Draghi Ready to Fight

Doug Nolan

A few Friday Bloomberg headlines: “Asian Stocks Jump by Most in Four Months on Stimulus Speculation;” “Japanese Stocks Surge by Most in Four Months as Bears Retreat;” “Hong Kong Dollar Jumps Most in 12 Years as Global Stocks Rally.” It was quite a week.

Back in early-December I posited that Mario Draghi had evolved into the world’s most powerful central banker. I also stated my view that his inability to orchestrate a larger ECB QE program was likely an inflection point in the markets’ confidence in Draghi and central banking more generally. Mario’s not going down without a fight.

Global markets were too close to dislocating this week. Wednesday saw the S&P500 trade decisively below August lows. Japan’s Nikkei 225 Index sank to test November 2014 lows. 
Emerging stocks fell to six-year lows, with European equities at 13-month lows. Wednesday also saw WTI crude trade below $27 (sinking almost 7%), boosting y-t-d losses to 25%. Credit spreads were blowing out, and currency markets were increasingly disorderly. Early Thursday trading saw the Russian ruble down 5.3% (at a record low vs. dollar), with Brazil’s real also under intense pressure. The Hong Kong dollar peg was looking vulnerable. The VIX traded to the highest level since the August “flash crash,” while the Japanese yen traded to one-year highs (vs. $). De-risking/de-leveraging dynamics were quickly overwhelming global markets.

The Italian banking sector sank 7% Wednesday, pushing y-t-d losses above 20% (down 32% from 2015 highs). Fears of mounting bad loans and undercapitalization have been weighing on Italian and European bank shares and bonds. This week also saw a notable widening of sovereign spreads to bunds. Despite a post-Draghi narrowing of risk premiums, Italian spreads to bunds widened another seven bps this week, with Portuguese spreads blowing out 35 bps. A fragile European financial sector was rapidly succumbing to a deepening global financial crisis.

January 21 – Financial Times (Claire Jones and Elaine Moore): “Mario Draghi signalled that the European Central Bank is prepared to launch a fresh round of monetary stimulus as soon as March, bolstering a recovery on US and European equities in the wake of heavy losses this year. The ECB president said it would ‘review and possibly reconsider’ its monetary policy stance at its next meeting in six weeks… ‘We are not surrendering in front of these global factors,’ he said, referring to the China slowdown and the falling oil price that have destabilised global markets in recent weeks. The ECB has ‘the power, the willingness, the determination to act, and the fact that there are no limits to our action’ to bring inflation up to its target of just below 2%, he added. Policymakers, he said, would ‘absolutely reject’ attempts to derail their efforts to raise inflation ‘without undue delay’.”
January 22 – Bloomberg (Roxana Zega and Alan Soughley): “European stocks posted their biggest two-day gain since October 2011 on increased investor confidence that central banks will act to support markets. The Stoxx Europe 600 Index rose 3% to 338.36 at the close of trading, taking its two-day climb to 5%.”
Italian bank stocks rallied 7% Thursday on Draghi. Germany’s DAX index surged 5.6% off Wednesday’s lows. Stocks in Spain and Italy rallied 7% and 8%. Japan’s Nikkei surged 5.88% on Friday. Overall, from Wednesday’s lows the S&P500 recovered 5.5%. Crude oil enjoyed its “biggest rally in seven years” (up almost 17% from Wednesday lows).

Bloomberg adjusted its original Friday morning headline, “Global Stocks Charmed by Draghi Effect as Oil Rallies With Ruble,” to “Global Stocks Charmed by Central Banks as Oil Jumps, Bonds Fall.” Draghi did have some help. The People’s Bank of China (PBOC) injected $61 billion of liquidity into the system, the “most in three years.” China’s Vice President assured the markets that Beijing will “look after” Chinese stock investors. There was also talk of added stimulus from the Bank of Japan (BOJ) and a much more dovish Fed. The markets interpreted a feistily dovish Draghi as evidence that global central bankers had assumed crisis-management mode.

The markets will now have six-weeks to ponder whether Draghi can deliver. Even assuming that he successful drags ECB hawks along, it’s not easy to envisage how an additional $10 billion or so of QE will have much impact on (bursting) global Bubble Dynamics. An emphatic Draghi was, however, certainly capable of reversing global risk markets that were increasingly positioned/hedged for bearish outcomes. Over the years we’ve witnessed powerful short squeezes take on lives of their own, repeatedly giving the global Bubble an extended lease on life. And while bear market rallies tend to be the most spectacular, at this point I expect nothing beyond fleeting effects on the unfolding global Bubble unwind. Draghi is a seasoned pro at punishing speculators betting against Europe.

The media fixates on “corrections,” “bottoms” and “bear markets.” Of late, there’s been some comparison of the current backdrop to previous periods, most notably 2008/09 and 2000. I have no desire to try to leapfrog other bearish commentary. My objective is always to present an analytical framework that assists in understanding the extraordinary world in which we live and operate.

Going back to 2009, I’ve referred to the “global government finance Bubble” as the “Granddaddy of All Bubbles.” I am these days more fearful than ever that this period has indeed been the terminal phase of decades of serial Bubbles. Bubble excess made it to the heart of contemporary “money” and Credit – central bank Credit and government debt. This period also saw a historic Bubble engulf the emerging markets, including China. It encompassed stocks, bonds, derivatives and financial assets generally – virtually everywhere. Central bankers “printed” Trillions out of thin air.

Today’s predicament is becoming increasingly apparent: as the current global Bubble deflates and risk aversion takes hold, there is both a lack of sources of reflationary Credit and insufficient economic growth potential necessary to inflate an even bigger reflationary global Bubble. With confidence in central banking waning and the monstrous Chinese Bubble faltering, there is confirmation in the thesis that a most prolonged period of inflationary financial Bubbles is drawing to a close.

The collapse of the Soviet Union coupled with the Greenspan Fed’s push into activist central banking ushered in what was almost universally accepted as an epic victory for free-market capitalism. Too much of this was a quite powerful illusion. U.S. finance was becoming increasingly state-directed. The Fed manipulated interest-rates and the shape of the yield curve. The Washington-based GSEs moved to completely dominate mortgage Credit. The massive U.S. “too big to fail” financial conglomerates came to dictate securities and derivatives-based finance – and market-based finance monopolized the real economy. And each faltering Bubble ensured more aggressive central bank “activism” – lower rates, greater market intervention and increasingly outlandish talk of “helicopter money” and the government printing press.

With the bursting of the mortgage finance Bubble, the Fed and global central banks resorted to desperate measures – reckless “money” printing, manipulation and market liquidity backstops. 
Along the way, virtually the entire world adopted U.S.-style market-based finance and policymaking. The process culminated with communist China adopting U.S.-style finance. So long as inflating financial markets were supportive of central planners’ objectives, everyone could pretend it was a move toward free markets.

What began with Greenspan’s early-nineties covert bank recapitalization evolved into Bernanke’s foolish policy to openly inflate risk markets with new central bank Credit. 
Amazingly, U.S. inflationism took the world by storm.

