Pushing Desperate Measures Too Far

Doug Nolan

Another unsettled week for global markets. Japan’s Nikkei equities index rallied 6.5%. Italian bank stocks surged 10%, with the Europe STOXX 600 Bank Index up 8.1%. Germany’s DAX equities index rallied 4.5%, with Spanish stocks up 5.0% and Italian 4.3%. The Hong Kong Hang Seng Financials surged 5.9%. The EM market rally continued. U.S. bank stocks jumped 7.0%. A Friday evening Bloomberg headline: “Rough Week for Shorts as Banks Send S&P 500 to Four-Month High.”

Recalling back in 2008, U.S. financial stocks surged 10% in a single session. Reminiscent of 2008 market dynamics, global bonds aren’t much buying into the equities market “risk on.” 
Japanese 10-year (JGB) yield fell three bps (to negative 13bps), and German yields increased only four bps (to 13bps). Ten-year Treasury yields rose four bps, only taking back two-thirds of last week’s decline. European periphery spreads tightened only marginally.

Policy-induced short squeezes do tend to take on lives of their own. This one’s no exception. 

The basic premise is that years of central bank monetary inflation and market manipulation have nurtured a “global pool of speculative finance” of incredible dimensions. The unstable dynamic of “too much ‘money’ chasing too few real opportunities” – along with the associated “Crowded Trade” phenomenon – has made it extraordinarily difficult for active managers to compete with the indices. And as “money” continues to gravitate to passive bets on the major indices, the markets’ dysfunctional trend-following/performance-chasing dynamic becomes only more deeply entrenched (and detached from fundamentals). When markets lurch higher, irrepressible forces begin pulling everyone in.

Recall back to the tumultuous January and early February period. Global “Risk Off” was in control. Crude traded down to about $27 a barrel. Global equities were under intense pressure, led lower by commodity producers and financial stocks. EM currencies were under liquidation. 

Chinese stocks were in free-fall, trading at about half the level of summer highs. The Chinese currency was under pressure, with unprecedented quantities of “money” fleeing the bursting Chinese Bubble.

The prevailing bullish view from December was that the U.S. economy was on solid footing, allowing the Fed to finally move forward with rate normalization. The European recovery had gained self-sustaining momentum. In Japan, yen devaluation had successfully boosted corporate profits and stock prices, positioning the economy for decent growth. The world was looking at China through rose-colored glasses, believing Chinese officials were adeptly orchestrating the mythological “soft-landing.” At the same time, a compelling argument could be made that an ongoing Chinese boom was all that was holding a global deflationary spiral at bay. A Chinese hard landing would dictate major revision to large numbers of market and growth assumptions around the globe.

Keep in mind that Chinese system Credit (“total social financing”) surged 12.4% in 2015, or almost $2.4 TN – a massive amount of Credit still insufficient to levitate global energy and commodity prices. The hard landing scenario – appearing increasingly probable back in January and February – would potentially see a significant slowing, or even halt, to the Chinese Credit boom.

It’s worth recalling that total U.S. mortgage Credit expanded $1.4 TN in 2006, dropped to $95 billion in 2008 and then contracted $290 billion in 2009. After expanding 10.9% in 1988, U.S. corporate Credit contracted 2.1% in 1991. U.S. corporate Credit expanded about double-digits in both 1998 and 1999, with growth slowing to 3.2% in 2001 and then flat-lining in 2002 and 2003. More dramatically, 2007 saw 11.5% U.S. corporate Credit growth, which turned to a 5.2% contraction in 2009. Have Chinese officials actually convinced themselves that they’ve repealed the Credit Cycle?

Examining further back in U.S. Bubble history, the nineties began with 1990’s $688 billion U.S. Non-Financial Debt (NFD). Credit issues (burst late-80s Bubble) and recession saw NFD growth slow to $527 billion (2/3 govt. borrowings) in 1991. The nineties Credit boom gained momentum throughout the decade, with over $1.0 TN of NFD growth in boom-years 1998 and 1999 (NFD growth averaged $770 billion annually throughout the nineties). NFD growth slowed to $884 billion in 2000, before resuming its rapid ascent. NFD growth was up to $1.695 TN by 2003, then surpassed $2.0 TN annually in Bubble years 2004 through 2007. Credit crisis saw NFD growth collapse to $829 billion in 2009, with an outright contraction of private-sector debt offset by massive Treasury borrowings.

U.S. data help put the spectacular Chinese Credit boom into clearer perspective. And when it comes to Credit Bubbles, there can be a fine line between burst and boom climax. Rather than the bust that appeared likely in 2016’s initial weeks, the first quarter witnessed record Chinese Credit expansion. Friday data showed Chinese March total social financing jumping $360 billion (led by a surge in bank lending). This was somewhat less than January’s incredible $520 billion expansion, though it did push Q1 Credit growth above $1.0 TN (historic).

Not long ago Chinese officials had set their sights on reining in rampant Credit growth. Having clearly reversed course, Credit expanded during the quarter at a blistering almost 20%. This compares to its recent target of 13% and China’s GDP target of 6.5-7.0%. In such a circumstance, what is the prognosis for Chinese currency stability? Uncharted Territory.

With markets in a tailspin and “money” fleeing China, reasonable analysis back in January might have anticipated Chinese 2016 Credit slowing to, say, $1.5 TN. It will instead likely double this amount. When one is pondering the unstable 2016’s market backdrop, it’s helpful to think in terms of China as the marginal source of global Credit. The immediate good news for equities and commodities is that Chinese central planning still holds astounding sway over the nation’s lending and investing. The ongoing good news for global bonds is that this historic experiment in state-directed Credit and economic management is in peril. The extremely bad news for China - as well as global markets and economy - is that $3.0 TN of unsound Credit at this very late stage of the Credit cycle ensures an even more destabilizing bust.

It must be tempting for the believers to again revel in the brute power of the “perpetual money machine.” Yet the costs associated with the latest round of monetary inflation are steep. Not many months ago it appeared that China was determined to rein in excess, while the U.S. was ready to lead the world toward policy normalization. Today it’s become rather obvious that China is out of control and global policymakers are trapped at near zero or negative rates and perpetual QE monetary inflation. What was always sold as temporary extraordinary measures is increasingly recognized as desperate “whatever it takes” indefinitely.

To reverse a rapidly strengthening de-risking/de-leveraging dynamic central bankers were compelled to convey to the markets that they were still very much in control with virtually limitless ammunition. Rates could go deeply negative. QE would expand as big as necessary. 

