Chinese society

The new class war

China’s middle class is larger, richer and more vocal than ever before. That threatens the Communist Party, says Rosie Blau
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WHEN 13-YEAR-OLD Xiao Kang began to feel lethargic and his breathing grew wheezy last autumn, his parents assumed he was working too hard at school. Then his fellow classmates at Changzhou Foreign Languages Middle School started complaining too. The private school in a wealthy city on China’s eastern seaboard had moved to a smart new campus in September 2015, close to a site formerly occupied by three chemical factories. Tests showed the soil and water to have concentrations of pollutants tens of thousands of times the legal limits, and over 100 pupils have been diagnosed with growths on their thyroid and lymph glands. Yet the school denies responsibility, and the local authority has put pressure on parents to keep their children in attendance and stopped them from protesting. The toxic school remains open.

Xiao Kang and his family are beneficiaries of China’s rise. His forebears were farmers and more recently factory workers, but he attends the “best” school in the city (meaning it gets the highest university entrance scores). His father hopes he will become an architect or a designer and may go to study abroad one day. As with many of his generation, all the financial and emotional resources of the boy’s two parents and four grandparents are concentrated on this single child. The family is shocked that the government is so heedless of the youngster’s fate. If a school in any other country was found to be built on poisoned ground, it would immediately be shut, says the boy’s father. Why not in China?

For most of China’s modern history, its people have concentrated on building a materially comfortable existence. Since 1978 more than 700m people have been lifted out of poverty. For the past four decades almost everyone could be confident that their children’s lives would be better than their own. But the future looks less certain, particularly for the group that appears to be China’s greatest success: the middle class. Millions of middle-income Chinese families like Xiao Kang’s are well fed, well housed and well educated. They have good jobs and plenty of choices in life. But they are now confronting the dark side of China’s 35 years of dazzling growth.

This special report will lay out the desires and aspirations of this fast-expanding group. Many Chinese today are individualistic, empowered and keen to shape society around them. Through social media, they are changing China’s intellectual landscape. They are investing in new experiences of all kinds. But discontent over corruption, inequality, tainted food and a foul environment is sharp and deep; many worry that their hard-fought gains are ill-protected. For decades the Communist Party has kept control over a population that now numbers 1.4 billion by exceeding people’s expectations.

Their lives have improved faster than most of them could have dreamt. Though the state has used coercion and repression, it has also relieved many pressure points. Now it is finding it increasingly hard to manage the complex and competing demands of the middle class; yet to suppress them risks holding back many of the most productive members of society.

When the Communist Party seized power in 1949, China’s bourgeoisie was tiny. In the Cultural Revolution two decades later, wealth, education and a taste for foreign culture were punished.

But after housing was privatised in the 1990s, the government tied its fortunes to this rapidly expanding sector of society, encouraging it to strive for the material trappings of its rich-world peers.

For the first time in China’s history a huge middle class now sits between the ruling elite and the masses. McKinsey, a consultancy, estimates its size at around 225m households, compared with just 5m in 2000, using an annual income of 75,000-280,000 yuan ($11,500-43,000) as a yardstick. It predicts that between now and 2020 another 50m households will join its ranks.

They are spread across the country, but are highly concentrated in urban areas (see map); around 80% of them own property; and they include many of the Communist Party’s 88m members.

Though China’s population as a whole is ageing, the middle class is getting younger. Nearly half of all people living in cities are under 35: they are eight times more likely than country-dwellers to be university graduates; and most are treasured and entitled only children, with no memory of a time when their country was poor. The internet has expanded their horizons, even if the government shuts out many foreign websites and quashes dissenting voices. Today’s young Chinese tend to do what they want, not what society expects—a profound and very recent shift. Most of these young people exercise their autonomy by choosing their own marriage partners or shelling out for a new car. But many have an appetite for civic engagement too: they are the foot-soldiers of China’s non-government organisations, a vast, though often politically sensitive, array of groups seeking to improve society in a variety of ways.

Pressures on the middle class are growing. Some feel that no matter how able they are, the only way they can succeed is by having the right connections. Housing has been a driver of economic growth, yet property rights are shaky, and the government encourages private investment without adequately regulating financial products. As more people go to university, returns to education are falling and graduate jobs are harder to come by. Many fret that their children may not see the progressive improvements in material well-being they themselves have enjoyed, and more youngsters are going abroad.

Political scientists have long argued that once individuals reach a certain level of affluence they become interested in non-material values, including political choice. Average income per person in China’s biggest cities is now at roughly the same level as in Taiwan and South Korea when those countries became democracies. When China opened up its markets in the 1980s, democratic demands were widely expected to follow. They did, but were savagely silenced in Tiananmen Square in 1989. Since then, a mixture of political repression, fear of chaos, pride in China’s advance and a huge rise in living standards has kept the country steady.

China’s middle classes increasingly look and behave like their rich-world peers, but they do not necessarily think like them. Intellectuals privately express a sense of despair that since becoming party chief in 2012, Xi Jinping has shuttered free expression and ramped up ideology. Yet most of the population at large seems unconcerned. If an election were held tomorrow, Mr Xi would very probably win by a large majority—and not just because there is no viable opposition.