The issue today goes much beyond a stock market correction, a bear market or even global financial crisis. Contemporary central banking has failed. Theories have failed. Doctrine has failed. The inability to spur self-sustaining economic recovery has been a major issue. Yet, from my perspective, the critical failure has been the incapacity to generate general price inflation. 
The delusion has been that central bankers would always enjoy the capacity to inflate away excessive debt. Bubbles needn’t be feared, not with central banks “mopping” up with reflationary monetary stimulus. And for quite a while it seemed that “enlightened” contemporary inflationist doctrine had it all figured out.

Central bankers and market-based finance are a dangerous mix. Over the years, I have referred to the market-based finance as the most powerful monetary policy transmission mechanism in the history of central banking. Greenspan could inflate the markets – and the entire system – with inklings of a 25 bps rate cut. Later it took Dr. Bernanke Trillions – the dawn of “whatever it takes,” and markets rejoiced.

Central banks around the world abused their newfound power and the power of financial markets. And for seven years egregious monetary inflation has been used specifically to inflate global securities markets. And “shock and awe,” “whatever it takes,” and “push back against a tightening of financial conditions” all worked to ensure the markets that central bankers would no longer tolerate crises, recessions or even a bear market.

For seven long years, risk misperceptions and market price distortions turned progressively more severe. Inflating securities markets around the globe became, as they do, self-reinforcing. “Money” flooded into the markets – especially through ETFs and derivatives. Trillions flowed into perceived safe equities index and corporate debt instruments. With central bankers providing a competitive advantage for leveraging and professional speculation, the hedge fund industry swelled to $3.0 TN (matching the $3 TN ETF complex). Wealth effects and the loosest financial conditions imaginable boosted spending, corporate profits, incomes, investment, tax receipts and GDP – not to mention M&A, stock repurchases and financial engineering.

But this historic wealth illusion has been built on a foundation of false premises – that central bank monetization can inflate price levels and spur system inflation necessary to grow out of debt problems; that securities markets should trade at higher multiples based upon contemporary central banker capacities to spur self-reinforcing economic recovery and liquid securities markets; that 2008 was “the hundred year flood.” In reality, central bankers inflated history’s greatest divergence between global securities prices and economic prospects.

Global markets have commenced what will be an extremely arduous adjustment process. 
Markets must now confront the harsh reality that central bankers don’t have things under control. Risk premiums must rise significantly – which means the destabilizing self-reinforcing dynamic of lower securities prices, faltering economic growth, uncertainty, fear and even higher risk premiums. This means major issues for global derivatives markets that have inflated to hundreds of Trillion on misperceptions and specious assumptions. I’ll assume Draghi, Kuroda, Yellen, the PBOC and others resort to more QE – and perhaps they prolong the adjustment period while holding severe global crisis at bay. But the global Bubble has burst. And if QE has been largely ineffective in the past, we’ll see how well it works as confidence in central banking withers. Perhaps this helps explain why global financial stocks now trade like death.

World faces wave of epic debt defaults, fears central bank veteran

Exclusive: Situation worse than it was in 2007, says chairman of the OECD's review committee

By Ambrose Evans-Pritchard, in Davos

Burning euro notes

The next task awaiting the global authorities is how to manage debt write-offs without setting off a political storm Photo: Rex
The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned.
"The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up," said William White, the Swiss-based chairman of the OECD's review committee and former chief economist of the Bank for International Settlements (BIS).

"Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief," he said.

"It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something," he told The Telegraph on the eve of the World Economic Forum in Davos.
"The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians."

The next task awaiting the global authorities is how to manage debt write-offs - and therefore a massive reordering of winners and losers in society - without setting off a political storm.
Mr White said Europe's creditors are likely to face some of the biggest haircuts. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed.

The European banking system may have to be recapitalized on a scale yet unimagined, and new "bail-in" rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.

The warnings have special resonance since Mr White was one of the very few voices in the central banking fraternity who stated loudly and clearly between 2005 and 2008 that Western finance was riding for a fall, and that the global economy was susceptible to a violent crisis.

Mr White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows.

The result is that these countries have now been drawn into the morass as well. Combined public and private debt has surged to all-time highs to 185pc of GDP in emerging markets and to 265pc of GDP in the OECD club, both up by 35 percentage points since the top of the last credit cycle in 2007.

"Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too," Mr White said.

Mr White, who also chief author of G30's recent report on the post-crisis future of central banking, said it is impossible know what the trigger will be for the next crisis since the global system has lost its anchor and is inherently prone to breakdown.

A Chinese devaluation clearly has the potential to metastasize. "Every major country is engaged in currency wars even though they insist that QE has nothing to do with competitive depreciation. They have all been playing the game except for China - so far - and it is a zero-sum game. China could really up the ante."  

Mr White said QE and easy money policies by the US Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as "inter-temporal smoothing".

It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you. "By definition, this means you cannot spend the money tomorrow," he said.

Federal Reserve

A reflex of "asymmetry" began when the Fed injected too much stimulus to prevent a purge after the 1987 crash. The authorities have since allowed each boom to run its course - thinking they could safely clean up later - while responding to each shock with alacrity. The BIS critique is that this has led to a perpetual easing bias, with interest rates falling ever further below their "Wicksellian natural rate" with each credit cycle.

The error was compounded in the 1990s when China and eastern Europe suddenly joined the global economy, flooding the world with cheap exports in a "positive supply shock". Falling prices of manufactured goods masked the rampant asset inflation that was building up. "Policy makers were seduced into inaction by a set of comforting beliefs, all of which we now see were false. They believed that if inflation was under control, all was well," he said.

In retrospect, central banks should have let the benign deflation of this (temporary) phase of globalisation run its course. By stoking debt bubbles, they have instead incubated what may prove to be a more malign variant, a classic 1930s-style "Fisherite" debt-deflation.

Mr White said the Fed is now in a horrible quandary as it tries to extract itself from QE and right the ship again. "It is a debt trap. Things are so bad that there is no right answer. If they raise rates it'll be nasty. If they don't raise rates, it just makes matters worse," he said.

There is no easy way out of this tangle. But Mr White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy - call it Keynesian, if you wish - and launch an investment blitz on infrastructure that pays for itself through higher growth.

"It was always dangerous to rely on central banks to sort out a solvency problem when all they can do is tackle liquidity problems. It is a recipe for disorder, and now we are hitting the limit," he said.

The world economy

Who’s afraid of cheap oil?

Low energy prices ought to be a shot in the arm for the economy. Think again

ALONG with bank runs and market crashes, oil shocks have rare power to set monsters loose.

Starting with the Arab oil embargo of 1973, people have learnt that sudden surges in the price of oil cause economic havoc. Conversely, when the price slumps because of a glut, as in 1986, it has done the world a power of good. The rule of thumb is that a 10% fall in oil prices boosts growth by 0.1-0.5 percentage points.

