforts to impose on every EU nation a quota of refugees it must accept.

This is where we start to see parallels with the Grexit crisis. Recall how EU leaders in Brussels tried to steamroll their way over all opposition. They’re doing it again.

Consider this little note from last week’s Charlemagne column in The Economist.

Policymakers are fizzing with ideas, from the use of development aid to bring recalcitrant transit countries into line to the strengthening of a Europe-wide border guard. Once the principle of shared responsibility for migrants is established, says another official, the numbers of relocated migrants can be scaled up, and new programmes established, without too much wrangling.

What arrogance. Brussels will bring those “recalcitrant transit countries” back in line. The “wrangling” will be over once they establish the “principle of shared responsibility.”

“Shared responsibility” is exactly the principle the EU never manages to establish, regarding immigrants or anything else. Yet nameless officials still tell Charlemagne not to expect “too much wrangling.”

Ambrose Evans-Pritchard launched into an epic rant on EU arrogance last week. I recommend you read the entire post, but here is a taste.

Personally, I think Europe's nations should open their doors to those fleeing war and persecution, with proper screening, in accordance with international treaties on refugees, and in keeping with moral tradition.

Those countries that etched the lines of Sykes-Picot on the map of the Middle East in 1916 as the Ottoman Empire was crumbling, or those that uncorked chaos by toppling nasty but stable regimes in Iraq and Libya, have a special duty of care. But the point is where the final authority lies.

By invoking EU law to impose quotas under pain of sanctions, Brussels has unwisely brought home the reality that states have given up sovereignty over their borders, police and judicial systems, just as they gave up economic sovereignty by joining the euro.

This comes as a rude shock, creating a new East-West rift within European affairs to match the North-South battles over EMU. With certain nuances, the peoples of Hungary, Slovakia, the Czech Republic, Poland and the Baltic states do not accept the legitimacy of the demands being made upon them.

But it is the countries of Eastern Europe that are bearing the brunt of the immigration crisis. This map from the  New York Times depicts the general flow of immigrants from Turkey into Germany. It was not all that long ago that one could pass freely from one country in the EU to another, but now border walls and controls are being erected.


And while Merkel says Germany can take 800,000 immigrants, notice that they are instituting border controls to stem the flow. It’s is all well and good to say you can absorb nearly a million immigrants, but where you going to put them? How will you feed them or school them? That effort takes planning and time, planning and time that have not been much in evidence the past few years in Europe.

Just as the Grexit crisis showed us the underbelly of European monetary integration, the refugee crisis highlights the huge difficulty of political integration. Hungarians, Slovaks, and Czechs do not want Brussels telling them how many Syrians they must admit and support. I don’t blame them.

Ambrose astutely points out that Europe must now deal with an east-west split on immigration along with the still-unbridged north-south economic chasm. Yet EU leaders push blithely on, thinking they can roll right over their opposition. To them each crisis presents another opportunity to impose structure and an artificial unity from the top down.

This is maddening, and it leaves an interesting question unanswered. Why is Germany so willing to accept so many migrants, while other countries are not? Aside from the 800,000 it will take this year, officials have said Germany can handle 500,000 more per year, indefinitely.

That starts to add up in a few years, even in a country of 80+ million. This is more than a gesture. What is Merkel thinking?

The answer is that Merkel is thinking ahead. Germany’s economy is going to need those people. Germany currently has a population of 82 million, but that number is expected to fall by 12 million over the next 40 years. Further, as the population ages, the number of potential workers who are not retired will be reduced by many more millions. The percentage of people in Germany of working age (between 20 and 65) was projected by a recent study to drop from 61% to 54% by 2030. Germany recorded the lowest birth rate in the world from 2008 to 2013. Hold that thought. (Mitchell)

Merkel Has a Plan

Merkel’s immigration plan presents huge problems, given Germany’s generous retirement benefits and social programs. For every baby boomer that stops working, the country needs at least one person to start working. The US is in better shape only because we have enough legal immigrants to keep the demographic pipeline flowing. Even so, we will hit the wall at some point unless more and more potential retirees keep working.

Germany is in much deeper trouble on this point, and Merkel knows it. I suspect she wants to bring in quite a few million immigrants, somehow make good Germans out of them, and keep the economy humming.