And, for emphasis, if required central banks still had “helicopter money” – printing ‘money’ and disseminating it directly to consumers – waiting in the wings. They pushed Desperate Measures too far this time.

April 12 – Reuters (Gernot Heller and Paul Carrel): “The European Central Bank's record low interest rates are causing ‘extraordinary problems’ for German banks and pensioners and risk undermining voters' support for European integration, Finance Minister Wolfgang Schaeuble told Reuters… Politicians from Chancellor Angela Merkel conservative camp, to which the finance minister belongs, have complained the ECB's ultra-low rates are creating a ‘gaping hole’ in savers' finances and pensioners' retirement plans as returns have dropped. Schaeuble suggested they risked fuelling the rise of euroscepticism in Germany, where voters flocked to the right-wing Alternative for Germany in state elections last month. ‘It is undisputable that the policy of low interest rates is causing extraordinary problems for the banks and the whole financial sector in Germany… That also applies for retirement provisions.’ ‘That is why I always point out that this does not necessarily strengthen citizens' readiness to trust in European integration,’ he added… A storm of protest erupted in thrifty Germany after ECB President Mario Draghi last month described the idea of so-called helicopter money - sending money directly to citizens - as a ‘very interesting’, if unexamined, concept.”

April 10 – Reuters (Michelle Martin): “A chorus of conservative German politicians have criticised the European Central Bank for its interest rate policy, which they say is hitting the retirement provisions of ordinary Germans, could lead to asset bubbles and even boost the right-wing. German Finance Minister Wolfgang Schaeuble partly blamed the ECB's policy for the success of the right-wing Alternative for Germany (AfD) in recent regional elections, which saw it take up to a quarter of votes in a setback to Schaeuble's conservatives… The newspaper quoted Schaeuble as saying he had told ECB President Mario Draghi: ‘Be very proud: You can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy.’”

April 14 – CNBC (Matthew J. Belvedere): “BlackRock chief Larry Fink said… that negative and low interest rates around the world are crushing savers, and those policies are ‘going to become the biggest crisis globally.’ …Fink called on political leaders to step in and provide fiscal reform to complement monetary policy. ‘We have become too dependent on central bankers’ to boost the global economies, he said, stressing easy money policies were supposed to be a temporary healing. ‘I don't call seven, eight years temporary... I don’t see how that [still] has a positive impact.’ ‘Over 70% of our clients are retirement plans and insurance plans. Our clients are in pain… Our clients are very worried how they’re going to be meet their liabilities’ because the yields are so low in the bond market.’”

April 14 – Bloomberg (Finbarr Flynn and Gareth Allan): “The top executive of Japan’s biggest bank delivered a rare criticism of the central bank, saying its negative interest-rate policy has contributed to anxiety among households and companies and prolonging it may weaken financial institutions. ‘Both households and businesses have become skeptical about the effectiveness of policy measures to address the current economic problems,’ Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group Inc., said… Hirano said there’s ‘no guarantee’ that negative rates will encourage companies to increase capital spending because low borrowing costs and deflation have been ‘business as usual for over a decade.’”

Albeit the Germans, Japanese bankers, pension fund managers or even the general public, it’s been a frustratingly long wait for policy normalization. And just when hope was running high, the rug was pulled right out from under. Around the world many had patiently accepted the favoritism and inequity of reflationary measures. But what was supposed to be extraordinary and temporary morphed into the normal and permanent: egregious wealth redistribution.

The course of global monetary policy increasingly lacks credibility. Patience has worn thin. 

Frustration and anger are being brought to the boil. Sure, global markets have gained momentum. But I actually think “whatever it takes” central banking has about run its course, with momentous ramifications for global market Bubbles. Reminiscent of how I felt in 2008, global markets would be a lot better off had they taken their medicine earlier.

Barron's Cover

Bill Gross: Why Interest Rates Must Rise

The renowned bond investor argues that the Fed must normalize interest rates in coming years to keep the economy functioning properly.

By Lauren R. Rublin

Home, they say, is where you make it. For Bill Gross, 71, manager of the Janus Global Unconstrained Bond fund, home these days is a small suite in an office tower in Newport Beach, Calif., down the road from Pacific Investment Management, or Pimco, the asset-management firm he co-founded in 1971 and ran until leaving abruptly in 2014, following a few years of poor investment results and an ugly management spat.
At Pimco, with which he is still feuding, Gross oversaw what was once the world’s largest mutual fund, Pimco Total Return (ticker: PTTAX) with assets of $293 billion at its peak, and built an outstanding investment record. At Janus Capital, a Denver-based firm with assets of $192.3 billion, he runs a $1.3 billion fund (JUCAX), seeded in part with his own money, that performed dismally in 2015, losing 0.72%. This year, however, it appears to have turned the corner; it was up 2.04% in the first quarter, placing in the top 15% of nontraditional bond funds tracked by Morningstar.

If Gross’ digs, portfolio, and results are humbler today than for most of his career, his ambition seems undimmed—to go out a winner, delivering substantial gains for investors even in a business that offers diminishing returns, now that interest rates in much of the world are close to zero, or less. He doesn’t think much of the central-bank policies that have repressed rates, punished savers, and failed to ignite economic growth, and says the Fed must begin to raise rates in coming years to keep the economy on track.
As of Feb. 29, Gross’ fund held a broad mix of assets, including agency, corporate, and high-yield debt; options on interest-rate volatility; and riskier credit-default swaps sold on Brazilian and Mexican debt. The swaps sales reflect his view that investors “tend to overpay for protection” against defaults by certain issuers, in this case two countries dependent on energy-sector receipts.
In a recent interview in his office, Gross was candid about the pros and cons of his transition to Janus.
“On the plus side, it is easier to manage $1.5 billion than $1.5 trillion [Pimco’s assets at year-end 2014],” he says. “One of the negatives is that the smallness is isolating at times. It’s not that I enjoyed daily investment-committee meetings at Pimco, but at some level, they were fun and engaging.”