However, although few people in China are demanding a vote, many are becoming more and more frustrated by the lack of political accountability and transparency, even if they rarely label them as such. The party is clearly worried. In an internal document in 2013 it listed “seven things that should not be discussed”: universal values, press freedom, civil society, economic liberalism, historical mistakes made by the party, Western constitutional democracy and questioning the nature of socialism with Chinese characteristics. Recently these have often become flashpoints between the middle class and the government.

No wonder that political trust in China is declining. A series of nationwide surveys from 2003 to the present, commissioned by Anthony Saich of Harvard University, show that the wealthy think less of the government than poorer folk do. Other polls show that richer and better-educated people are more likely to support the rule of law, market allocation of resources and greater individual autonomy; the less-well-off often favour traditional values and authoritarian rule.

Wang Zhengxu of the University of Nottingham in Britain and You Yu of Xiamen University in China go further. They observe a clear decline in trust in legal institutions, the police and local government between 2002 and 2011, despite a consistently good economic performance and rising social benefits, and reckon that “the era of critical citizens” has arrived in China.

Many wondered how the party could ever survive after it brutally crushed pro-democracy demonstrators in 1989. Its solution was to make people rich very quickly. Since 1990 the blistering pace of economic growth has been the party’s most important source of legitimacy, delivering its overriding priority: stability. For a while these goals meshed well with each other and with people’s personal aspirations: under an unspoken agreement, people could amass wealth so long as they did not try to amass political power too. The recent slowdown in growth puts a question mark over that compact.

Kingdom in the middle
 
Looking ahead, in a host of areas from taxation to industrial overcapacity to the environment, the party must make an invidious choice: introduce unpopular reforms now and risk short-term instability, or delay reform and jeopardise the country’s future. On present form, stability is likely to win: the mighty party is terrified of its own people.

The middle class is not the only source of potential instability. In the western province of Xinjiang, repression of ethnic minorities has aggravated an incipient insurgency. Tibet is simmering too. And across China millions of workers in declining industrial sectors risk losing their livelihoods. Many migrants from rural areas working in cities feel rootless and marginalised, denied access to facilities such as health care and education. Divisions within the party elite are also a potential problem. And although dissidents have been silenced for now, they could find their voice again.

China’s Communist Party has shown extraordinary resilience to destabilising forces and an impressive ability to recreate itself. It has ditched most of its founding principles and tied itself to the middle-class wealth-creators, expanding its membership to include the very group it once suppressed.

Since the 1990s the Chinese model has proved so flexible that it appeared to break the democratic world’s monopoly on economic progress. To some it seemed to offer a credible alternative to democracy.

Now China is beginning to reach the limits of growth without reform. The complexity of middle-class demands, the rush of unintended consequences of economic growth and now a slowing economy are challenging the party’s hold. It has to find new ways to try to appease a population far more vocal and more individualistic than previous generations.


The Strategy Behind the Nice Attack

The purpose of terror is to terrify.


At this point, the details of the terror attack in Nice are still unknown. We still do not know if these were jihadists. However, it seems likely. Each attack is different in some detail, but it is not unreasonable to assume that it was. Assuming that, it is important to understand why Islamic State is doing this.

Its goal is to construct a multinational caliphate, uniting Islamic countries under a single state. In order to do that it must unite Muslims. In order to unite Muslims, it must give them an unmistakable enemy, that only unity can defeat. At the moment there is no such enemy that would force Muslims to unite. IS wants to create one.

Lenin said that the purpose of terror is to terrify. The creation of terror can cause any population to demand protection from such attacks. IS is a sparse global network operating covertly. It is difficult to identify its soldiers, and therefore difficult to destroy them. A purely defensive posture, protecting airports and buildings, won’t work. In this case, the offense has a substantial advantage over the defense. The defense can’t be everywhere. Therefore, the offense can identify gaps and exploit them. Populations cannot live their lives constantly under threat.

Multiple attacks like the Nice attack can terrify a population over time. It is not an irrational fear. The whole point of terrorism is to take the population to the point where fear is the only rational response. When that happens, there are political consequences. First, governments that have spoken of prior tragedies but have not prevented further attacks become delegitimized. Second, there is no moderate response that could work – only extreme ones like mass deportations, or worse. Given enough terror, unthinkable results can be generated.

This is precisely what IS wants to achieve. It wants a response so overwhelming it will unite Muslims everywhere. The strength of IS strategy is that it leaves the defenders an impossible decision. No moderate defense is possible. Any extreme response by France or the West will create a response in the Muslim world that would benefit IS.

The fact that there have been relatively few catastrophic events like Nice has kept the pot from boiling over. It may be that IS doesn’t have enough operatives or that Western intelligence is detecting and destroying cells. But if the number increases, then the only reasonable response will be fear, and fear demands action. It becomes an irresistible force. The brutal fact is that IS has not hit the tripwire on extreme fear yet, which means the likelihood of more frequent attacks is high.