My good friend Dennis Gartman wrote about this in his September 15 daily report:

But there is a very real demographic reason why Germany is so willing to take a surfeit of these refugees: German’s demographics demand it. Simply put, Germany’s population… and especially its indigenous… population is imploding swiftly and certainly.

Already there are very real shortages of young, skilled workers, and many German companies openly and regularly complain that they cannot hire enough workers to fill job vacancies because there are not enough workers available for those jobs.

Further, Germany needs younger workers to fill those jobs because it needs their salaries for the social welfare programs that Germany is so renowned for. Simply put, there are not enough workers paying into the social programs to pay for them at present, and this problem shall become worse, not better, unless Germany’s population swells measurably in the coming years and decades.

So, Ms. Merkel has a clear ulterior motive for her seeming generosity: she wants the present welfare system in Germany that benefits now and will even more greatly benefit more in the future her normal constituency. If Germans are going to retire they shall need either newly born Germans to take their place and pay into the social security systems or Germany shall need to “import” foreign workers. For now, it is the latter that Ms. Merkel is embracing.

Newfound Sympathy

Before going any further, let’s define some terms. Refugees are persons driven from their homes by war, natural disasters, or other circumstances beyond their control. They have little or no choice but to seek refuge elsewhere.

Migrants, in contrast, are people who have homes but choose to move elsewhere, typically for economic reasons. They think they can increase their income or improve their lives in a new country.

This distinction is important in international law. Various treaties and agreements obligate governments to give refugees at least temporary shelter. Migrants, because they have a home to which they could return, receive lower priority.

One of the problems is that Europe’s incoming masses include both refugees and migrants. Sorting them out is not always easy. Many lack passports and other identifying documents. I saw a small note in the Wall Street Journal this week saying that Sweden is paying a language-analysis firm to verify refugee candidates’ origins by their accents. As good a method as any, I suppose.

I think everyone agrees that sheltering genuine refugees is simply the right thing to do. We all know that in other circumstances we could be the homeless ones. Some older Europeans saw World War II uproot millions. Their children and grandchildren have heard the stories, and that awareness probably drives some of the sympathy we see now.

While the goals are laudable, there are limits. Even a continent as large as Europe needs to manage population inflows and screen out undesirables. The sheer scale of the challenge is mindboggling. More than four million people have left Syria alone. Tens of thousands more are leaving each week. Most are still in the bordering states of Turkey and Jordan, which have their own challenges and can’t offer permanent resettlement.

This graphic from Stratfor shows where people are leaving and where they want to go. 


You can see that part of the problem is intra-European. People from Kosovo, Montenegro, and Albania want to leave their countries. While some of them might be able to legitimately claim refugee status, I think most can be properly labeled as economic immigrants.

It’s also interesting which countries have received the most asylum applicants relative to their populations: Hungary, Sweden, Austria, Germany, and tiny Malta lead the list. In sheer numbers, though, Germany is clearly the favorite destination.

Merkel has a great idea – with a potentially fatal flaw. Germany, like much of Europe, doesn’t have a great history of assimilating immigrants, even those from relatively similar cultures.

I’m sure the majority of immigrants are ordinary people who will be glad to have homes again and act accordingly. Within their numbers, however, will likely be some who don’t appreciate German culture, including a small number of radical Islamists.

As of now, Germany is about 4% Muslim. That number is growing, but gradually. Adding several million more to the population in a few short years will dramatically increase the Muslim population. Interestingly, Europe has fewer foreign-born residents than most other wealthy regions of the world.


The rise of anti-immigration political parties throughout Europe is now quite evident.

Such parties are not yet a majority anywhere, but Marine Le Pen in France is only a crisis or two away from winning a national election. And the proliferation of stories that keep coming out about problems with immigrants doesn’t help the matter.

For example, consider this Telegraph story of a recent incident in France. Some young French women disrupted an Islamic event (a lecture by two Islamic religious leaders seriously discussing whether wives should be beaten – dear gods) by rushing onto the stage and inappropriately stripping to the waist and shouting feminist slogans. The Muslim men in the crowd were not amused, to put it mildly. The pictures of them manhandling the women and angrily kicking them while they were on the floor are disturbing.

Europe will see more such clashes if millions of new refugees decide to stay there. Can Germany handle them? I don’t know, but Syrian culture and German culture have little in common. It will take time for both sides to learn the other’s ways and even more time to respect them. The interviews I’ve seen with Syrian immigrants show them generally to be relatively educated, potentially hardworking, and adventurous, just wanting to find a place to work and live their own lives away from the violence. Typically, that is what you want in your country.