The Fed has to “normalize interest rates over a period of two, three, four years or the domestic and global economy won’t function.“ —Bill Gross Photo: Sam Comen

It is too soon to tell whether the onetime bond king will build a successful record at Janus—or win the breach-of-contract lawsuit he filed last fall against his former Pimco colleagues, charging that a “cabal” of executives wrongly had sought to oust him, to take his share of the firm’s profits. Last week, Pimco filed its own claim in connection with the suit, saying that Gross had quit without notice, leaving a handwritten resignation letter on his desk in the middle of the night, and that he was aware he would be giving up his bonus by leaving the firm before a certain date. Gross didn’t respond to queries about the latest developments in the suit.
Even as the case plays out, two things are clear: Gross is thrilled to still be in the competitive investment game, and remains one of the smartest market observers around.
Barron’s: How would you grade your performance at Janus so far?
Gross: Since I began managing the fund on Oct. 6, 2014, the I-class shares [JUCIX] are up 1.17% cumulatively through the first quarter, in the 22nd percentile of Morningstar’s universe of nontraditional bond funds. I’ll take it. We had some ups and downs early on, but things have turned around in the past few months. You have to follow the same strategy as a golfer who is down one, with two holes to play. You can’t panic; you just have to play your game. Sometimes, over short periods, it doesn’t work; it didn’t work for the first six months or so after I got here.

But things have improved, and this year, returns have turned positive. I’d like to be 4% or 5% positive, but markets haven’t allowed for that.
Fund flows are improving, as well. Is that a validation of the improvement in your performance?
Fund flows are a function of two things. One is performance. The other is interest in the asset class—in this case, the interest of the public in mutual funds, exchange-traded funds, or alternative types of assets. Mutual funds are on the bottom rung at the moment, having been displaced to some extent by lower-cost ETFs. Also, the unconstrained-fund universe has disappointed investors as an asset class. It hasn’t been profitable in the past 15 months. Still, I’m glad that fund flows have turned positive. The object wasn’t to build this into a $1 trillion company or fund, but every manager wants his or her fund to be popular.
Was it difficult to take charge of an unconstrained bond fund after running a portfolio of mostly U.S. Treasuries and corporate bonds?
It is challenging. A manager of an unconstrained fund not only has more choices, but has to accept more risk. The unconstrained universe was born six or seven years ago from the idea that interest rates would bottom at some point, and bonds no longer would provide a decent return; in fact, returns might be negative.
From conception, these funds were relatively neutral, duration-wise. To the extent that duration is minimized, a greater emphasis must be put on other elements of return, including credit, volatility, currency, and liquidity.
What do you emphasize in Janus Unconstrained?
I begin with the premise that money returns nothing at the moment. There’s an old song that goes “Nothing from nothing…
“…leaves nothing.”
That’s right. The song is about a relationship, not money, but the fund is positioned with that in mind. If you start at zero and aim to deliver a 4% or 5% annual return, you’ve got to lever your assets to some extent.
The positions in the fund are primarily volatility-related, because volatility has the lowest amount of risk, relative to return, of the elements I mentioned.
Years of easing by central banks mean that interest rates in most of the developed world will fluctuate narrowly. That offers an opportunity to sell volatility to create return. If you bought a 10-year Treasury bond today and nothing changed, you would get a 1.9% yield. If you bought a seven-year German Bund, you’d get zero. If, however, you sold a three-month call or three-month put on that same Treasury with a 20-basis-point [hundredths of a percentage point] variation—in other words, the yield stayed in the range of 1.7%-2.1% for three months—the trade would produce an annual return of 6%, as opposed to 1.9%.
The risk is that interest rates will go up or down by more than 20 basis points over a three-month period. But my premise is that central bankers will do anything possible to contain interest-rate fluctuations. The sale of volatility is producing the predominant amount of return in my fund.
How is the fund structured?
If you make a pie, you have the crust and the filling. The crust in a $1.3 billion fund is 12- to 18-month corporate bonds and notes, triple-B rated—hopefully, with no credit sinkholes—that yield about 2%. That’s where all the cash goes. If you start your pie with a 2% yield, you aim to get to 5% with a derivatives-based filling, much like the options I just discussed. You do it by assuming credit risk or selling credit risk, buying or selling volatility, taking mild currency positions, or buying or selling liquidity.
The Securities and Exchange Commission is seeking to regulate the use of derivatives in mutual funds. Wouldn’t that pose a risk for you?
The SEC is challenging mutual funds in a number of areas. Leverage in Janus Unconstrained has averaged about 150%. As I understand it, that is within regulators’ potential guidelines, but we’ll see.
You have taken central bankers to task for impotence and ignorance, among other sins. In particular, you have written that Fed Chair Janet Yellen and others are ignorant of the harm done by their policies “to a classical economic model that has driven prosperity.” Just what did you mean, and what sorts of dangers do we face?
The Federal Reserve was created in 1913. President Nixon took the U.S. off the gold standard in 1971. For the past 40-plus years, central banks have been able to print as much money as they wanted, and they have.
When I started at Pimco in 1971, the amount of credit outstanding in the U.S., including mortgages, business debt, and government debt, was $1 trillion. Now it’s $58 trillion. Credit growth, at least in its earlier stages, can be very productive. For all the faults of Fannie Mae and Freddie Mac, the securitization of mortgages lowered interest rates and enabled people to buy homes. But when credit reaches the point of satiation, it doesn’t do what it did before.
Think of the old Monty Python movie, The Meaning of Life. A grotesque, rotund guy keeps eating to demonstrate the negatives of gluttony, and finally is offered one last thing, a “wafer-thin mint.” He swallows it and explodes. It’s pretty funny. Is our financial system, with $58 trillion of credit, to the point of a wafer-thin mint? Probably not. But we’re to the point where every bite is less and less fulfilling. Even though credit isn’t being created as rapidly as in the past, it doesn’t do what it did before.
Central banks believe that the historical model of raising interest rates to dampen inflation and lowering rates to invigorate the economy is still a functional model. The experience of the past five years, and maybe the past 15 or 20 in Japan, has shown this isn’t the case.
So where does that leave our economy?
In the developed financial economies, as a bloc, lowering interest rates to near zero has produced negative consequences. The best examples of this include the business models of insurance companies and pension funds. Insurers have long-term liabilities and base their death benefits, and even health benefits, on earning a certain rate of interest on their premium dollars. When that rate is zero or close to it, their model is destroyed.
To use another example, California bases its current and future pension payments to civil workers on an estimated future return of 8% or so from bonds and stocks. But when bonds return 1% or 2%, or nothing in Germany’s case, what happens? We’ve seen the difficulties that Puerto Rico, Detroit, and Illinois have faced paying their debts.
Now consider mom and pop and other people who read Barron’s. They are saving for retirement and to put their kids through college. They might have depended on a historic 8%-like return from stocks and bonds.
Well, sorry. When interest rates get to zero—and that isn’t the endpoint; they could go negative—savers are destroyed. And savers are the bedrock of capitalism. Savers allow investment, and investment produces growth.
Are you suggesting a recession looms?
No. I see very slow growth. In the U.S., instead of 3% economic growth, we have 2%. In euroland, instead of 2%, growth is 1%-plus. In Japan, they hope for anything above zero.
What governments want, and what central banks are trying to do, is produce, in addition to minimal growth, a semblance of inflation. Inflating is one way to get out from under all the debt that has been accumulated. It isn’t working, because with interest rates at zero, companies and individual savers sense the futility of taking on risk. In this case, the mint eater doesn’t explode, but the system sort of grinds to a halt.
It doesn’t look like anything is grinding to a halt around here. You can see gorgeous golf courses from one window and a yacht basin from the other.
This isn’t the real economy. It is Disneyland and Hollywood. It is finance-based prosperity, based on money that doesn’t produce anything anymore because yields are so low.
Even in a negative-rate environment, as in Germany or Switzerland, banks and big insurance companies have little choice but to park their money electronically with the central bank and pay 50 basis points. But an individual can say “give me back my money” and keep it in cash.