In the past 18 months the price has fallen by 75%, from $110 a barrel to below $27. Yet this time the benefits are less certain. Although consumers have gained, producers are suffering grievously. The effects are spilling into financial markets, and could yet depress consumer confidence. Perhaps the benefits of such ultra-cheap oil still outweigh the costs, but markets have fallen so far so fast that even this is no longer clear.

The new economics of oil
The world is drowning in oil. Saudi Arabia is pumping at almost full tilt. It is widely thought that the Saudis want to drive out higher-cost producers from the industry, including some of the fracking firms that have boosted oil output in the United States from 5m barrels a day (b/d) in 2008 to over 9m b/d now. Saudi Arabia will also be prepared to suffer a lot of pain to thwart Iran, its bitter rival, which this week was poised to rejoin oil markets as nuclear sanctions were lifted, with potential output of 3m-4m b/d.

Despite the Saudis’ efforts, however, producers have proved resilient. Many frackers have eked out efficiencies. They hate the idea of plugging their wells only for the wildcatter on the next block to reap the reward when prices rebound. They will not pack up so long as prices cover day-to-day costs, in some cases as low as $15 a barrel (see article). Meanwhile oil stocks in the mostly rich-country OECD in October stood at 267 days’ net imports, almost 50% higher than five years earlier. They will continue to grow, especially if demand slows by more than expected in China and the rest of Asia. Forecasting the oil price is a mug’s game (as the newspaper that once speculated about $5 oil, we speak from experience), but few expect it to start rising before 2017. Today’s price could mark the bottom of the barrel. Some are predicting a trough of as low as $10.

The lower the better, you might say. Look at how cheap oil has boosted importers, from Europe to South Asia. The euro area’s oil-import bill has fallen by 2% of GDP since mid-2014. India has become the world’s fastest-growing large economy.

Yet the latest lurch down is also a source of anxiety. Collapsing revenues could bring political instability to fragile parts of the world, such as Venezuela and the Gulf, and fuel rivalries in the Middle East. Cheap oil has a green lining, as it drags down the global price of natural gas, which crowds out coal, a dirtier fuel. But in the long run, cheap fossil fuels reduce the incentive to act on climate change. Most worrying of all is the corrosive new economics of oil.

In the past cheap oil has buoyed the world economy because consumers spend much more out of one extra dollar in their pocket than producers do. Today that reckoning is less straightforward than it was. American consumers may have been saving more than was expected. Oil producers are tightening their belts, having spent extravagantly when prices were high. After the latest drop in crude prices, Russia announced a 10% cut in public spending. Even Saudi Arabia is slashing its budget to deal with its deficit of 15% of GDP.

Cheap oil also hurts demand in more important ways. When crude was over $100 a barrel it made sense to spend on exploration in out-of-the-way provinces, such as the Arctic, west Africa and deep below the saline rock off the coast of Brazil. As prices have tumbled, so has investment. Projects worth $380 billion have been put on hold. In America spending on fixed assets in the oil industry has fallen by half from its peak. The poison has spread: the purchasing managers’ index for December, of 48.2, registered an accelerating contraction across the whole of American manufacturing. In Brazil the harm to Petrobras, the national oil company, from the oil price has been exacerbated by a corruption scandal that has paralysed the highest echelons of government.

The fall in investment and asset prices is all the more harmful because it is so rapid. As oil collapses against the backdrop of a fragile world economy, it could trigger defaults.

The possible financial spillovers are hard to assess. Much of the $650 billion rise in emerging-market corporate debt since 2007 has been in oil and commodity industries. Oil plays a central role in a clutch of emerging markets prone to trouble. With GDP in Russia falling, the government could well face a budgetary crisis within months. Venezuela, where inflation is above 140%, has declared an economic state of emergency.

Other oil producers are prone to a similar, if milder, cycle of weaker growth, a falling currency, imported inflation and tighter monetary policy. Central banks in Colombia and Mexico raised interest rates in December. Nigeria is rationing dollars in a desperate (probably doomed) effort to boost its currency.

There are strains in rich countries, too. Yields on corporate high-yield bonds have jumped from about 6.5% in mid-2015 to 9.7% today. Investors’ aversion spread quickly from energy firms to all borrowers. With bears stalking equity markets, global indices are plumbing 30-month lows. Central bankers in rich countries worry that persistent low inflation will feed expectations of static or falling prices—in effect, raising real interest rates. Policymakers’ ability to respond is constrained because rates, close to zero, cannot be cut much more.

Make the best of it
The oil-price drop creates vast numbers of winners in India and China. It gives oil-dependent economies like Saudi Arabia and Venezuela an urgent reason to embrace reform. It offers oil importers, like South Korea, a chance to tear up wasteful energy subsidies—or boost inflation and curb deficits by raising taxes. But this oil shock comes as the world economy is still coping with the aftermath of the financial crash. You might think that there could be no better time for a boost. In fact, the world could yet be laid low by an oil monster on the prowl.

Central America’s Gangs Are All Grown Up

And more dangerous than ever.

By Douglas Farah

Central America’s Gangs Are All Grown Up

The possible arrival of a few thousand Syrian refugees in the United States has caused a political firestorm, but there is a much more serious humanitarian crisis brewing on America’s southern border. The growing wave of unaccompanied children flowing from the northern tier of Central America across the U.S.-Mexico border could very well turn into a long-lasting tsunami due to the horrific violence and gang warfare wracking the region.

Despite the announcement by Secretary of State John Kerry last week that the United States will increase the number of Central American refugees admitted and work with the United Nations to help those at risk, the number of unaccompanied minors fleeing the Northern Triangle of El Salvador, Honduras, and Guatemala will likely soon surpass the 2014 surge. Nor are recent efforts by the Obama administration to round up and deport those already in the United States illegally likely to blunt the dynamics driving people to leave.

The spreading wave of savagery — including beheadings, dismemberment, and systematic rape — is the result of the growing involvement of the Mara Salvatrucha (MS-13) and Barrio 18 gangs in the global cocaine trade. The increasing revenues of these transnational gangs have pushed the groups toward greater sophistication and political awareness. The result is a lethal combination of political messaging that is part liberation theology and part Pablo Escobar — the outcome being that these gangs now boast vast territorial control, growing military power, and rapidly expanding criminal enterprises.

With soaring revenues from transporting and selling cocaine and crack, the inter-gang violence and bloody territorial disputes have spread and grown more brutal. The gangs are not only fighting each other, but muscling in on territories of the well-entrenched drug trafficking transport networks tied to Mexico’s Sinaloa cartel.

As a result, El Salvador’s homicide rate in 2015 was 105 per 100,000 inhabitants, the highest in the world. Guatemala and Honduras ranked among the world’s top five. This level of violence makes daily living in much of the Northern Triangle a potentially fatal gamble. Boys are corralled into gangs; those who refuse are killed. Girls as young as 11 years old are taken as jainas, or sex slaves.