But keeping the flow of immigrants to a reasonable level does not seem to be in the cards for Europe.

Baylor University history professor Philip Jenkins had a good analysis in The American Conservative:

However obvious this may be to say, there is no logical end to this process, even if the Syrian crisis ended tomorrow. As it becomes known that Germany is so open to migrants, that fact offers an irresistible invitation to anyone living in a country roiled by violence or economic crisis, which basically means most lands from Libya to Pakistan. There is no terminal point at which the nations sending migrants would ever run out of candidates seeking refuge and asylum. And even that projection takes no account of the likely spread of open warfare and terrorism into Turkey and Egypt in the coming decade.

So let’s put those numbers in context. Germany’s population is about a quarter that of the United States, so multiply all those refugee figures by four. Imagine if a U.S. president declared that the country would commit itself to taking between two and four million new refugees and migrants, annually, over the coming years—and that over and above other forms of immigration. Even given the diversity of the U.S. population, that would represent an inconceivably large social transformation.

If assimilation does not go well, Germany could find itself in cultural chaos as the immigrant minority tries to find its place. Government spending will go up as politicians try to keep everyone calm, which will drive up taxes and create more resentment.

If assimilation does go well, the new generation of workers will restore Germany’s fiscal balance and enhance its export-driven economy. What’s not to like? Well, in this scenario the gap between Germany’s economic strength and that of the rest of the continent will grow even wider. The euro will make even less sense than it does now, and people outside Germany will see no advantage to staying under the same roof.

Both scenarios are bad. The second one may be less bad but will come at a cost: the collapse of European unity.

Keep in mind that this demographic and social adjustment will be playing out on a continent that has just forced its eastern half to accept immigrants it did not want and whose southern tier is still trying to emerge from a deep, prolonged economic slump. Greece stayed in the club this time because it had little choice. That won’t always be the case.

As more and more countries, especially the larger ones, see themselves losing their sovereignty to Brussels and to an increasingly out-of-touch elitist leadership, the pressures on the European Union are going to become ever more profound. It would be a great irony if, after all, it wasn’t the irrationality of the single currency that was the final straw to break the back of the European Unión.

Detroit, Toronto, NYC(?), and Coconut Grove

My September travel schedule still looks surprisingly light, but that is going to change in October or November. Right now there is nothing until the end of the month, when I will go to Detroit for a day and then on to Toronto for a few days. In Toronto I will be speaking at the annual CFA Forecast Dinner. I am told there will be some 1200 people there. I will also be doing a completely different presentation the night before for my Canadian partners, Nicola Wealth Management. You can contact them for info at 604-739-6450.

At some point I have to get to New York but haven’t been able to work out the schedule yet – it appears likely it will be the first week in October. On November 6-8 I will be speaking at the Financial Festival, which is hosted by investment impresario Todd Harrison. There is a very lively lineup of speakers, and in addition to my normal presentation I will have a debate with my old friend, the quick-witted and sagacious Jeff Saut of Raymond James. I can’t beat him with one-liners – he’s the king there – so I will simply have to make do with facts and reason. He has been wearing his bull-market cheerleader uniform of late. Oddly, it looks good on him. Just saying… If you want to know more about the event, just click on this link.

I will be speaking in the Oregon wine country in the middle of October. The plan is to visit San Francisco first with my biotech buddy Patrick Cox to see a few companies and to do a deep dive on where we are in the antiaging movement at the Buck Institute, the world’s premier antiaging research center. Pat has been invited to meet with several of the leaders, and I get to tag along as sidekick. I also see Atlanta and Hong Kong showing up in the calendar. Maybe even a side trip to Jersey Shores when I’m in New York.

George and Meredith Friedman are dropping by Monday night for dinner, and the next day my business partners Olivier Garret and Ed D’Agostino will be in town to go over planning for next year Strategic Investment Conference, which will be held here in Dallas, May 24 through the 27th. Save the date in your calendar, because it’s going to be the best ever. We are going to open up the conference to a few select sponsors; so if you would like to participate, drop me a note.

I spent a great deal of time planning the speaking lineup and overall ambience of the Strategic Investment Conference. Fortunately, I have a fabulous team that can help me with the actual details. One of the cool things we will have this next year is a networking app that will actually let conference attendees (who opt in) know who is there, what they do, and what they are looking for. It is actually a very sophisticated way for you to know who your fellow attendees are and to meet the one person you know is there but just can’t find. I think that will increase the value of the conference immensely.