That’s what would make the system implode. I’m not talking about millionaires or Newport Beach–aires, but people with $25,000 or $50,000.
Without deposits, banks can’t make loans anymore, so the system starts to collapse.
Let’s say Yellen steps down and President Obama appoints you the new head of the Fed. What would you do differently?
What you’re really asking is: What is the way out? The way out is a little bit of pain over a relatively long period of time. That is a problem for politicians and central bankers who are
concerned with their legacy. It means raising interest rates and returning the savings function to normal. The Fed speaks of normalizing the yield curve but knows it can’t go too fast. A 25-basis-point increase [in the federal-funds rate] in December had consequences in terms of strengthening the dollar and hurting emerging markets.
Will the Fed raise rates this year?
Yes, as long as the stock market permits it. They have to normalize interest rates over a period of two, three, four years, or the domestic and global economy won’t function. In today’s world, normalization would mean a 2% fed-funds rate, a 3.5% yield on the 10-year bond, and a 4.5% mortgage rate. Would this create some pain? Of course. Housing prices probably would stop rising, and might fall a bit. The Fed has to move gradually.
What will be the 10-year Treasury yield at the end of 2016?
Close to what it yields now. I expect the Fed to raise rates once or twice this year. That would put the fed-funds rate at 1%. Does the 10-year deserve to yield 1.90% with fed funds at 1%?

Yes, so long as inflation is 2% or less. If the Fed raises rates, the euro and yen could weaken.

That would mean rates in Europe and Japan don’t have to go negative, or to extreme lows. In a sense, the Fed is driving everything. But it can’t raise rates too much without threatening a country like Brazil, whose corporations have tons of dollar-dominated debt.
What will the global economy look like in five or 10 years?
Structurally, demographics are a problem for global growth. The developed world is aging, with Japan the best example. Italy is another good example, and Germany is a good, old society, too. As baby boomers get older, they spend less and less. But capitalism has been based on an ever-expanding number of people. It needs consumers.
Another thing happening is deglobalization, whether it’s Donald Trump building a wall to keep out Mexicans, or European nations putting up fences to keep out migrants. Larry Summers [former secretary of the Treasury] has talked about secular stagnation, or a condition of little or no economic growth. At Pimco, I used the term “the new normal” to refer to this condition. It all adds up, again, to very slow growth. The days of 3% and 4% annual growth are gone.
How can an investor prosper in a world of low bond yields and sluggish growth?
When rates are low, it pays to borrow, rather than invest. How do you do that relatively safely? One way I try to do it in the fund is to invest in merger-arbitrage situations, where the acquiring company is borrowing for you. Take Berkshire Hathaway’s [BRKA] $35 billion bid last year for Precision Castparts. Janus Unconstrained bought Precision Castparts shares in advance of the closing. There was a $3-$4 gap in the price of the Precision Castparts between the time the deal was announced and the time it closed. That produced a 4%-5% return for us, with little risk.
Here’s another example. Anheuser-Busch InBev [BUD] is planning to buy rival SABMiller [SAB.UK] for 44 British pounds [$61.85] a share. The deal could close by year end. A-B InBev has already borrowed about $50 billion by selling bonds cheaply in the U.S. and Europe.

You’re letting the company borrow for you, and you’re taking advantage of the gap between the current stock price, in this case £42, and the deal’s expected closing price. Plus, you’re collecting a dividend in the intervening months. It’s a pretty safe bet.
Merger arbitrage hardly seems safe, given the possibility that a deal will unravel before the closing, as many have.
It is never risk-free, but that is why you want to hang your banner with a Warren Buffett [chairman of Berkshire Hathaway] or a company such as Anheuser-Busch that has already borrowed a substantial amount of money to do the deal. This sort of arbitrage accounts for maybe 10% of fund assets, and these types of situations can produce returns of 4% to 5%.

Another way to borrow and invest is to sell puts and calls around the current yield on the 10-year Treasury bond, as we discussed. A third way is to buy a closed-end fund. Most closed-end funds borrow, and lever their assets 35% to 50%. They might borrow at Libor [London interbank offered rate] types of rates, and use the funds to buy municipal bonds, which yield more. When an investor can buy a municipal closed-end fund at a discount to net asset value—most are trading at discounts of 6% to 10% of NAV—that’s a head start.
The leverage then produces a return of 5% or 6%, tax-free. Janus Unconstrained has 8% to 9% of assets in closed-end funds selling at a discount to NAV. Sure, there is risk in this leverage, but so long as rates stay low, it is unlikely to be a problem.
What are some closed-ends you like?
Nuveen Preferred Income Opportunities fund [JPC] holds bank preferred stock, and sells at a 6% discount to NAV. It is preferable to a large preferred-stock ETF because the mild use of leverage produces a higher yield. JPC currently yields 8.5%. I also like the Duff & Phelps Global Utility Income fund [DPG]. This is a global utility-stock closed-end fund trading at a 14% discount to net asset value. It yields 9.2%.
Another example of letting others borrow for you is Annaly Capital Management  [NLY].