This inescapable threat is why parents and relatives send their children on the treacherous and costly trip to the United States.

“We are living through the worst war in our history, but no one wants to acknowledge it as a war,” said Dagoberto Gutiérrez, a former commander of the Farabundo Martí National Liberation Front (FMLN), a onetime Marxist-led guerrilla army that fought the U.S.-backed military in El Salvador’s bloody 12-year civil war. Sitting in his small office at Salvadoran Lutheran University, Gutiérrez said that in the civil war, at least, the battle lines were clear.

“Now we have multiple wars underway at the same time and a government that has no capacity or will to save its people,” he said.

The FMLN, the most formidable rebel force in the region in the 1980s, became a legal political party in 1992 as part of a peace agreement. It won the presidential elections in 2009 and 2014, and has so far proved incapable of stemming the worst spate of violence since death squads hunted down suspected communists decades ago.

While gang violence was an important driver in the 2014 immigration crisis, that influx was also fed by deceptive reports in Central America that the children could receive U.S. citizenship. In response, the governments of the Northern Triangle countries, in conjunction with the United States, launched a campaign to correct the misinformation. More importantly, Mexico agreed to dramatically step up its southern border enforcement efforts to halt the immigrants before they reached the United States. The flow slowed to a trickle for most of 2015, before accelerating again in the past four months. Now the convergence of gang violence and growing territorial control — coupled with rampant corruption and lack of any faith in the existing political structures — is overwhelming those fragile firewalls.

While the budget Congress passed in December surprisingly gave the Obama administration $750 million of the $1 billion requested in aid for Central America, 75 percent of aid was conditioned on the regional governments reining in corruption, strengthening the rule of law and judicial structures, and ending rampant impunity. Given the complexities of the possible disbursements and the unlikeliness of the conditions being met, money will likely not begin to flow for at least a year and then only in trickles.

Meanwhile, the gangs — each with tens of thousands of members — have become vicious occupying forces in much of the Northern Triangle, replacing the hollowed-out state structures with deliberate trappings of their own authority. MS-13 is now an important link in the chain that moves cocaine to Mexico and the United States — more a political military force than a street gang. The scruffy, rag-tag teens of years past were violent, brutal, and often stoned, but could only afford homemade pistols and the rare AK-47 or hand grenades left over from the 1980s. Now many of the clicas, or neighborhood gang organizations, have assault rifles, vehicles, safe houses, and encrypted satellite phones. Some factions are even able to deploy drones to monitor the movements of the police or rival gangs.

With absolute impunity, the gangs extract payments from neighborhood businesses, enforce curfews, man roadblocks to control access to their neighborhoods, and decide who can sell or move drugs and where. MS-13 also has installed a rudimentary judicial system where gang-imposed punishments — from harsh beatings to public executions — are meted out for offenses such as stealing, informing the police of gang activities, or abusing one’s spouse. Some clicas in Honduras also fund school lunch programs for poor children in their territory — usually just a bowl of soup and bread, but far more than the state has offered. Programs such as these have enhanced the gang’s legitimacy and political support, and allowed MS-13 to dramatically expand the areas under its control.
How did the gang war get this bad? Blame peace.

The misnamed gang truce in El Salvador in 2012, brokered by the government at the behest of local drug traffickers and supported by the Organization of American States, proved to be a tipping point in the gangs’ political and criminal evolution. The rising strength of the gangs, particularly MS-13, is directly tied to the truce itself: They used the cease-fire to rearm, reorganize, and build closer ties to regional cocaine transport networks. The leadership had almost two years to develop a political and economic strategy, bring in advisors, and begin a profound metamorphosis from street gangs to criminal organizations with territorial and political control.

Empowered by their ability to negotiate as equals with the government, the gangs for the first time came to understand their true political strength. When they found that even their most preposterous demands (prostitutes in prison, unfettered cell-phone communications, police withdrawal from the interiors of jails) could be met if they dumped enough dead bodies on the streets, the gangs rediscovered their primary negotiating tool: murder. In a 2013 interview with gang leaders in El Salvador, they laughed when asked about how negotiations were conducted with the government. It was very simple, one replied: “We dump bodies on the street until they say yes. And they always say yes.”

By the time the truce formally fell apart in early 2014, the strategy was laid bare. The government and the Organization of American States had trumpeted the official drop in homicides by more than 40 percent. But the Institute of Legal Medicine, the forensic body under the Salvadoran Supreme Court, found that while there were more than 800 fewer homicides reported, the number of “disappeared” — a term with deep psychological impact in the wake of the nation’s civil war — had risen by an almost identical amount. Many of the “disappeared” had been buried in clandestine cemeteries. The excavation of those graveyards simply overwhelmed the system, and efforts to identify the bodies were largely abandoned.

MS-13, to a much larger degree than Barrio 18, seems intent on rebranding and remaking itself, based on the lessons it learned during the truce and after several years of sending members to enroll in police, army, law school, and accounting programs. In the first nine months of 2015, the army expelled 223 suspected gang members, according to published reports. But many more are inside, quietly rising through the ranks.

The new discipline is evident in several ways. Tattoos, once de rigueur, are now banned — not because of potential police harassment but because the gang leaders now feel that they are a relic of the past. On the soccer field, in parts of Honduras’s second-largest city, San Pedro Sula, violent play or threats to the referee are no longer tolerated, and MS-13 players have been taken off the field and beaten for breaking the new rules. The reason: If one cannot be disciplined on the soccer field, one cannot be disciplined in the gang.

Current leaders are seeking to project a more corporate image and have largely marginalized many in the historic leadership, who remain in prison. The ranfla libre, or leaders on the street, have moved MS-13 decisively in a new direction. Law enforcement and intelligence officials say the gangs are opening semi-legitimate businesses, both to generate income and to launder funds. Among the favorites are public transport buses, bakeries, gas stations, and other retail businesses that generate large amounts of cash.

The desire to go corporate is visible. My recent meetings with senior MS-13 leaders of the ranfla libre in El Salvador were unlike previous ones. We met in the restaurants of luxury hotels, not the dusty streets of the slums. They wore dress shirts and carried briefcases, rather than tattered jeans and homemade pistols, and the discussions were largely free of the gang argot that peppers most such talks.

The discussions centered on the gang’s growing territorial control, U.S. policy toward MS-13, and a feeling of betrayal by the FMLN — which, the leaders said, had failed to fully deliver on promises of large amounts of money in exchange for the blocs of votes the gangs delivered from their neighborhoods in the 2014 presidential election. Because the FMLN government then refused to negotiate a new truce as promised, the gang leaders said, MS-13 in El Salvador took to assassinating policemen, soldiers, and prosecutors — leading to retaliation by the state.

With the disintegration of the truce, there are indications that MS-13 is actively seeking to expand its operational capacity by emulating other armed actors on the world stage. In El Salvador, police showed me evidence from a raid on an MS-13 safe house: printed documents taken from the Internet relating to the military tactics of al Qaeda, the Islamic State, and Colombia’s FARC guerrillas. This is not to imply there is a link between the Northern Triangle gangs and any of these groups — only that MS-13 is actively looking to the literature of terrorist groups to learn.