Our latest Mauldin Economics documentary film, China On The Edge, premieres online this Wednesday, September 23. As you know, China’s fate is in many ways going to be the whole world’s fate. We pulled in some of our top China hands to show you what already happened and what will be next. Our video team did an amazing job. The production is simply top-notch, network-TV quality.

I’m very proud of this work, as you can probably tell, so let me just ask your help. We want to show China On The Edge as widely as we possibly can. Click here and enter your e-mail to receive a link so that you can watch the premiere absolutely free. If you find the film valuable, please share it with three other people. I really want to get this film in front of a whole new audience. With your help, I know we can do it. Your friends will thank you and I will, too.

OK, it’s time to hit the send button, take a little time off, and then get back to the work stacking up in my inbox. Have a great week.

Your thinking about his immigrant forebears analyst,

John Mauldin


Up and Down Wall Street

For Markets, It’s the Treacherous Season

Despite the Fed’s decision to delay raising interest rates, stocks and commodities swoon at week’s end. Shades of past market crashes, Long Term Capital Management’s fall, and the Panic of 1873.

By Randall W. Forsyth       

 
 
It’s the most awful time of the year.

One wouldn’t think that, not around these parts anyway. The weather is just right, with warm days and cooler nights; the water is delightful, and the kids are back in school. Sports fans rejoice as the football season is under way, and baseball’s pennant races are reaching their climaxes. What could be better?

For investors, what could be worse? Whether owing to some cosmic correlation or mere coincidence, financial markets seem to be roiled in the days and weeks leading up to and following the autumnal equinox.
 
Many hypotheses have been proffered. Among them from various eras: the return of the bosses from holidays in the Hamptons, who find business has fallen off in their absence, resulting in their slashing payrolls and purchases; the movement of cash from city to country banks to pay for crops back when agriculture dominated the U.S. economy; and even the effect of lunar and planetary movements on the human brain as the seasons change.

Yes, I’ve heard them all.

For whatever reason, a strange confluence of bad things seems to happen at this time of year.
As I’ve noted previously, on Barrons.com (“It’s the First Day of Fall—in More Ways than One,” Sept. 22, 2009), there have been an unusual number of market upheavals around this time. A partial list includes a panic that shut the New York Stock Exchange in 1873; Britain’s exit from the gold standard in 1931; and the Plaza Accord in 1985, which led to the attempt to stabilize exchange rates, which came unraveled two years later and, in turn, led to the October 1987 crash.

Other early-fall market plunges occurred in 1978 and 1979, along with the Long-Term Capital Management–related plunge in 1998. And the crash of 1929 and the financial crisis of 2008 are major events, not just in market lore, but in the nation’s history, as well.

Given this treacherous season, it’s perhaps not so surprising that global stock markets once again were in full swan-dive mode at the end of last week. Yet, more than the time of the year appears to have caused equities to retreat.

On form, stocks ought to have been rallying on the seemingly bullish news that the Federal Reserve decided not to initiate the liftoff in interest rates. The continuation of the near-zero rate policy put in place in December 2008, during the darkest days of the financial crisis, should have been good news for risky assets, whose values have been boosted by investors’ flocking after anything, which is better than the nothing that they get on their cash.

Still, the stock market’s response—surrendering initial gains on Thursday afternoon in the U.S. after the Fed’s stand-pat announcement and plunging worldwide on Friday—suggests that investors sense something less than salubrious in the actions of Fed Chair Janet Yellen and her cohort on the Federal Open Market Committee.

In point of fact, despite the near 300-point, or 1.7%, plunge on Friday in the Dow Jones Industrial Average and the 1.6% drop in the Standard & Poor’s 500, U.S. equity markets fared less badly than other bourses. Germany plunged 3.1% and Japan, 2%. And developing markets also took it on the chin, with the iShares MSCI Emerging Markets exchange-traded fund (ticker: EEM) off 1.9% on Friday.

The FOMC’s policy statement explicitly noted the pressures being felt from abroad, even as the domestic economy chugs along and the labor market is approaching full employment (at least according to conventional measures). “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” according to the policy-setting panel’s statement.