Annaly and American Capital Agency[AGNC] are bank-like real estate investment trusts without a bank infrastructure.
Annaly is levered four to six times—less than banks, which are levered eight to nine times—and invests in government-guaranteed mortgages. It borrows money in the overnight repo [repurchase agreement] market. It yields about 11% because of leverage, not risky assets. The concept, again, is letting corporations borrow for you to produce a return higher than the 1% to 2% return the bond market gives you today.
You’ve had an extraordinary career. Who, among today’s younger bond managers, might become the next Bill Gross?
I don’t think there will be another, and that’s not because I’m some kind of Babe Ruth. My career coincided with a unique period in which credit expanded from $1 trillion to $58 trillion, and returns justified that growth. That isn’t going to happen again. The Earth is fully formed now; it isn’t in a molten stage anymore. In other words, the system itself has matured. There will always be bond kings and queens, but less cachet will be attached to the job.

Thank you, Bill.

The Deflation Bogeyman

Daniel Gros

Japan deflation

BRUSSELS – Central banks throughout the developed world have been overwhelmed by the fear of deflation. They shouldn’t be: The fear is unfounded, and the obsession with it is damaging.
Japan is a poster child for the fear. In 2013, decades of (gently) falling prices prompted the Bank of Japan to embark on an unprecedented monetary offensive. But while headline inflation increased for a while, the factors driving that increase – a competitive depreciation of the yen and a tax increase – did not last long. Now, the country is slipping back into near-deflation – a point that panicked headlines underscore.
But, contrary to the impression created by media reports, the Japanese economy is far from moribund. Unemployment has virtually disappeared; the employment rate continues to reach new highs; and disposable income per capita is rising steadily. In fact, even during Japan’s so-called “lost decades,” per capita income grew by as much as it did in the United States and Europe, and the employment rate rose, suggesting that deflation may not be quite as nefarious as central bankers seem to believe.
In the US and Europe, there is also little sign of an economic calamity resulting from central banks’ failure to reach their inflation targets. Growth remains solid, if not spectacular, and employment is rising.
There are two key problems with central banks’ current approach. First, they are focused on consumer prices, which is the wrong target. Consumer prices are falling for a simple reason: energy and other raw material prices have declined by more than half in the last two years. The decline is therefore temporary, and central banks should look past it, much as they looked past the increase in consumer prices when oil prices were surging.
Instead, central banks should focus on the rate of revenue increase, measured in nominal GDP growth; that is, after all, what matters for highly indebted governments and enterprises. By this measure, there is no deflation: The GDP price index (called GDP deflator) in developed countries is increasing by 1-1.5%, on average. In the eurozone, it is rising at 1.2%. This may fall short of the European Central Bank’s target of “below but close to 2%,” but not by a margin substantial enough to justify the ECB’s increasingly aggressive use of monetary instruments to stimulate the economy.
Moreover, nominal GDP growth exceeds the long-term interest rate. When, as is usually the case, the long-term interest rate is higher than the GDP growth rate, the wealthy may accumulate wealth faster than the rest of the economy – a point made by the economist Thomas Piketty. But today, nominal GDP growth far exceeds average long-term interest rates (which, in some countries, include risk premia of up to 100 basis points) – even in the eurozone, where nominal GDP growth is expected to reach about 3% this year. This means that financing conditions are as favorable as they were at the peak of the credit boom in 2007, and much better than they have been at any other point in the last 20 years.
Eurozone nominal growth
One might expect this evidence to compel central bankers to rethink their current concerns about deflation. But they remain committed to pursuing their inflation targets, convinced that even a slight bout of deflation could initiate a downward spiral, with falling demand causing prices to decline further. This is their second mistake.
Of course, a deflationary spiral is possible, and its consequences could be serious. If real interest rates were significantly positive, demand could plummet, pushing down prices to the point that it becomes impossible for borrowers to service their debts. Such a spiral contributed to the Great Depression in the US in the 1930s, with prices falling, in some years, by some 20-30%.
But we are nowhere near such conditions today. In fact, nominal interest rates are at zero, while the broadest price indices are increasing, albeit gently. Given that financing conditions are so favorable, it is not surprising that domestic demand has remained robust, allowing unemployment to return to pre-crisis lows almost everywhere.
The eurozone is the only large developed economy where unemployment remains substantial, and thus the only economy where the case could be made for a downside risk of deflation. But even in the eurozone, GDP growth is slightly above its (admittedly very meager) potential, so that the remaining output gap is being closed gradually.
Furthermore, the only reason why unemployment remains high in the eurozone is that the labor-force participation rate has continued to increase throughout the recession; and, indeed, employment is returning to pre-crisis levels. This is the exact opposite of what the deflation hawks warn about. The popular “discouraged worker” hypothesis holds that a slide into deflation is costly, because a long recession induces workers to leave the labor force altogether. That is simply not the case in Europe today.
The evidence is clear. Developed-economy central banks should overcome their irrational fear of a deflationary spiral, and stop trying desperately to stimulate demand. Otherwise, they will find themselves with massively expanded balance sheets, and very little to show for it.

The Dictator of the Vatican

The “People’s Pope” is not trying to build an inclusive Catholic Church. He’s ruthlessly making it liberal.

By Steve Skojec 

The Dictator of the Vatican

There is hardly anyone in the world by now who is unfamiliar with the affable, down-to-earth, conspicuously humble persona projected by Pope Francis. His style of governance, however, is a far cry from this carefully cultivated public image. Influenced by the Peronist ideology of his native Argentina, he rules the Roman Catholic Church with the idiosyncratic passions, and disciplined commitment to an agenda, of a true ideologue. And Amoris Laetitia, Francis’s 260-page, nearly 60,000-word, post-synodal apostolic exhortation on marriage and family, which was at long last released on Friday, is the clearest example yet.

Francis’s “People’s Pope” persona has always belied an autocratic temperament that is coldly efficient at achieving his aims, if not winning allies to his cause. In his National Geographic profile of the pontiff, formerly known as Jorge Mario Bergoglio, Robert Draper relates that:
[Francis has] an awareness that his every act and syllable will be parsed for symbolic portent. Such prudence is thoroughly in keeping with the Jorge Bergoglio known by his Argentine friends, who scoff at the idea that he is guileless. They describe him as a “chess player,” one whose every day is “perfectly organized,” in which “each and every step has been thought out.” Bergoglio himself told the journalists Francesca Ambrogetti and Sergio Rubin several years ago that he seldom heeded his impulses, since “the first answer that comes to me is usually wrong.”
Robert Mickens, editor in chief of Global Pulse, an online Catholic magazine, described Francis as a “master tactician” who was able to “make a move to outflank various groups and people that continue to oppose many of his initiatives.”