There are some striking similarities between the behavior of some of MS-13 and the Islamic State.

Like the Islamic State, the gangs primarily recruit young, unemployed males with few economic opportunities, both in person and through extensive social media outreach. The recruiters promise a life of purpose and a chance to be part of something larger than oneself. The gangs radicalize recruits with videos of savage violence and a quasi-religious call to arms against other gangs and “civilians,” as non-gang members are called. Beheadings, dismemberments by chainsaw and machetes, and savage tortures are posted to YouTube as a multipronged tool to recruit new members and show how powerless the state is to stop them. This brazen violence has shredded the fabrics of these societies in ways far deeper than the civil wars of the 1980s.

Meanwhile, endemic police and governmental corruption only feeds the cycle of despair. It is no wonder so many thousands of families have been pushed to desperately entrust their children and their life’s savings to strangers in the hopes that at least these innocents can defy the long odds stacked against them and find a better life in the United States. Neither the Obama administration nor the Northern Triangle governments will likely be able to stem the exodus of those fleeing this new power configuration. We may well see an entire generation of Central Americans soon attempt to leave the countries of their birth.
Douglas Farah is a senior visiting fellow at the National Defense University's Center for Complex Operations. The views expressed in this article are those of the author and do not reflect the official policy or position of the National Defense University, the Department of Defense, or the U.S. government.

Why the U.S. Should Stand by the Saudis Against Iran

Much about the House of Saud is detestable, but that isn’t a reason to abandon a vital ally.

By Bret Stephens

President Franklin D. Roosevelt and Saudi Arabian King Abdul Aziz Ibn Saud meet aboard a U.S. Navy vessel near Suez, Egypt, Feb. 14, 1945.

President Franklin D. Roosevelt and Saudi Arabian King Abdul Aziz Ibn Saud meet aboard a U.S. Navy vessel near Suez, Egypt, Feb. 14, 1945. Photo: Associated Press

There is so much to detest about Saudi Arabia. The kingdom forbids women from driving and bars its doors to desperate Syrian refugees. For years its sybaritic leaders purchased their legitimacy by underwriting, and exporting, a bigoted and brutal version of Sunni Islam. Crude oil aside, it’s difficult to find much of value produced by the desert kingdom.

More recently, the Saudis have increased tensions with Iran by executing, over U.S. objections, a prominent radical Shiite cleric while waging a brutal war against Iran’s Shiite proxies in Yemen. So why should the U.S. feel obliged to take sides with the country that Israeli diplomat Dore Gold once called “Hatred’s Kingdom,” especially when the administration is also trying to pursue further opening with Tehran?

That’s a question that suddenly seems to be on Washington’s liberal foreign-policy minds, as if they’ve just discovered that we don’t exactly share Saudi moral values. Some on the right also seem to think that, with the U.S. leading the world in energy production, we no longer have much use for the Saudi alliance.

So let’s remind ourselves why it would be a bad—make that very bad—idea for the U.S. to abandon the House of Saud, especially when it is under increasing economic strain from falling oil prices and feels acutely threatened by a resurgent Iran. Despite fond White House hopes that the nuclear deal would moderate Iran’s behavior, Tehran hard-liners wasted no time this week disqualifying thousands of moderate candidates from running in next month’s parliamentary elections, and an Iranian-backed militia appears to be responsible for the recent kidnapping of three Americans in Iraq.

No wonder the Saudis are nervous. The nuclear deal guarantees Iran a $100 billion sanctions windfall that will offset its losses from falling oil prices while doing nothing to stop its regional imperialism. Russia’s military support for the Assad regime in Syria, along with its sale of advanced weaponry to Tehran, means that Riyadh’s regional enemies now enjoy the protection of a major nuclear power. Armed Iranian proxies are active in Lebanon, Syria and Yemen, and dominate much of southern Iraq.

Restive Shiite populations in Saudi Arabia’s oil-rich Eastern Province and neighboring Bahrain provide further openings for Iranian subversion on the Arabian peninsula.

Add to this an American president who is ambivalent about the House of Saud the way Jimmy Carter was about the Shah of Iran, and no wonder Riyadh is acting the way it is. If the administration is now unhappy about the Saudi war in Yemen or its execution of Shiite radicals, it has only itself to blame.

All this means that the right U.S. policy toward the Saudis is to hold them close and demonstrate serious support, lest they be tempted to continue freelancing their foreign policy in ways we might not like. It won’t happen in this administration, but a serious commitment to overthrow the Assad regime would be the place to start.

As it is, what’s the alternative? The House of Saud is not going to relocate en masse to its mansions on the French Riviera and leave a self-governing democracy behind. Instead, America’s distancing will bring them closer to the Russians or Chinese. They will also be tempted to repeat the mistakes of their past by drawing closer to Sunni extremists as a way of buying them off and as a counterweight to Iran.

Also contrary to the myth that the Saudis were somehow “behind” 9/11, the kingdom has been fighting al Qaeda for decades. It revoked Osama bin Laden’s citizenship in the early 1990s and pushed the Taliban to expel him from Afghanistan. Saudi intelligence has been vital in stopping major terrorist plots, including the 2010 al Qaeda plot to bomb cargo planes bound for the U.S.

The U.S. would not be safer without this kind of intelligence cooperation. Much worse would be a scenario in which the monarchy collapsed. The generally depressing results of the Arab Spring don’t inspire much hope of a peaceful democratic transition, and Saudi Arabia’s internal sectarian and tribal divisions could lead to an outcome similar to Syria’s. Islamic State and other jihadist groups would flourish. Iran would seek to extend its reach in the Arabian peninsula. The kingdom’s plentiful stores of advanced Western military equipment would also fall into dangerous hands.

Nor would such a civil war exhaust the region’s sectarian furies. As we’ve seen in Syria, Libya and Iraq, radical Islam flourishes in areas of chaos—the “management of savagery” is its explicit political aim. And a civil war in Saudi Arabia, population 30 million, could lead to a fresh refugee exodus that would further erode and overwhelm Europe’s borders.

So should the U.S. desist from encouraging the kingdom to reform? Of course not. Saudi women were allowed to participate as voters and candidates in municipal elections for the first time in December. That’s still a baby step, and the Saudis should use the city states of Dubai and Abu Dhabi as viable models for political reform. But it’s hard for the U.S. to urge such changes on a country that feels it’s being abandoned.

Foreign alliances are not like wardrobes: You cannot change them on the tide of fashion. America’s 71-year alliance with the kingdom is one we abandon at our peril.


The Real Reason Behind This Selloff

by: Martin Vlcek
- Currency and stock market regulations are making markets more volatile.

- Although these central bank and regulatory moves seemingly managed to suppress volatility, the risk will just rear its ugly head elsewhere, and with more vigor.