Up and Down Wall Street

Yes, a Fed Rate Hike May Come Sooner Than Later

Surging stocks, plus strong jobs data, could ease Yellen & Co.’s concerns and spur a July 27 statement surprise.
  

Will new highs in stocks spur the Federal Reserve to raise interest rates sooner than the market expects, perhaps even later this month?
 
Given the Fed’s mandates to aim for maximum employment with moderate inflation (which it defines as 2% per annum), the level of U.S. equity prices should play little, if any, role in setting monetary policy. But even from a totally non-cynical view, there may be justification for the Fed to raise its interest rate target more and sooner than the single hike the financial futures market currently foresees later in 2017.
cat
Photo: Andrew Harrer/Bloomberg
           
 
In a research note published Tuesday, Goldman Sachs’ chief economist Jan Hatzius wrote the Federal Open Market Committee, in holding rates steady at last month’s meeting, opted to “play for time” ahead of the U.K. vote on leaving the European Union and with uncertainty hanging over U.S. economic data after the shockingly weak May payrolls report.
 
But now, a lot of these uncertainties have cleared. He suggests the markets now may be unduly optimistic in expecting just a single Fed rate hike and too pessimistic in their assessment of the economy, especially after the “blowout” 287,000 jump in June nonfarm payrolls reported last Friday.
 
Payrolls are growing at a 150,000-175,000 monthly clip — a strong pace with the economy near full employment with a jobless rate of 4.9%, and arguably stronger than 225,000 a month with a 6%-7% unemployment rate, he suggests.
 
Wages and prices also have picked up, Hatzius continues, with Goldman’s pay tracker based on various measures accelerating to a 2.9% annual rate from the 2% pace that prevailed from 2010 to 2014. Forward inflation measures, both from break-even rates from Treasury Inflation Protected Securities and survey measures, show a moderate rebound in the past month or so, he adds.
 
Growth forecasts of 2% over the next two years look less daunting, he continues. That’s especially true given that the risks from Brexit and renewed turbulence from China have receded.
 
“On the positive side, our financial conditions index has now moved to its easiest level since July 2015,” Hatzius continues. “This is important because we estimate that the earlier tightening in financial conditions subtracted more than one percentage point from U.S. growth over the past year.
 
The current FCI level suggests that this drag will give way to a slight positive impulse over the next year.”
 
“So the economy is close to the mandate, financial conditions have eased, and the risks around our forecast of further above-trend growth look balanced. Given all this, why is the bond market priced for only a bit more than one rate hike over the next two years?” Hatzius asks.
 
That may owe partly to a less optimistic consensus outlook than the Goldman view. “But the strong performance of the equity and credit markets casts some doubt on the market’s growth pessimism,” he observes. In that regard, since their Feb. 11 low, junk-bond prices are up over 13% based on the iShares iBoxx High Yield Corporate Bond exchange-traded fund while the SPDR S&P 500 ETF is up 17% over that span.
 
Indeed, what has changed mainly are securities prices rather than economic realities. The economy is the proverbial supertanker while markets change tacks on a proverbial dime. Markets dart around like hyperactive kids.
 
The mythical man from Mars would observe that the Fed raised its federal funds target a quarter point last December when the stock market was on a positive trajectory with the Standard & Poor’s 500 not far from its previous 2135 high. The Fed backed off from rate hikes after the S&P 500 went into correction territory in early 2016.
 
And the central bank’s reluctance has persisted amid the uncertainties over the jobs numbers and Brexit but also while the S&P 500 had stayed below 2100. Coincidence? Perhaps.
 
Arguably, the recovery in risk markets owes mainly to the perception that, absent any imminent disasters, stocks and corporate debt are attractive relative to sovereign bonds yielding less than zero.
 
As the risks from Brexit and U.S. economic data dissipated, new highs were set in the U.S. stock market.
 
Could that leave the Fed an opening to boost rates? Hatzius suggests the July 27 Federal Open Market Committee meeting offers the possibility of sending a message that a rate hike could be coming this year.
 
A Sept. 21 rate increase could then follow. MFR’s chief U.S. economist, Joshua Shapiro, suggests this FOMC meeting offers the chance for the panel to move further from the zero bound on short-term rates — before the slowdown he sees for late this year or 2017 from deteriorating corporate profits forcing more cost-cutting and weaker jobs growth. The FOMC also will present a new set of year-end federal funds rate forecasts (the “dot plot”) and economic projections.
 
As for the studiously apolitical Fed, a September hike would be a politically adroit move to maintain its appearance of nonpartisanship. The Nov. 1-2 meeting would come a week before Election Day. The next FOMC meeting is Dec. 13-14, which would be a year after the Fed’s initial hike, to 0.25%-0.5%, and probably would be the next most likely candidate.
 
To be sure, the futures market doesn’t see any Fed rate increases for more than a year. Only by September 2017 does the probability of a hike exceed 50%, according to Bloomberg’s analysis.
 
All of which means the markets aren’t pricing any rate increase this year while the FOMC dot plot consensus calls for two quarter-point moves. Even though, as Goldman’s Hatzius points out, the data align for a rate increase.
 