Many observers were actually shocked, shocked!!! by the FOMC’s recognition of overseas influences in its deliberations. Readers of this space, however, have been beaten about the head over the importance of global influences. “The world is too much with us,” as this column channeled Wordsworth a month ago (“Submerging Markets,” Aug. 24).

Far from being cheered that the proverbial punch bowl is being refilled by the Federal Reserve, markets seem more concerned that the party is winding down. In commodities, crude oil’s bounce was reversed, while copper fell anew on Friday, both signs of subdued animal spirits, to use Keynes’ description.

It should be noted that there was a dissent in the FOMC’s decision to hold rates steady, from Jeffrey Lacker, president of the Richmond Fed, who preferred an immediate increase. But, in a curious footnote, at least one unnamed Fed official called for further easing—to lower the federal-funds target to below zero percent. That was indicated by the dot-plot graph of guesstimates from the various Fed governors and district presidents.

While negative-rate targets have been adopted by central banks abroad, that’s not about to happen here. The Fed’s words and dot plots still indicate the next move will be to raise the rate target from just over zero, not lower it further.

Moreover, negative interest rates have been resorted to by the European Central Bank to deal with average unemployment rates in double digits and far higher rates in Spain and Italy, let alone Greece. In contrast, the headline jobless rate last month was 5.1% in the U.S., a hair above what the FOMC sees as full employment.

Yellen did aver in her post-FOMC news conference that the main unemployment measure does understate the slack in the labor market. But even so, job prospects in the U.S. are better than in most of Europe, where there are officially mandated negative interest rates.

So it’s curious that short-term Treasury-bill rates dipped below zero at week’s end during the global stock market rout and renewed slide in commodities. Some folks are so querulous as to be willing to pay Uncle Sam to hold their money; that’s what negative interest rates mean. And, as a reminder, the Fed pays banks 25 basis points (a quarter percentage point) to park their dough with it—lots more than you or I get in our money-market accounts.

All of which bespeaks tremendous nervousness in the markets. Perversely, the Fed might have fed the disquiet by recognizing the weakness in global markets, notably China, which has been a recurring theme here. The ostrich strategy is an alternative, to be sure, but not one that provides real protection.

In the best of circumstances, the central bank’s policy decisions might be just a matter of timing. To reiterate the point about rate hikes made at the Federal Reserve’s Jackson Hole confab last month by Raghuram Rajan, the head of India's central bank, “My position over time has been, don’t do it when the world is in turmoil.…It’s a long-anticipated event; it has to happen sometime, everybody knows that, but pick your time.”

Now isn’t the time. The reason for that extends beyond the plunge in stocks in China, as implied by the global selloff in equities and commodities and the dip into negative territory by T-bill rates. The markets sense something, and it’s not just the date on the calendar.

THE OTHER PUZZLING ASPECT of the Fed’s nondecision decision is: How could a measly quarter-point hike in short-term interest rates mean so much? It may have been more because the FOMC lowered its median rate guesstimates for the end of 2016 and 2017 by about a quarter percentage point, to 1.5% and 2.5%, respectively.

For what it’s worth, the FOMC also projected a fed-funds rate around 3.5% by the end of 2018, roughly in line with what participants think is the long-run equilibrium. Given the uncertainty about the next three months, however, forecasts for three years should be taken with a hefty chunk of salt. The key message is lower rates, for longer.

But that isn’t the whole story. With interest rates in most advanced countries near zero, currency exchange rates arguably are more important influences on their economies. By holding rates near zero, Yellen sends an implicit message that the U.S. central bank doesn’t want the dollar to rise further and exert further restraint.

A strong buck also weighs on the prices of commodities, including oil. And that has translated into credit problems.

As The Wall Street Journal reported on Friday, defaults among leveraged oil producers are on the rise. That is the main— but not the only—area of strain in the junk-bond market. In the emerging markets, a further rise in the greenback also would boost the burden of companies’ dollar-denominated debt.

Inflation-phobes fear that maintaining near-zero interest rates will push up prices, in a rerun of the 1970s.

But in the 21st century, cheap money has mainly boosted asset values. The Fed reported on Friday that households’ net worth rose to a record $85.7 trillion in the second quarter, a 0.8% increase from the level three months earlier. The bulk of that gain was in the value of residential real estate.

A modest proposal: Maintain zero interest rates to produce a bubble and then an oversupply in rental properties, to help house the millennials who might finally move out of their parents’ basements to sign leases on affordable digs of their own. Cheap credit brought us low-cost gasoline. It could do the same for flats.