Such cold and calculating determination has been in evidence throughout the process leading up to Friday’s publication of Amoris Laetitia. Never in my lifetime as a Catholic has a papal document been more anticipated — or feared — than this follow-up to the two-part Synod of Bishops that originally convened in October 2014. Institutionally, the document’s roots can be traced back even further, at least to the consistory, or meeting of cardinals, in February 2014, at which the octogenarian Cardinal Walter Kasper, bishop emeritus of Rottenburg-Stuttgart, was personally asked by Francis to give the keynote address. It was here that Kasper — once a lightning rod of theological controversy who had already begun to fade into the obscurity of retirement — had new life suddenly breathed into his ecclesiastical career as he was lavished with praise by the unconventional new pope for his “serene theology.”

At the core of this theology was a novel conception of mercy that appeared to preclude repentance. While paying lip service to the church’s long-established doctrine on the indissolubility of marriage, Kasper proposed the exploration of new paths to respond to the alleged deep needs of divorced people who have remarried, offering the idea of a period of penance after which they might be re-admitted to the sacraments. This “Kasper Proposal,” as it came to be known, was nothing new in his native Germany, where he had advocated it (and implemented it in practice) for years, but thrust into the spotlight of Rome it became an immediate point of contention for orthodox Catholics. It represented the possibility of an institutional embrace of adultery, as well as permission for those living in grave sin to be re-admitted to Holy Communion — a practice that had been understood previously as sacrilege.

Nevertheless, it formed the locus around which both the extraordinary and ordinary synods on marriage and family would trace their orbits in October 2014 and 2015, respectively.

For his part, Kasper — with a strong papal endorsement in hand — continued to pitch the idea as he went on a world tour to promote his book Mercy: The Essence of the Gospel and the Key to Christian Life. Francis, who described Kasper early in his papacy as a “superb theologian,” said that his book “has done me so much good, so much good.” As pressure mounted against the Kasper Proposal from more conservative quarters within the church, the cardinal responded with an appeal to authority: “I agreed with the pope. I spoke twice with him. He showed himself content [with the proposal]. Now, they create this controversy. A cardinal must be close to the pope, by his side. The cardinals are the pope’s cooperators.”

With no correction from the Vatican, Kasper’s testimony stood, in the eyes of many of the faithful, as proof that Francis was an advocate of his position. And as the list of unorthodox prelates invited personally by Francis to the synod grew, so too did the suspicion that the pope was, in fact, entertaining the unthinkable: a blessing for changes in Catholic practice that would fatally erode the very doctrine they purported not to change.

Examples abound that the apparently simple, jovial Francis — who is so keen to refer to himself only as the “bishop of Rome,” and who gives the appearance of a strong sense of collegiality with his brother bishops — has always preferred to wield his authority like a hammer in pursuit of his own agenda. His scathing and wide-ranging rebuke of the Roman Curia, the central government of the church, in his 2014 Christmas address left feathers ruffled among the “princes of the church.”

His removal of the staunchly orthodox Cardinal Raymond Burke from his position as the head of the Apostolic Signatura (and his other curial positions) was seen by many as retribution for Burke’s public criticisms of the themes — like Holy Communion for the divorced and remarried — that were informing the synod process. His unilateral promulgation of two motu proprio letters reforming the marriage annulment process caused consternation among canonists and members of diocesan marriage tribunals and generated uncomfortable whispers from members of the appropriate Roman dicasteries who were not consulted in the creation of these important juridical documents. Last year, rumors of a conspiracy to force Pope Benedict XVI out of office and elect then-Cardinal Bergoglio were started by none other than Cardinal Godfried Danneels, the beleaguered archbishop emeritus of Brussels who remains a close associate of Francis, despite his track record as a promoter of heterodox ideas and protector of clerical sex abusers.

For close observers of the church, if not the wider public, Francis’s ruthlessness is no secret.

This aspect of the Argentinian pope’s personality has already earned him his share of enemies.

In an open letter to Francis from a former high-ranking member of the Roman Curia published last December, the official — who chose to remain anonymous for fear of retribution — admonished the pope for “an authoritarianism of which even the founder of your Order of Jesuits, St. Ignatius himself, would not approve.” He went on to describe the result of this authoritarianism: a “climate of fear” within the Vatican. Rumors have been circulating Rome for months that the Holy Father threatened the 13 Cardinals who sent him a letter expressing their own concerns over the synod — rumors that no source able to talk about it has been willing to confirm on the record. Francesca Chaouqui, an Italian public relations executive under investigation for leaks detailing scandalous Vatican mismanagement, went so far as to say of the pope’s growing list of opponents that “many people in the Vatican want Francis dead.”

With the promulgation Friday of his new, extensive apostolic exhortation, Francis has shown once again that he is a man clever enough to get what he wants against all odds. The document’s length will prohibit a comprehensive analysis for some time yet, but already Catholic progressives are celebrating its innovations, and theologians are lamenting the damage it will undoubtedly do to the already crumbling edifice of Christian marriage and the church’s teaching on sexual ethics. As has been the Vatican playbook since the 1960s, the document is packed with careful language, layers of nuance, and ambiguity offering a buffer against cries of “heresy.” At the same time, these openly semantic doors offer opportunities for exploitation by means of subjective “discernment” by those who have most longed to see the church change its teachings to “get with the times.”

In his own words from the text of the exhortation, Francis advises that we “recall that this discernment is dynamic; it must remain ever open to new stages of growth and to new decisions which can enable the ideal to be more fully realized.” Like much else about this papacy, it’s a statement that could mean whatever one wants it to mean. The real agenda lies hidden beneath.

Steve Skojec is the Founding Publisher and Executive Director of OnePeterFive.com, a journal of Catholic commentary on news, tradition, and culture. His commentary has appeared in The New York Times, USA Today, The Washington Post, The Washington Times, Crisis Magazine, EWTN, Huffington Post Live, The Fox News Channel, and the BBC. Steve lives in Northern Virginia with his wife Jamie and their seven children.

Brazilian banks

Defying gravity

Brazil’s banks have shrugged off the country’s recession—for now

IT LOOKS like a bad joke: the world’s fastest man promoting a bank in the world’s fastest-shrinking big economy. Yet the use of Usain Bolt’s image on posters for Banco Original, a five-year-old Brazilian bank, is apt in a way. In 2015 Original raced ahead at a clip worthy of Mr Bolt: profits increased by half compared with the previous year, to 111m reais ($30m). Its loan book grew by two-thirds, to 4.25 billion reais, even as Brazil’s economy shrivelled by 3.8%.