So does the stock market’s record level. Don’t lose sight of what happened after last December’s rate hike.



US stocks and bonds delay epic reckoning

Michael Mackenzie

Push by US stocks into fresh record territory reflects lower-for-longer interest rates Outlook

 
 
Bull market milestones always matter, especially when they arrive with a red flag.
 
Perennially optimistic investors may be heartened at the sight of the S&P 500 and Dow Jones Industrial Average entering uncharted territory this week.

But first, a little perspective. It has taken the S&P 14 months to reach a peak of 2,168. The nominal gain since the market ascended to 2,130 back in May 2015 is a paltry 1.7 per cent.

Including dividends, the performance improves to about 3.6 per cent.

A fresh market peak tends to signal one of two outcomes: the start of an extended breakout for prices such as investors enjoyed during 2013, or a topping-out process that ultimately defines the end of a bull run as seen in 2000 and 2007.

So what awaits US equities?

Usually a peak in equities reflects a combination of robust earnings growth, an improving macro outlook and excessive investor optimism over the ability of companies to grow their businesses.

At this juncture, we have a middling US economy expanding about 2 per cent, illustrated by a Federal Reserve unsure about the interest rate outlook. Enthusiasm for biotech and other fast-growing tech companies has distinctly cooled, while companies are on course to record their fifth straight quarterly year-over-year decline in earnings growth. Hardly the ingredients of a bull market.

Except these are not normal times; far from it.

If you are looking for an explanation as to why US equities are exploring record territory, much of the answer lies in the ever-shrinking yields on government debt.

In the wake of Brexit, the universe of negative-yielding debt has expanded further, while UK and US long-term bond benchmarks have plumbed all-time lows, with investors snapping up 30-year Treasury paper on Wednesday.

A dual rally in share and bond prices to record levels should not normally occur. Rising equity values signal optimism over the economy and earnings, contradicting the dour message sent by sinking yields.

The lower bond yields fall, so the attraction of securing some form of fixed return only intensifies. Declining yields boost the value of future cash flows for companies, and in an uncertain world, US blue-chips have a certain lustre that has not escaped the attention of investors.

Expanding equity multiples reflect how the market has become a proxy for yield seekers and, unsurprisingly, the big gainers among S&P sectors this year have been utilities and telecoms, which are packed with dividend payers.

A glance at a coterie of blue-chips, known as S&P Aristocrats — 50 US companies that have regularly increased payouts over the past 25 years — shows a total return of 14.5 per cent so far this year, more than double the broad market’s gain for 2016.

The distortions rendered by a world of negative and near-zero interest rates, along with central banks deploying quantitative easing policies, have dominated financial markets in recent years.

Periods of sliding bond yields are accompanied by robust buying of shares in dividend-paying companies. Indeed many companies have taken advantage of low borrowing costs to help fund shareholder-friendly activities of buybacks and increasing dividends.

That debt binge is now being followed by weakening earnings and a high multiple for the S&P — trading at forward 12-month P/E ratio of 16.6 versus a 10-year average of 14.3, according to FactSet.

Such a combination should temper bullish inclinations for US shares. However, set against that, there is a relief factor of Brexit jitters easing, Japan inching towards a fiscal stimulus package and no Fed tightening on the horizon.

The bottom line for investors is that both US equities and bonds — corporate bonds have not missed out on the sovereign rally — trade at expensive levels and face a reckoning of epic proportions at some juncture.

However, unlike Japan and Europe — where negative yields dominate and equity markets remain well under water for the year — the US remains an outlier, or what some traders are saying: “The only game in town.”

Plenty of juice remains in US bond yields that can be squeezed a lot lower from their present levels, helping drive equity prices higher.


A World of Constraints

A leader’s potential actions are far more limited than one would think.


Geopolitics is not simply the intersection of geography and politics. At its core, understanding geopolitics is about understanding power. I would define power simply as the ability to either make someone do what you want them to do or make something happen that you want to happen.

The irony about studying power is that most don’t actually possess it, and for those who do, their ability to use it is ephemeral. It is easy when writing about politics to be seduced by what is possible. It is much harder to see what is impossible, but also much more useful.

The word “constraint” is what we use internally to describe the impossible. It is the geopolitical corollary to the Sherlock Holmes principle: “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.” And it grounds our forecasting methodology. Once you have identified the constraints, whatever is beyond them, no matter what one says or believes, is not going to happen.

Take, for example, the burgeoning awareness in the world of the Italian banking crisis.

This was a development we forecast in December, and it has been striking to watch as the Financial Times on July 3 and the Wall Street Journal on July 4 picked up the story, citing sources that said Italy would flaunt EU regulations against using public funds to pump money into the system. From there it was off to the races, and the story was picked up by over 180 different newspapers, if Google News’ counting algorithms are to be trusted.