The Data Revolution for Sustainable Development

Jeffrey D. Sachs, Shaida Badiee, Robert Chen
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Development data
 
NEW YORK – There is growing recognition that the success of the Sustainable Development Goals (SDGs), which will be adopted on September 25 at a special United Nations summit, will depend on the ability of governments, businesses, and civil society to harness data for decision-making. The key, as I have highlighted before, is to invest in building innovative data systems that draw on new sources of real-time data for sustainable development.
 
We live in a data-driven world. Advertisers, insurance companies, national security agencies, and political advisers have already learned to tap into big data, sometimes to our chagrin; so, too, have countless scientists and researchers, thereby accelerating progress on new discoveries.

But the global development community has been slower to benefit – not least because too much development data are still being collected using cumbersome approaches that lag behind today’s technological capabilities.
 
One way to improve data collection and use for sustainable development is to create an active link between the provision of services and the collection and processing of data for decision-making. Take health-care services. Every day, in remote villages of developing countries, community health workers help patients fight diseases (such as malaria), get to clinics for checkups, receive vital immunizations, obtain diagnoses (through telemedicine), and access emergency aid for their infants and young children (such as for chronic under-nutrition). But the information from such visits is usually not collected, and even if it is put on paper, it is never used again.
 
We now have a much smarter way to proceed. Community health workers are increasingly supported by smart-phone applications, which they can use to log patient information at each visit. That information can go directly onto public-health dashboards, which health managers can use to spot disease outbreaks, failures in supply chains, or the need to bolster technical staff. Such systems can provide a real-time log of vital events, including births and deaths, and even use so-called verbal autopsies to help identify causes of death. And, as part of electronic medical records, the information can be used at future visits to the doctor or to remind patients of the need for follow-up visits or medical interventions.
 
Education provides the same kind of vast opportunity. Currently, school enrollment rates tend to be calculated based on student registrations at the beginning of the school year, even though actual attendance may be far below the registration rate. Moreover, officials wishing to report higher enrollment rates sometimes manipulate registration data, so we never get an accurate picture of who is actually at school.
 
With mobile apps, schools and community education workers can log student and teacher attendance on a transparent, real-time basis, and follow up more easily with students who drop out, especially for reasons that could be overcome through informed intervention by community education workers.
 
This information can be fed automatically into dashboards that education administrators can use to track progress in key areas.
 
Such data collection can accelerate sustainable development by improving decision-making.
 
But that is only the first step. The same techniques should also be used to collect some of the key indicators that measure progress on the SDGs.
 
In fact, measuring progress at frequent intervals, and publicizing the successes and shortfalls, is vital to keeping the world on track to meet its ambitious long-term targets. Doing so would not only enable us to reward governments that are fostering progress; it would also keep laggard governments accountable for their weak performance and, one hopes, motivate them to redouble their efforts.
 
The need for such real-time measurement became apparent over the last 15 years, when the world was pursuing the Millennium Development Goals. Given that many key indicators are not yet collected in real time, but only through laborious retrospective household surveys, the indicators for the key poverty-reduction goal are as much as five years out of date for many countries. The world is aiming for 2015 targets for poverty, health, and education, with, in some cases, key data only up to 2010.
 
Fortunately, the information and communications technology revolution and the spread of broadband coverage nearly everywhere can quickly make such time lags a thing of the past. As indicated in the report A World that Counts: Mobilizing the Data Revolution for Sustainable Development, we must modernize the practices used by statistical offices and other public agencies, while tapping into new sources of data in a thoughtful and creative way that complements traditional approaches.
 
Through more effective use of smart data – collected during service delivery, economic transactions, and remote sensing – the fight against extreme poverty will be bolstered; the global energy system will be made much more efficient and less polluting; and vital services such as health and education will be made far more effective and accessible.
 
With this breakthrough in sight, several governments, including that of the United States, as well as businesses and other partners, have announced plans to launch a new “Global Partnership for Sustainable Development Data” at the UN this month. The new partnership aims to strengthen data collection and monitoring efforts by raising more funds, encouraging knowledge-sharing, addressing key barriers to access and use of data, and identifying new big-data strategies to upgrade the world’s statistical systems.
 