Original’s lightning loan-growth stands out. Demand for credit has sagged as the worst recession since the 1930s deprives Brazilian businesses of customers and workers of income or, worse, jobs. With non-performing loans (NPLs) on the rise, banks think twice before lending. After a decade of expansion, outstanding credit barely budged last year; in real (ie, inflation-adjusted) terms it contracted.

But look at Brazilian banks’ bottom lines, and most, like Original, have had a remarkably good crisis so far. Out of 180-odd institutions monitored by the central bank only 25, most of them small, posted losses in 2015. In the year to September the banking sector as a whole (excluding state-owned development banks) raked in net profits of 85 billion reais, up from 66 billion reais in 2014 (see chart 1). Return on equity averaged 15%, down from more than 20% in the mid-2000s, when Brazil prospered on the back of a commodity boom, but better than in the preceding couple of years.

This seems to fly in the face of financial aerodynamics, much as Mr Bolt’s towering figure (too tall for a sprinter, apparently) defies physics on the track. Part of the explanation is that lower loan volumes have been offset by higher interest margins (the difference between the rates banks pay on deposits and those they charge on loans). These have jumped as the central bank has lifted its benchmark SELIC rate by seven percentage points since 2013, to 14.25%, in an effort to curb inflation, currently around 10%. The average price of credit hit a high of 32% a year in October. As rich-world banks bewail negative rates, their Brazilian peers enjoy real returns of around 5% on government bonds, which make up a quarter of their assets, according to José Perez-Gorozpe of Standard & Poor’s, a rating agency.

But Brazilian bankers have been sensible as well as lucky. The industry drew the right lessons from a formative crisis in 1995-98, says Ivan de Souza of Strategy&, a consultancy. Back then distressed loans from failing institutions, many of them state-owned, were hived off into a government-run bad bank and the good bits sold to stronger private-sector rivals. The cleansed system that emerged was more concentrated: today the five biggest banks account for three-quarters of all loans. It was also more conservative, partly because banks must set aside hefty provisions for delinquent loans (at present, 180% of their value). When the global financial crisis struck, only one big lender, Unibanco, got into trouble, from trading losses. (It subsequently merged with a competitor, Itaú, creating Latin America’s biggest bank by market capitalisation.)

In the aftermath of that crisis Brazil’s left-wing government kept subsidised credit flowing through its two retail giants, Banco do Brasil and Caixa Econômica Federal, and the national development bank, BNDES. Rather than compete on price, rivals in the private sector focused on their own asset quality. When car loans began to sour in 2011, hinting at trouble ahead, they shifted towards less risky borrowers and safer assets, such as mortgages (nearly all for first homes, with loan-to-value ratios below 60%) and payroll loans (serviced directly from salaries, predominantly of unsackable public-sector employees). To preserve profits, the private sector let the state-owned banks chip away at its market share, which declined from two-thirds in 2008 to just 45% last year.

Meanwhile banks are putting more emphasis on less volatile, fee-based services, such as insurance and credit cards. A host of measures from voluntary redundancies to sharing ATMs has helped to contain costs. Heavy investment in technology—22 billion reais in 2014 alone—has shunted more than half of transactions online. This is reducing banks’ dependence on costly branches, which are required by law to employ at least two armed guards: last year the sector spent 9 billion reais just on physical security. Banco Original dispenses with bricks and mortar altogether, plumping instead for a digital-only service.

Relative prudence and decent management will, observers agree, help Brazil avert a banking crisis of the sort that befell other struggling economies (think Spain or Greece). Fewer than ten tiddlers have folded—chiefly as a result of fraud. Roughly 70% of loans are funded with deposits. The likelihood of a run on these is a very low: high inflation makes mattress-stuffing costly for Brazilian savers, who also cannot easily invest abroad. The system’s overall capital buffer, currently 15.8% of risk-weighted assets, is well clear of the 11% regulatory minimum.

Most private-sector banks are on course to meet the stricter “Basel 3” capital standards, which come into full effect in 2019. Public ones will have a harder time. They generate half the earnings of Itaú and Bradesco from comparable risk-weighted assets, since they charge lower interest rates (admittedly, their NPLs are also lower, since cheap loans are easier to service). They, too, have begun reining in credit (see chart 2). Nonetheless, J.P. Morgan, an investment bank, reckons that Banco do Brasil (BB), Caixa and BNDES will need to raise 56 billion reais, or 0.9% of GDP, of extra capital.

With a budget deficit of 10.7% of GDP, the government cannot afford to recapitalise the state-owned banks. That makes President Dilma Rousseff’s recent noises about getting BNDES to pump out more subsidised credit all the more alarming. The idea appeals to her left-wing base, whose support she needs to fend off looming impeachment by Congress (over, of all things, failing to make certain payments to state-owned banks on time). Most economists think earmarked loans merely crowd out private investment and force the SELIC much higher than it need be, since the benchmark rate only affects unsubsidised credit, currently just half of the total.

At least Caixa and BB are undertaking (timid) capital-preserving measures. In March BB decided to return just 25% of profits to shareholders, instead of the usual 40%. On March 24th Caixa raised the interest rate it charges on mortgages. There is talk of spinning off its insurance business.

Profits are expected to dip across the industry this year. Natalia Corfield of J.P. Morgan warns that with GDP doomed to shrink by another 4% or so in 2016, delinquent loans will take more than the usual 11-17 months to reach a peak, requiring more costly provisions for longer. With the exception of Bradesco, whose pending acquisition of HSBC’s Brazilian retail business may cut the combined entity’s costs by 30%, banks will struggle to find more savings. And with no more rate hikes on the horizon, interest margins will remain flat at best. Even Brazil’s well-run lenders cannot defy the laws of finance for ever.

Gold Stocks Breakout, Gold to Follow

By: Jordan Roy-Byrne

Last week we concluded:
As long as the gold stocks continue to hold support for another week or two then the near term outlook is bullish. A bull flag is a consolidation pattern that separates two strong moves. It could be developing in the miners. There is logical reason to be cautious if not bearish at this point. The metals look okay at best while the miners remain somewhat overbought. However, the action in the miners, if it continues for another few weeks is telling us what could be ahead.
The strength in the miners continues to surprise as the majority of pundits look for any reason for a pullback in the face of very bullish price action. The gold miners are now breaking out and Gold is likely to follow.