One of the questions that readers have posed to us and that we have debated internally is, why is the EU, and by extension Germany, being so tough on Italy? For over a year, Brussels, with Berlin’s backing, has shot down proposal after proposal from the Italians as they attempt to deal with the over 17 percent of non-performing loans that are weighing down their banking sector. Germany very clearly needs to preserve its access to the European market, and the existence of that market is dependent on not letting its third largest Continental economy go up in flames. Why not let the Italians bail out their banking system? And if that doesn’t work, why wouldn’t Germany take the drastic step of bailing the Italians out themselves?

There are a number of reasons, but the key one to understand is that German Chancellor Angela Merkel is not simply free to do as she pleases, or even to do what she thinks is best. The voters who elected her don’t want to bail out the Italians. The business interests intertwined with the German political elite don’t want to bail out the Italians either, and they have the luxury of taking this position because they are more insulated than the common depositor when it comes to the fall-out from the type of cascading systemic crisis that is possible. And German lawmakers, keen to preserve competition rules and deter other countries from risky banking practices, don't want to see Rome use its own funds to bail out private institutions. People don’t intentionally walk into catastrophes. They are often dragged into them against their will.

And so Merkel, who just a few weeks ago huddled with Italian Prime Minister Matteo Renzi and French President François Hollande over how to save the EU in the wake of Brexit, is engaged in a public showdown with Renzi over Italy’s request to bend the rules. Merkel cannot bend, and Renzi cannot do nothing. The fact of the matter is, if she values her political career this is the position she has to take – she doesn’t have a choice. She will likely be relieved when Italy is forced to ignore EU directives and use public funds when the crisis arrives in earnest.

She will also likely support small EU concessions and attempts to look the other way when Italy finds tools to skirt European regulations. This is what the obsolescence of the European Union looks like – each nation-state doing what it must for its best interest.

We have been focusing quite a bit on Europe in the weeks since Brexit, but there are some other recent salient examples of how difficult it is for leaders faced with constraints.

Yesterday afternoon, President Barack Obama announced that the U.S. would be leaving more troops in Afghanistan after the end of his second term than he had previously stated. He had said that by January 2017 there would only be 5,000 troops left.

This is a subject that we have addressed in the past, not just in terms of Afghanistan, but in terms of the full scope of foreign policy goals Obama set for himself before he ascended to the presidency. He was going to be the president who ended the wars in Afghanistan and Iraq, he was going to close Guantanamo Bay, he was going to be tough on environmental regulations, and he was going to pass comprehensive health care reform.

The wars in Afghanistan and Iraq will continue after Obama leaves office. The Taliban and the Islamic State will see to that. Guantanamo Bay will remain open, for reasons we have outlined in the past. Obama spent most of the political capital he had to get a compromised version of his vision for health care past Congress. In the intervening months, both Congress and the Supreme Court have reminded the U.S. public how little power a sitting president has, especially when both houses of Congress are held by the opposing party.

As we head into the Democratic and Republican conventions at the end of July, it will be worth remembering amid all the policy pronouncements and good intentions that U.S. presidents are weak executives. George W. Bush’s presidency was not defined by his policy goals but by 9/11.

Obama’s was defined before he even got to office with the 2008 subprime mortgage crisis.

The big news out of China in the past week has been the sentencing of former Chinese President Hu Jintao’s top aide, Ling Jihua, to life in prison. There are those who lament the fact that current Chinese President Xi Jinping is tightening his grip on China. In the past six months, he has moved to assert his control over the Communist Party, the People’s Liberation Army, and even over economic policy, which is usually the purview of the premier.

This is something that we predicted Xi would do, and not because we have some deep window into Xi’s soul that others don’t. We saw clearly that 2016 was going to be a very difficult year for the Chinese economy and that the old export-centered high-growth model was running on fumes. The Communist Party had maintained control by ensuring prosperity (in this way, the party shares something deeply in common with the European Union), but Xi knew that prosperity was no longer assured and that something besides money was needed to bind his nation together.

The anti-corruption purges in which Xi has engaged the Central Commission for Discipline Inspection are not random, and they aren’t only targeting people who take bribes, though I’m sure they have got a few of those too. Ling was a top aide to a former president, one who was associated with the Communist Youth League of China, which we identified in May as an institution Xi had good reason to fear because of its ties to Premier Li Keqiang and its 90 million members. Many see Xi’s moves as a demonstration of strength. But they are motivated first and foremost by weakness. Understanding his limits is the key to understanding what he does.

If they possessed unlimited power, Merkel would be able to let Italy have its cake and eat it too, Obama would have the presidential legacy he wanted, and Xi wouldn’t have to crack down on potential rivals. But that is not how the world works, and so each must roll along in the currents in which they are inexorably caught, all the while appearing to be immensely powerful. When you pull back the wizard’s curtain, it’s an individual pulling levers, creating illusions and just trying not to screw up. Once you’ve realized that, what comes next becomes far more certain.


Gold Headed For $1500 And This Time It Really Is Different

by: J Clinton Hill
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Summary

- Gold has made quite a run and some bears argue that it will correct at least 300 points because of a commodity bear super cycle.

- Despite the long-term double top pattern in gold, one should not automatically presume that crowd behavior will react in a similar manner.