- China was probably the trigger for the current selloff, but the underlying reasons go much deeper.

- Tuesday's rebound driven by hopes for more China easing supports this assumption.

The U.S. (and global) markets have dealt investors an unpleasant welcome to 2016. In that light, please allow me a "shameless plug". Going into 2016, I expected very rough markets in 2016 compared to 2015. First, I heavily de-risked my premium subscription portfolio roughly a month ago on Dec. 23. Then I offered a very conservative guide to 2016 to all Seeking Alpha readers right before the market crash on Jan. 7 (written on Jan. 4th). I believe a lot of the rules in that article are still valid and will be extremely useful in 2016. So if I had to ask you to read just one article written by me recently, it would be this one.
The usual suspects
Back to the markets. The markets are selling off hard for a multitude of reasons. But let's not forget that markets don't really need any reason to sell off just as they have been rising throughout the last several years, often for no reason at all, or even against all good reason.
I believe the whole global economic system is interconnected and there is no one single reason that is the cause of the current selloff. The "usual suspects" include crashing oil prices, global weak growth, deflationary pressures, high corporate and public debt, high stock trading margin debt, high valuations of some stocks and other assets (QE, ZIRP effects), hedge fund redemptions induced by heavy 2015/early 2016 losses and I could go on and on.
What I believe is really behind the selloff
I believe some of the underlying causes of the selloff in equities include:
  1. Too much central bank and government intervention in the currency, interest rate and stock markets (many central banks do this). Specifically, the currency pegs to the dollar, and the recent attempts by the Chinese regulators to ban short selling and prevent large investors from selling existing long positions.
  2. QE and ZIRP policies of easy money that stimulate the creation of asset bubbles and excessive risk taking.
  3. Lack of suitable hedges for the long stocks exposure (will be covered in the follow-up article).
  4. The relative valuation of stocks relative to the "risk-free" Treasury yield and risk premium (will be covered in the follow-up article).
So let's have a closer look at the first two factors, starting with the Chinese currency and stock market interventions
China moving from a de-facto "fixed peg" to a de-facto "managed floating rate"
We could go on and on about how QEs and ZIRP cause bubbles in financial and real assets but the topic has been covered well. Let's focus specifically on the currencies. Many currencies are pegged to the dollar. When the U.S. dollar rises swiftly as it has in the past two years, this creates enormous pressures on the peg and negatively affects the local economies. Let's focus on the Chinese yuan because that is the currency that has been using a "managed floating exchange rate" but held the exchange rate more or less at a fixed level to the U.S. dollar, de-facto using a fixed peg for some time within the "managed float" regime.
Due to the dollar's rise, China recently decided to abandon the de-facto hard-wired peg to the U.S. dollar with a very narrow trading range and is now moving to the true "managed floating" currency regime, allowing the yuan to depreciate in a calm and managed way in order to get rid of some of the strength automatically acquired from the fixed peg to the dollar.
To cut things short, let's say that the "managed" moves are not always as smooth as desired and the markets of course try to front-run, out-guess the Chinese authorities on their next move, creating fluctuations. The moves are further exacerbated by the fact that markets fear that this may be just the beginning of a very large move in the USD/CNY currency, given how much the dollar has appreciated within the past two years.
How to hedge or front run this expected currency move?
But due to the "managed" nature of the currency float, market participants cannot really front-run this move or hedge enough against this move directly. Being short CNY/long USD is not enough for them and is hard due to other obstacles and currency flow regulations as well. So what do the markets do? How do they hedge or front run? They try to find correlated assets. One way for the U.S. denominated markets is to short the Chinese equities. In U.S. dollar terms, if the yuan depreciates by 10% and the local value of the stocks remains the same, the U.S.-denominated Chinese stocks will fall in value by 10%.
Some view many Chinese stocks as still being very overvalued, so being short Chinese stocks made sense even as a stand-alone trade without any considerations for the Chinese currency.
Many U.S. investors shorted the Chinese stocks as a hedge against a weakening global economy and falling commodity prices, and the trade has worked very well. But the bans on shorting and the ban on selling of large holdings makes this hedge less viable, so investors are searching elsewhere for a suitable hedge. They've found a refuge in shorting oil, natural gas and other commodities heavily dependent on China, and their futures being in heavy contango.
Excessive stock market regulation is making things worse
The recent actions of the Chinese authorities to try to stem the run on Chinese equities by effectively forbidding massive selling of existing large long positions of Chinese funds, brokers and other large market participants is having these two negative effects:
  1. First, at the turn of the year, the Chinese markets tried to front-run the end of the previously imposed sell limitations, resuming the crash in Chinese stocks. So the regulations and the changes in regulations exacerbated the volatility and the fall.
  2. Second, when the authorities effectively backtracked from their decision to remove the selling restrictions on Jan. 6 and extended the selling ban, the Chinese A-Shares (NYSEARCA:ASHR) were actually up for a day and flat the next day on the positive news that the ban would be extended (and central bank liquidity injection). But how did the U.S. markets react? The S&P was down the next trading day when this news could be reflected in U.S. markets, and the index more or less never looked back until now.
My view on the trigger of the selloff
We are getting to the crucial point of why I think the U.S. markets sold off. It is the renewed Chinese stock selling ban that was the direct cause in my opinion. What would you do if the U.S. markets were suddenly shut down, or you were not allowed to sell most of the stocks you held and at the same time you wanted to sell because you viewed the stocks as overvalued, the economy slowing, the currency expected to depreciate? Well, the only option you have left is to short some proxies for the Chinese market. Some of the most correlated assets to the Chinese stocks include U.S.-listed Chinese ADRs, other Asian and U.S. stocks directly exposed to China or to the global economy. And, of course, you would sell the commodities, of which China is a dominant importer, including oil.
Virtually all the assets mentioned above sold off hard. Not only that. This selloff in commodities reinforced in a circular fashion the expectations of troubles in the commodity and energy stocks (and their bonds) across the world. This commodity stocks risk-off mode and later panic selling dragged the global markets down.
I believe the immediate cause for the recent selloff in U.S. stocks lies in China
This does not mean one should solely "blame" China for the selloff. Everything is interconnected in the global financial markets; truth be told, the Chinese shares started another major down leg right around the Fed rate hike on Dec. 16-17. And the U.S. dollar strength can be partly attributed not only to the relative weakness of the other economies and currencies, but also the expectations of the divergent monetary policies (Fed rate hike expectations vs. more easing or stable easy conditions elsewhere).
So it's hard to blame Chinese markets directly for the recent U.S. selloff as the Chinese market bubble was partly caused by previous ultra-easy dollar interest rate monetary policy, and the subsequent selloff in Chinese stocks was caused by the strong dollar, the Fed rate hike expectations and the actual hike. So everything is interconnected and the original reasons run back years and years. We could argue forever what was the original cause in a "chicken or egg" fashion.
The conclusión
Global financial markets are very interconnected. I believe the immediate cause of the U.S. selloff was the Chinese extension of the selling ban on large equity holders. However, the real, original effects run deeper and are interconnected with the easy money policies around the globe, the low U.S. dollar interest rates, and the subsequent tightening, overcapacity caused by export-led growth policies in some countries, and many other factors.
In short, the feedback loop started with the sharp strengthening of the U.S. dollar over the past two years and gradually cascaded to other asset classes as the intermarket relations took effect, and as investors were looking to hedge their portfolio exposure or front-run the markets on the global effects of the strong dollar and easy monetary policies.
The central banks and other institutions' meddling with the financial markets are making the markets more unstable and prone to sharp moves and volatility bursts in unexpected places. The intervention only means the risk has to be hedged elsewhere and the volatility will simply have to resurface elsewhere, where it can, and with even higher power and speed. The Swiss Franc's 41% overnight move last year is such example and a warning sign of what happens when investors don't have enough reasonably priced "safe haven" assets for hedging and when central banks try to control and fix the price in the markets by force. I will cover the very important aspect of "safe haven" assets used for hedging in my follow-up article.