The weekly candle charts of GDXJ and GDX are shown below along with their 80-week moving averages. Note that the miners advanced for six weeks and their bullish consolidation began during that sixth week in late February. This week marks the fifth week since the previous advance. The miners are a little overbought here but not as much as they were five weeks ago.

Moreover, we should note that overbought can become very overbought and extremely overbought. The immediate upside targets are GDXJ $33 and GDX $22.50 and it is possible this move has even greater upside.

Market Vecors Gold Miners and Junior Gold Miners Weekly Charts

Turning to Gold, we see that it has stabilized in the mid $1200s within a larger range of $1210 to $1270/oz. With the miners breaking to the upside, Gold is very likely to follow to the upside.

The current net speculative position of 43% is relatively high but we should note that from 2001 to 2012 it often peaked at 50% to 60%. Gold is weaker than the miners and may require a bit more consolidation. Nevertheless, weekly closes above $1262/oz and $1300/oz could send Gold on its way to $1400/oz.

Spot Gold and Gold CoT Weekly Charts

A move in Gold to $1400/oz would fall in line with history. In the chart below we compare the current rebound in Gold to its rebounds following major lows in 1976 and 2008. If Gold rallies to $1400/oz in the next few months then its recovery would be in line with those previous two recoveries.

Gold Recovery Analog

After consolidating in bullish fashion for a good five weeks the miners appear to be starting their next leg higher and this should eventually propel Gold higher. The toughest time to buy is after a market has already had a strong rebound, following a nasty bear market. Investors and pundits alike subconsciously refuse to believe a major change has taken place. Gold stocks endured the worst bear market in 90 years. Of course there will be fear that it could reassert itself at any time. However, the action of the market is clear. Gold stocks are breaking out and could be headed much higher in the near term.

Panama Bernie

Bernie Sanders’s politics produced the Panama Papers.

By Daniel Henninger

Bernie Sanders at a campaign rally in Laramie, Wyo., April 5. Photo: Associated Press

Bernie Sanders caused the Panama Papers. Bernie of Vermont didn’t do it by himself, of course. The world’s most famous socialist, and Hillary Clinton’s albatross, had a lot of help.

Spare me the crocodile tears over the immorality of tax avoidance. Panama is an indictment of government greed.

After World War II, the governments of the West established tax regimes to support the reconstruction of their nations. Six decades later, that tax machinery, which runs the social-welfare states in the countries Bernie Sanders cites in every campaign stop as a model for America, has run totally amok—an unaccountable, devouring monster. Billionaires aren’t the only ones who run from it.

Most governments, including ours, overtax their citizens to feed their own insatiable need for money. Then the legal thieves running the government and their cronies, unwilling to abide the
tax levels they created, move their wealth offshore to places like Panama. Arguably, all the world’s people should be able to move their assets “offshore” to escape governments that are smothering economic life and growth, which has stalled in the U.S., Europe and Asia.

Speaking of crocodile tears, Barack Obama spent Tuesday bragging that corporate tax inversions are akin to Panama Papers’ tax avoidance. Mr. Obama said “corporations,” another swearword invoked by Bernie Sanders at every stop, are “gaming the system.”

Well what about that “system?” Mr. Obama is saying, with Bernie Sanders and Hillary Clinton in his echo chamber, that U.S. corporations should suck it up on the U.S.’s 35% corporate tax rate, the developed world’s highest, and simply send that money to him. Why? Because he’s gotta have it. To spend.

Other than their national health-care systems, many of which are effectively bankrupt, most Europeans would be hard put to explain what it is their high-tax governments actually do with their money.

Suppressed for generations by high tax rates and regulatory minutiae, most Europeans survive in an economic half-life of gray and black markets, with their assets protected by cash-only transactions, bartering, and endless hours devising off-the-books deals involving family real estate, inflated art prices and anything else they can hide from the taxman. The Beatles actually wrote a song about it in 1966—“Taxman,” a grim ode to all this.

Governments with unsated “needs” for revenue exist in Europe, Africa, Russia and South America. The Associated Press this week reported that in Russia today shell companies exist simply to pay the bribes that are the price of daily life.

One way or another, most people living in the countries run on the Obama-Sanders-Clinton model eventually go searching for their own private Panama. When private capital is under public assault, it will hide. From the wealthiest to the poorest, it creates a world of chiselers, not productive citizens.

Sen. Sanders gave his Wisconsin victory speech in Laramie, Wyo., backgrounded by the smiling, bobbing heads of his 20-something voter base. In Western Europe, which is Sanders Land, those 20-somethings are the subject of a permanent economic discipline called high youth unemployment.

The Sanders campaign isn’t about idealism. It’s about the misallocation of capital.

“Misallocation of capital” is a phrase utterly alien to socialists, and increasingly to most of the modern Democratic Party.

In the now-extinct Democratic Party—the party of Hubert Humphrey, Jimmy Carter and Bill Clinton—room existed for the private sector to breathe. Not yet unhinged completely from economics, Democrats understood the symbiosis between healthy private production and public revenues. Both Presidents Carter and Clinton deregulated economic life.

No longer. The deconstructed party of Barack Obama, Elizabeth Warren, Bernie Sanders and forced-recruit Hillary Clinton says: Just keep squeezing them.

This week marked a historic moment in the Democratic drift toward low-growth Euro-socialism.

Both California and New York raised the minimum wage to $15. California Gov. Jerry Brown, who in his career has been every Democrat that ever was, summarized the true meaning of the new party.

“Economically, minimum wages may not make sense,” he said, but they make sense “morally, socially and politically.”

It has been my view for some time that to help her navigate Bernie’s new Democratic world Hillary Clinton should bring in Lady Gaga as a consultant. An expert in magic realism.

Sen. Sanders is getting mocked now by Hillary Clinton and her supporters for a catastrophic interview he gave this week to the New York Daily News, revealing he knows little about his own proposals. But France’s Socialist President François Hollande knew everything about his economic proposals. What difference does it make?

The day before losing to Bernie Sanders in Wisconsin, Mrs. Clinton argued: “I think we need a nominee who’s been tested and vetted already. For 25 years they’ve thrown everything they could at me, but I’m still standing.”

Tested, vetted and still standing. On the available evidence so far, that isn’t this year’s criteria for the American presidency.