The UN Sustainable Development Solutions Network will support the new Global Partnership by creating a new Thematic Network on Data for Sustainable Development, which will bring together leading data scientists, thinkers, and academics from across multiple sectors and disciplines to form a center of data excellence. We are delighted to be chairing this network, which has at its core a commitment to turn facts and figures into real development progress.

We firmly believe the data revolution can be a revolution for sustainable development, and we welcome partners from around the world to join us.
 



Opinions

Pope Francis’ fact-free flamboyance

By George F. Will 


Pope Francis delivers his message during an audience with faithful at the Vatican. (Gregorio Borgia/Associated Press )


Pope Francis embodies sanctity but comes trailing clouds of sanctimony. With a convert’s indiscriminate zeal, he embraces ideas impeccably fashionable, demonstrably false and deeply reactionary. They would devastate the poor on whose behalf he purports to speak — if his policy prescriptions were not as implausible as his social diagnoses are shrill.

Supporters of Francis have bought newspaper and broadcast advertisements to disseminate some of his woolly sentiments that have the intellectual tone of fortune cookies. One example: “People occasionally forgive, but nature never does.” The Vatican’s majesty does not disguise the vacuity of this. Is Francis intimating that environmental damage is irreversible? He neglects what technology has accomplished regarding London’s air (see Page 1 of Dickens’s “Bleak House”) and other matters.

And the Earth is becoming “an immense pile of filth”? Hyperbole is a predictable precursor of yet another U.N. Climate Change Conference — the 21st since 1995. Fortunately, rhetorical exhibitionism increases as its effectiveness diminishes. In his June encyclical and elsewhere, Francis lectures about our responsibilities, but neglects the duty to be as intelligent as one can be. This man who says “the Church does not presume to settle scientific questions” proceeds as though everything about which he declaims is settled, from imperiled plankton to air conditioning being among humanity’s “harmful habits.” The church that thought it was settled science that Galileo was heretical should be attentive to all evidence.

Francis deplores “compulsive consumerism,” a sin to which the 1.3 billion persons without even electricity can only aspire. He leaves the Vatican to jet around praising subsistence farming, a romance best enjoyed from 30,000 feet above the realities that such farmers yearn to escape.

The saint who is Francis’s namesake supposedly lived in sweet harmony with nature. For most of mankind, however, nature has been, and remains, scarcity, disease and natural — note the adjective — disasters. Our flourishing requires affordable, abundant energy for the production of everything from food to pharmaceuticals. Poverty has probably decreased more in the past two centuries than in the preceding three millennia because of industrialization powered by fossil fuels. Only economic growth has ever produced broad amelioration of poverty, and since growth began in the late 18th century, it has depended on such fuels.

Matt Ridley, author of “The Rational Optimist,” notes that coal supplanting wood fuel reversed deforestation, and that “fertilizer manufactured with gas halved the amount of land needed to produce a given amount of food.” The capitalist commerce that Francis disdains is the reason the portion of the planet’s population living in “absolute poverty” ($1.25 a day) declined from 53 percent to 17 percent in three decades after 1981. Even in low-income countries, writes economist Indur Goklany, life expectancy increased from between 25 to 30 years in 1900 to 62 years today. Sixty-three percent of fibers are synthetic and derived from fossil fuels; of the rest, 79 percent come from cotton, which requires synthetic fertilizers and pesticides. “Synthetic fertilizers and pesticides derived from fossil fuels,” he says, “are responsible for at least 60 percent of today’s global food supply.” Without fossil fuels, he says, global cropland would have to increase at least 150 percent — equal to the combined land areas of South America and the European Union — to meet current food demands.

Francis grew up around the rancid political culture of Peronist populism, the sterile redistributionism that has reduced his Argentina from the world’s 14th highest per-capita gross domestic product in 1900 to 63rd today. Francis’s agenda for the planet — “global regulatory norms” — would globalize Argentina’s downward mobility.

As the world spurns his church’s teachings about abortion, contraception, divorce, same-sex marriage and other matters, Francis jauntily makes his church congruent with the secular religion of “sustainability.” Because this is hostile to growth, it fits Francis’s seeming sympathy for medieval stasis, when his church ruled the roost, economic growth was essentially nonexistent and life expectancy was around 30.
 
Francis’s fact-free flamboyance reduces him to a shepherd whose selectively reverent flock, genuflecting only at green altars, is tiny relative to the publicity it receives from media otherwise disdainful of his church. Secular people with anti-Catholic agendas drain his prestige, a dwindling asset, into promotion of policies inimical to the most vulnerable people and unrelated to what once was the papacy’s very different salvific mission.