Oil’s Financial Depletion: What’s Ahead for Energy Firms?


oil drop
In a boom-and-bust business like oil, a company must be nimble to survive.

Companies that grew quickly thanks to the shale boom are trying to weather the dramatic slide in oil prices with measures like scaling back production and laying off workers. But for many, sunk costs and high debt levels mean cutbacks are not enough.

As a result, defaults and bankruptcies are mounting in the U.S. energy industry as the price of crude bounces along under $30 a barrel amid a worldwide oil glut. And with some forecasts pointing to oil — already down more than 70% since mid-2014 — possibly falling below $20 a barrel, failures are expected to continue. What’s more, plummeting energy prices have been a large contributor to the huge slide in global stock markets now underway.  

But while there’s plenty of pain to go around, for stronger energy companies, the shakeup may provide a salve in the form of a chance to pick up some strategic assets on the cheap.

“Even bad times provide some opportunity,” says Lawrence Hrebiniak, a Wharton emeritus professor of management.

A Fast Slide

After recovering from a sharp fall during the global economic crisis, benchmark oil prices reached the mid-$80s by late 2010. In February 2011, another spike sent crude back over $100 a barrel, where it would largely stay for the next three-and-a-half years.

The boom encouraged more companies to invest, often using borrowed money.

Then the unraveling started 18 months ago. The price of a barrel of crude fell from over $114 in June 2014 to $49 in January 2015. In a brief reprieve, prices then went back over $65, but in May, the declines resumed and the slide has accelerated since the start of 2016. Benchmark prices fell below $30 a barrel last week for the first time in 12 years, according to Bloomberg Business. Brent crude, the international benchmark, settled at $27.99 on Tuesday.

Several factors are driving prices down, but the main issue is oversupply. There’s simply more oil on the market than anyone needs, especially given the economic slowdown in China and emerging markets. OPEC nations, reluctant to give up market share, have abandoned their traditional role regulating supply, and instead are maintaining high production levels. By some estimates, the world is producing as much as 2 million barrels more per day than it can consume, says Wharton finance professor Erik Gilje.

One reason for that was unexpected success, Gilje explains. In mid-2014, it became clear that the technology used to extract shale oil was even better than anticipated. Wells were twice as prolific as expected, even in older drilling areas. Where the markets expected overall North American supply would grow by about 1 million barrels per day, “it actually reached 1.8 million,” he says. That caught many by surprise, in part because of the difficulty tracking production. “Real time consumption and production figures are incredibly opaque,” Gilje explains, noting that data may be revised up to 12 months later. “It’s hard to know what’s happening.”

Complicating decision making for producers: The predictive markets were wrong. “You can go back to September 2014 and basically look at what the futures curve looked like for oil,” he says.

“Everyone expected it would be at $90-a-barrel-plus out to the future.
To make matters worse, Iran announced this week it is re-entering the market after sanctions were lifted following its landmark nuclear deal with world powers. That means supplies will be even greater, one of the reasons many analysts predict even lower prices to come.

The Fallout

The rout already has taken a heavy toll, especially among smaller companies. According to Texas-based law firm Haynes and Boone, 42 U.S. energy companies in debt for more than $17 billion went bankrupt last year.

“There’s probably quite a few more on the fence,” says Hrebiniak. Bond default rates are also rising, he notes. “There are some companies whose credit ratings are going to be dropped drastically.” That will make it more difficult and expensive for the companies that survive to borrow in the future.

And there’s reason to believe the shakeout will continue. A report from consultant AlixPartners said the projected revenues of 134 North America-based exploration and production companies show there could be a gap of $102 billion against their operating and capital expenditures in 2016.

In a move reminiscent of the housing bust, the four biggest U.S. banks — Bank of America, Citigroup, JPMorgan Chase and Wells Fargo — have set aside at least $2.5 billion combined to cover souring energy loans, Bloomberg reported. All four are prepared to boost their reserves even more if oil prices stay low.

One step some public companies have already taken is reducing dividends and cutting share buyback programs. “Shareholders have to understand they might miss a dividend or two, but that’s better than going out of business,” Hrebiniak says.

The industry is also following other steps in Hrebiniak’s prescription for survival. It has already cut more than 200,000 jobs in the past 18 months, according to AlixPartners.

Companies have also renegotiated contracts with suppliers and dropped capital spending by 20% to 40%. “Drilling activity in the United States declined by more than 50% in the past 12 months,” the AlixPartners report stated.

The firm said that those actions helped some companies lower their break-even costs across active oil fields by 30% or more, which should help relieve some of the financial pressure this year. “Those measures should serve as a roadmap for other players that face continuing challenges,” the report said.

And it’s not just small U.S. companies cutting back in response. In September, Royal Dutch Shell said it would end its controversial drilling program in the Alaskan Arctic and cut 7,500 jobs. BP said last week it will eliminate 4,000 jobs worldwide.

“Projects all around the world are being cancelled or postponed,” Gilje says. “If you’re in a position to be responsive here, you basically are going to cut back everything that you can in terms of investment.”

Oil companies should also be looking to their lenders for some relief, according to Hrebiniak. “Even though banks have cut bank lending, they know the industry,” he says. Companies may be able to renegotiate loans for better terms. “If the past is any indication, the bust will turn, slowly, but into a more positive position for the industry.”

M&A Pickup in Store?

Already, several companies have combined as they try to squeeze out savings by reducing duplicate operations.

“We expect the paces of those types of activities to pick up in 2016 because current industry dynamics appear geared to a lengthier slump than previous cycles lasted,” the AlixPartners report said.

Companies that don’t want to sell outright can also look to strategic alliances that can help reduce costs without giving up their best assets, Hrebiniak suggests.

One logical step, selling non-core or underperforming assets, may become more challenging if low prices persist. Bloomberg reports that increasingly, bankrupt companies are having trouble pulling in even their minimum bids for the assets they’re selling. That’s an indication there’s plenty to choose from, which will drive prices down. “It’s a buyer’s market,” Hrebiniak notes.