- This time it really is different as the underlying economic fundamentals support higher gold prices.

- Currently, gold is in the midst of a bullish Fibonacci retracement and its next target is $1500.

 
Earlier Wednesday, I listened to a Wells Fargo analyst on CNBC discuss what he sees as the end in Gold's (NYSEARCA:GLD) bull run and the potential for a 300 point decline in the precious metal. His rationale for such is that gold is trading within a commodity bear super cycle (which typically last 20-25 years). He believes this super cycle began in 2011. Below is a 100-year chart of gold adjusted for inflation, which illustrates a double-topping pattern in gold, which is typically considered a bearish omen.
 
100 year monthly chart of gold 
As an analyst, and someone who relies mostly upon technical analysis as a decision support tool for entry, exit, and risk management of positions, I fully embrace the concept of cycles.
 
However, as an economic historian and someone who does not discount the fundamentals, I do take issue with this thesis which is primarily predicated on the notion that human behavioral patterns are repetitive simply "because they are". Like most technical analysts, I do believe that price charts reflect the collective consciousness and sentiment of market participants, but I think it is also important to ask under what conditions are they exhibiting such behavior.

To illustrate my point, I have included a historical chart comparing the movement of gold to the 10-Year Treasury Constant Maturity Rate. In the example below, although the price of gold is not adjusted for inflation, its purpose is to illustrate a peak in price relative to the interest rate environment. At the time gold peaked, the economic condition was one of rampant inflation and interest rates were raised to historically high levels to combat it, which anyone who is a student of the markets will acknowledge had the intended effect of lowering inflation and the price of gold too.
 
In contrast to today's economic environment, inflation is not yet a problem, but instead deflation. With some $10 trillion in sovereign debt yielding negative rate returns, the US Federal Reserve will most likely defer any interest rate hikes until next year as its monetary policy must balance global economic risks stemming from China, Japan, Europe and Great Britain versus any upside or downside economic data dependent surprises. Under such conditions, gold has not only provided a safe haven, but also a competitive alternative to paper assets, e.g. bonds, which offer negative to almost zero level yields. Simply put, this time it really is different. We are in a post-recession environment with massive amounts of QE sloshing around in bubble-mania.
 
Not that markets are always rational, but a strong dollar and a strong bond market cannot co-exist over a long term period. Eventually, one must yield (no pun intended) to the other and I think gold and bonds are suggesting such. Currently, there is a bullish retracement occurring in gold of which it has only completed almost 38.2%. A 50% retracement could send gold even higher to $1500 (for the sake of rounding numbers), while a full 61.8% Fibonacci move takes us almost to $1600. Gold bears should "bear" in mind that I am not throwing these numbers out simply because of chart patterns dictating such, but because the underlying economic conditions and trends of global central bank policies enable such and therein lies the difference.
weekly gold chart july-6-2016 Fibonacci retracement
 

 

It's Not The BREXIT Stupid

 By: The Burning Platform


Just over a week ago the world was coming unglued, as enough British citizens grew a pair and spit in the face of the EU establishment and global elite by voting to exit the EU. The fear mongering by central bankers and their puppet political hacks failed to deter people who have become sick and tired of being abused and pillaged by bureaucrats working on behalf of bankers and billionaires.

Stock markets around the world plummeted on Thursday and Friday. The world braced for another Black Monday. The phone lines were buzzing between central bankers around the world over the weekend as their banker constituents demanded relief. If one thing has been proven over the last seven years, its a coordinated effort between central bankers and Wall Street banks to rig the stock market higher can work over a short time period.

The titans of finance were able to once again confound short-sellers and the prophets of doom with a 5% surge from the Friday lows over the next week. It was surely a coincidence the Fed declared all Wall Street banks, safe, sound, and capable of buying back their stocks to the tune of billions early in the week.

These insolvent zombies were now free to borrow billions to buy back their overvalued stocks, destroying shareholder value, while boosting executive compensation. Poor Jamie Dimon is struggling to get by on his $27 million per year. The Wall Street banks obliged by immediately announcing multi-billion dollar buyback schemes to capitalize on the short-term trading mentality of the 30 year old MBA trading geniuses who bought the news without worrying about the actual value of the stocks they were buying.

The stock prices of the biggest banks in the world rose in unison, as the lemming traders use the same HFT programs and the same illogical thought process. By the end of the week Brexit meant nothing as far as the markets were concerned. And they are probably right. Brexit was just the latest distraction to keep the masses focused on the wrong things, as the scoundrels continue to pillage the wealth of the people.

The largest banks in the world have experienced large declines over the last year, before Brexit ever entered the lexicon. Even after the central banker induced bounce last week, the price action of the largest banks in the world over the last year reflect an impending financial crisis.

The truth is the Fed's report on the health of banks is nothing but propaganda to keep the masses sedated. Without the suspension of mark to market rules in March 2009, every major bank in the world would have been liquidated in bankruptcy. Anyone who thinks these banks are healthy is either brain dead or dependent upon the establishment for their sustenance.