He stands against modernity, rationality, science and, ultimately, the spontaneous creativity of open societies in which people and their desires are not problems but precious resources.

Americans cannot simultaneously honor him and celebrate their nation’s premises.


Fed Blows It....No Confidence...

By: Jack Steiman & Robert New


As the Byrd's wrote a long, long time ago. There is a season, turn, turn, turn. The fed had been on a long term zero policy rant and refused to raise rates even a quarter of a percent due to the fears of a global slow down. The stock market fell in love with the idea of zero rates since it meant there were few other places to use your dollars with the ability to make any real other dollars. On and on it went.

Week after week and month after month. The fed had some decent reasons to hold near zero but as things got slightly better she still refused to give that first rate hike which for the masses meant she believed things were really getting better. Her refusal to do so while things were seemingly getting better made most realize that the fed thought any short term economic strength was not sustainable.

That thinking was correct as we recently saw China print a sub 50 reading on their manufacturing which signaled recession. Not only that we saw our own manufacturing number fall to 51 after hitting near 58 at its highs. Things clearly are not improving. So yesterday came and the masses were again hoping for some confidence to be shown by our fed leader who always wants those 401k's to go higher. Give us a rate hike the market was saying. Tell us things are truly improving in our economy and hopefully abroad as well but especially our economy. She didn't deliver the goods. She didn't raise and the wording about the global economies and even our own economy were disappointing.

Weakness a word used far too often for anyone to be happy about. If things really aren't improving then stocks are over valued. Sell! Today we sold. Late yesterday we sold. No confidence equates to not much on the positive side for stocks. I believe strongly and stated many times before the report came out that I thought no rate hike would be a negative for the very first time. Sadly and unhappily I was correct. A rate hike is very much what the market wanted but did not receive. The poor action from late yesterday through today a reflection of her lack of confidence. If the fed doesn't like what she sees then we shouldn't either and who can blame anyone for believing that. So today we saw a big gap down that was left open and thus caused technical damage which isn't good for the bulls. We now have to adapt to what we see and that's to be even more cautious in the short term. Just too much technical damage created by today's action across the board after most major indexes and sectors stalled off 50 EMA tests as seen in the SP 500 and Dow charts below. Do what feels right to you but for me it's about capital preservation. No fun time is back yet again.

S&P500 Daily Chart
Dow Daily Chart

The market certainly has a chance to retest the old lows but before we get there we have to remember that we are dealing with short interest that's completely off the charts. The fear and pessimism has risen dramatically over the past several weeks to months and that is a good thing if you're bullish. If you're bullish you at least want to see folks getting dark emotionally as things falter. No lack of that around the market these days. The bull bear should still be around zero after today's poor trading so we have nothing to worry about in terms of getting out of the emotion of fear. It's here to stay for quite some time. Even if the market improves there will be a lack of confidence amongst traders thus froth isn't anything we'll be seeing for a very long time to come. Once the masses have made friends with fear due to losses in the stock market, it takes a long time to have the desire to get back in the game or to believe things will get better even that process has already begun. It won't be accepted. It won't be believed. All of this will help the bullish case down the road. Now we have to learn as we go based upon the usual price/oscillator relationship. We can always retest the lows or go lower than that but fear says things should not get out of hand on the down side. Time will tell that tale.

Rough action in many sectors after the release of the Federal Reserve decision. The Banks fell by close to 5% as seen in our chart below:

Banking Index Daily Chart

The Transports reversed lower after a bounce back into its 6 Month Downtrend Line seen below:

Transports Daily Chart


This is a time to think about safety first and gains last. The gap down and run today leaving the gap wide open is not bullish for the near term. It created a lot of technical damage. Just getting back through this gap will take a tremendous amount of work by the bulls. They'll need a catalyst and now their main source of something to that effect, the fed, is not there any longer.

She has made her bed with the zero rate policy and isn't likely to reverse that decision any time soon. 1867 needs to hold on any back test. If it doesn't, we can see 1800/1820 very quickly. If that does indeed take place the damage technically would get far worse than it already is. These aren't the best of times for the bulls but at least pessimism is ramping to all time levels so they can hang their hats on that for the mid term. One day at a time as always. A dangerous market so please be careful.