Some of the larger firms might try moving into alternative energy as a way to hedge oil losses, but that strategy has its own challenges. “The problem is not only economic; the problem is also political,” Hrebiniak says. Given that alternative energy tax breaks and other subsidies can be an important part of the mix, Hrebiniak adds that “it depends on who’s in the Senate and the House and the White House.”

Plus, there may be more enticing opportunities for large investors. “I think the bigger companies are going to be more interested in asset accumulation than investment in alternative sources of energy right now,” Hrebiniak says.

Alternatives are also an unlikely course for the smaller companies hit hardest, due to the huge investment costs refocusing would require.

“Most of the companies are not in the position to simply shift to alternatives,” Gilje says. And alternatives face their own economic challenges as a result of the sharp drop in oil prices. “One of the side effects is that the day when solar and wind make up a big component of electric power is farther away. It’s hard when competing fuel prices are going down in price.”

Economists on the Refugee Path

Robert J. Shiller

 Hand rail with Refugees Welcome sticker on it 

NEW HAVEN – Today’s global refugee crisis recalls the period immediately after World War II. By one contemporary estimate, there were more than 40 million refugees in Europe alone.

These “displaced persons,” as they were called at the time, were forced to flee their homes because of violence, forced relocation, persecution, and destruction of property and infrastructure.
The dire postwar situation led to the creation in 1950 of the United Nations High Commissioner for Refugees, which was expected to serve only a temporary mandate, protecting displaced people for three years. But the problem never went away. On the contrary, the UNHCR is not only still with us; it is sounding an alarm.
In its 2015 mid-year report, the agency put the number of “forcibly displaced” people worldwide at 59.5 million at the end of 2014, including 19.5 million internationally displaced, which they define as true refugees. Some countries – Afghanistan, Azerbaijan, Colombia, Central African Republic, Democratic Republic of Congo, Iraq, Myanmar, Nigeria, Pakistan, Somalia, South Sudan, Sudan, Syria, and Ukraine – each accounted for more than a half-million forcibly displaced people at the end of 2014. The report noted that the total number had certainly grown substantially since.
Unfortunately, the report underscores the incompleteness of our understanding of the refugee problem. In fact, throughout history, the fate of refugees seeking asylum in another land has largely been unstudied. Historians record wars, and they mention diasporas, but they rarely show much interest in how refugee crises arose or were resolved.
To the extent that history is written by the victors, that is not surprising. The knowledge that one’s country terrorized a minority to the point that its members had to flee, or that a substantial share of one’s forebears arrived in defeat and panic, is not exactly an inspiring source of national identity. So the stories, unheard and untold, are lost.
That is why we need more research on what can and should be done for refugees in the long term. The UNHCR has been doing an important job in protecting refugees, but it cannot possibly address their needs alone. Its budget of $7 billion in 2015 may seem large, but it amounts to only about $100 per displaced person – not enough to cover even essentials like food and shelter.
As President of the American Economic Association for 2016, I felt a moral obligation to use our annual meeting earlier this month as a setting in which to bring attention to serious economic problems. And the refugee crisis, whatever else it may be, is an economic problem.
But a dearth of papers addressing it had been submitted to the meeting. So I decided to create a session entitled Sixty Million Refugees, and invited some of our discipline’s most distinguished scholars on migration. I asked them to describe the dimensions of the refugee problem in economic terms, and to propose some sensible policies to address it.
One of the papers, by Timothy J. Hatton of the University of Essex and Australian National University, examined refugee flows around the world, to see what drives them. Hatton confronts a popular argument against admitting refugees: that asylum-seekers are not really desperate, but are just using a crisis as a pretext for admission to a richer country. He finds that, contrary to some expectations, refugee flows are driven largely by political terror and human rights abuses, not economic forces. People in fear for their lives run to the nearest safe place, not the richest. There is no escape from the moral imperative to help them.
Semih Tumen of the Central Bank of Turkey presented evidence regarding the impact of the 2.2 million Syrian refugees on the labor market in the border region. Tumen’s paper, too, takes on an argument frequently used to oppose admitting refugees: that the newcomers will take locals’ jobs and drive down wages. He found that in the formal sector, jobs for locals actually increased after the influx of refugees, apparently because of the stimulative effect on the region’s economy. If further research backs up this finding, countries might actually welcome the inflow of labor.
Another paper, by Susan F. Martin of Georgetown University, described the arbitrariness of our current refugee procedures, calling for “legal frameworks based on the need for protection, rather than the triggering causes of the migration.” But formulating such rules requires some careful economic thought. The framers of a refugee system need to consider the rules’ incentive effects on the migrants themselves and on the governments of their countries of origin. For example, we do not want to make it too easy for tyrants to drive unwanted minorities out of their country.
Finally, Jeffrey D. Sachs of Columbia University detailed a major new system for managing refugees. Sachs is concerned with how such a system’s rules will shape the world’s economies in the longer run. He wants such a system to prevent encouraging a brain drain by enforcing a commitment to admitting low-skilled and desperate immigrants, not just those who are highly useful to the host country. Moreover, the rate of flow must be regulated, and economists need to develop a way to ensure equitable burden sharing among countries.
Under today’s haphazard and archaic asylum rules, refugees must take enormous risks to reach safety, and the costs and benefits of helping them are distributed capriciously. It does not have to be this way. Economists can help by testing which international rules and institutions are needed to reform an inefficient and often inhumane system.

Read more at https://www.project-syndicate.org/commentary/economic-research-contribution-to-asylum-reform-by-robert-j--shiller-2016-01#QlAKf05RhvVclQUE.99

Why This Next Crisis Will Be Worse Than 2008

by Chris Martenson

Executive Summary

  • There are too many signs of deflation to deny it's winning the day
  • Why China's weakening will accelerate the global economy's decent
  • Why this next crisis will be worse than 2008
  • What will it look like if things really get out of control (how bad could things get?)
  • The best investments to be making now, before the rout

Too Many Warning Signs To Talk About

The deflationary monster is here and there are almost too many warning signs to list, let alone fully describe.
So I’ll just list and link them…you can follow up on the details if you want, it’s the ‘general vibe’ I want to get across.
Here are the signs of a weak economy that we are dealing with:
The pattern here is one of rapidly slowing economic activity and mounting pain starting “from the outside in” as emerging markets and the poor people within the core countries bear the brunt at first. Things always get rolling to the downside starting with the weakest, peripheral elements first.
Copper and oil are providing very clear signs that economic activity is not just slow, but in rapid retreat. Wal-Mart tells us that its shoppers are having trouble. The fresh all-time lows in a variety of currencies, plus massive weakness in others, is telling us that the virtuous portion of the liquidity cycle that the Fed, et al., unleashed on the world has entered the vicious part of the cycle.
The pain will spread to the center with increasing speed. The main question is if the authorities can stop that before the momentum becomes too great to halt? And what will happen if they cannot?