 % Change since 7/15
JP Morgan-13.1%
Bank of America-28.7%
Wells Fargo-20.1%
Citigroup-30.2%
Barclays-59.9%
Deutsche Bank-57.9%
HSBC-32.8%
BNP-34.0%
Mitsubishi Bank-50.0%

The EU economic situation still reflects depression conditions across most of the continent.

Europe is drowning in bad debt as their largest banks (Deutsche Bank, Barclays, BNP, all Italian banks) are effectively insolvent and are propped up by the EU central bank. Greece was never fixed. Nothing has been fixed. The little people continue to suffer, while the Brussels bureaucrats fiddle and delay the inevitable implosion by replacing old bad debt with new bad debt. The idiocy of allowing millions of refugees to flood the continent when their socialist paradise is already bankrupt, is beyond comprehension for rational thinking people.

2-Day EU Bank Stock Loss 1986-2016


Brexit was nothing more than a reaction to the political corruption of the establishment and the economic policies (bank bailouts, ZIRP, QE, NIRP) jammed down the people's throats by the rich to benefit the rich. The middle and lower classes around the world have been screwed over by the bankers and their captured politicians. The anti-establishment sentiment is spreading like wildfire and is likely to set off a firestorm which will eventually burn down the palaces of the ruling elite. But, in the meantime, these greedy myopic sociopathic bastards will use every means necessary to retain their power, control of the system and their immense riches.

The stock market is their sole gauge of success or failure. The Federal Reserve and their central banker brethren in Japan, China and Europe know they are running nothing but a confidence game based upon their ability to keep their debt based ponzi scheme running for a little while longer. Their fear is palpable. They've tried every monetary trick in their briefcases. They have failed to revive the real economy, but that was a secondary goal. Their job was to revive the wealth of their banker owners and the billionaire class who run the show. Keeping the stock market elevated has become their one and only goal.

Confidence in clueless academics like Yellen is dwindling. Anger is building among the hoi polloi. They are sick of getting pissed on, while the politicians and bankers tell them its just rain. Brexit was another crack in the ice. I was not surprised by the stock market recovery. When Bear Stearns collapsed in March 2008 the market sold off, but quickly recovered all its losses. Six months later the world blew sky high. Jim Cramer and his slimy ilk were bullish the whole way down.

Brexit is just a symptom of the disease eating away at the fabric of our global economy. Lehman's collapse was not the cause of the 2008 worldwide financial crisis. It was just the excuse for something that was going to happen no matter what. Bad debt, bad bankers, bad regulators, bad politicians, media cheer leading, and a willfully ignorant populace were a toxic combination - and it's worse today.

The always thoughtful and honest John Hussman points out the coming stock market crash will have nothing to do with Brexit or any other excuse used by the mainstream media to obscure the truth. It's the extreme valuations that will result in the stock market falling.
First things first. While the full attention of financial market participants is focused on "Brexit" - last week's British referendum to exit the European Union - the singular factor to recognize here is that the vulnerability of the financial markets to steep losses has very little to do with Brexit per se. Rather, years of yield-seeking speculation, encouraged by central banks, had already brought the financial markets to a precipice prior to last week's vote. It's not entirely clear whether Brexit is a sufficient catalyst to burst the bubble, as we recall that the failure of Bear Stearns in early-2008 was followed by a period of calm before the crisis was sealed by Lehman's failure, and numerous dot-com stocks had already been obliterated by September 2000, when the tech bubble began its collapse in earnest. We'll take the evidence as it comes, but we're certainly defensive at present, for reasons that have little to do with Brexit at all.
The Brexit "recovery" was touted by the CNBC apparatchiks as proof all is well. They dare not point out a 10 year investment in Treasuries will net you a 1.35% yield (the lowest in history) and almost guaranteed capital losses. They certainly won't pontificate on stocks being priced to deliver negative real returns over the next 10 years. You won't hear any warnings about home prices now exceeding the 2005 peaks in most major markets, just prior to a 30% collapse. Commercial real estate is also at bubble levels. Every asset class is overvalued. There is no place to hide and the average Joe is unwittingly unaware of the danger looming just over the horizon. Hussman explains the peril awaiting the unprepared.
The high-level churning in global financial markets since late-2014 represents what we view as the top formation of the third speculative bubble in 16 years. For the U.S. market, valuation measures most reliably correlated with actual subsequent market returns pushed to the third most offensive extreme in history at the May 2015 market high, eclipsed only by the 2000 and 1929 peaks (see Choose Your Weapon for a ranking of various measures, and the chart series in Imagine for a current perspective). Because this speculative episode has infected nearly every asset class, rather than favoring tech stocks or mortgage securities as in previous bubbles, the median price/revenue ratio across individual U.S. stocks actually pushed to the most extreme level on record in recent weeks, before promptly retreating on Friday.
Brexit doesn't matter. Japan's deflationary depression doesn't matter. The fraudulent US jobs recovery and falsified inflation figures don't matter. The Chinese real estate collapse doesn't matter. Low oil prices destroying the economies of Middle East countries, Russia, Venezuela, and Brazil don't matter. Double digit unemployment and civil chaos across Europe don't matter. Speeches by Yellen, Draghi, and Kuroda attempting to prop up markets don't matter.
Mainstream corporate media propaganda about economic growth doesn't matter.

The latent risk is already in place. Total global debt is now $70 trillion higher than it was in 2007, a 50% increase. Real median household income is lower than it was in 2007, while rent, food, healthcare, and taxes have risen dramatically. QE, ZIRP, and a myriad of other Keynesian "solutions" have failed miserably, while piling unpayable debt on top of unpayable debt. With corporate profits plunging, all economic indicators flashing red, consumers tapped out, confidence in leaders waning, and stock valuations at extreme levels, the plunge through thin ice is inevitable. The trigger is inconsequential, as Hussman points out.
"Imagine the error of skating on thin ice and plunging through. While we might examine the hole in the ice in hindsight, and find some particular fracture that contributed to the collapse, this is much like looking for the particular pebble of sand that triggers an avalanche, or the specific vibration that triggers an earthquake. In each case, the collapse actually reflects the expression of sub-surface conditions that were already in place long before the collapse - the realization of previously latent risks. 
Finding the specific trigger that causes the skaters to plunge through the ice isn't particularly informative. The fact is that catastrophe is inevitable the moment the skaters ignore the latent risk, or rely on faulty evidence to conclude that the ice is stable. The fracture in some particular span of ice is just one of numerous other spots that might have otherwise given way if the skaters had chosen a different course. Hitting that spot creates the specific occasion for the underlying risk to be expressed, but an unfortunate outcome was already inevitable much earlier."

The dead EU bounce produced by central bank coordination, Wall Street buyback announcements, and hedge fund HFT machines buying the most shorted stocks, appears to have run its course. These rigged markets do not reflect fundamentals or valuations. They are controlled by traders and central bankers. Their movements are based on technical criteria programmed into Wall Street supercomputers by Ivy League MBAs. Their lemming like behavior works well on the way up, but not so good on the way down.

Deteriorating fundamentals, a two year topping distribution, and declining liquidity has set the stage for a market plunge. As Hussman points out, in a technical market where all players are following the exact same playbook, when certain levels are breached the bottom will fall out of this market and no one will step in to buy. It's a long way down to fair value - at least 50%.
But for investors, the main objects of focus should be the condition of valuations and market action, particularly the status of market internals, and the position of the major indices relative to various trigger points that might result in concerted selling attempts by trend-followers. That's particularly important since value-conscious investors will likely have little interest in absorbing shares at nearby prices.
The general public always underestimates the danger at market tops. Things have been going swimmingly well for those with substantial assets to gamble in the markets. As we entered 2008 the "experts" on Wall Street, in academia, and in the financial media predicted smooth sailing and 10% annual returns in perpetuity.

They called Bear Stearns a hiccup on the road to riches. The enormous mortgage control fraud being perpetrated by the largest banks in the world went unnoticed by Bernanke and his band of merry bankers. Paulson acted clueless. Bush muddled along in his moronic trance. Until the ice gave way and hundreds of millions went under and have never come back up. Brexit is a large crack in the ice.

Italian banks are the next crack. Muslim refugees are a crack. Declining oil prices are a crack.

There are dozens of potential triggers for the inevitable clearly foreseeable catastrophe.

As we saw with the Bernie Madoff ponzi scheme, it can go on for years with the willful disregard of regulators and co-conspirators (JP Morgan), the denial of reality by investors, and the illusion of stability provided by the ponzi masters. Once stress is applied and too many investors ask for their money at the same time, the collapse is sudden and catastrophic.

Hussman knows the EU is a ponzi scheme, their banks are insolvent, and collapse is inevitable.

The EU leadership is attempting ever greater distortions to avoid the catastrophic collapse.

Britain just asked for their money back. Referendums loom in other countries. They will not be the cause of the collapse. The fundamentally unsound and increasingly bankrupt system is the cause.
Think of the EU, in its current ill-structured form, as a kind of Ponzi scheme, and Britain as the guy who just asked for his money back. There are undoubtedly greater prospects for near-term disruption after last week's vote, but the hallmark of a Ponzi scheme is the attempt to use progressively greater distortions in order to preserve a structure that is fundamentally unsound and increasingly bankrupt.

China’s Outflows Aren’t Over

Reserves rise despite yuan’s depreciation, but capital flight is still a concern

By Anjani Trivedi

    Beijing has recently been keeping to a predictable path of weakening the yuan. Photo: jason lee/Reuters


Beijing seems to be exercising restraint in the face of chaos in global financial markets. For now.

China’s foreign-exchange reserves in June registered their biggest monthly increase in more than a year—up $13.4 billion to $3.21 trillion. This happened while the yuan fell almost 1% last month. The consensus was that reserves would fall, but the increase is likely because China holds fewer British pounds or more Japanese yen than expected. The rise was largely cosmetic with the Japanese yen climbing almost 7% last month.

By keeping to a predictable path of weakening the yuan, Beijing hasn’t sparked market panic as it did in January and in August of last year. It has also managed to slow capital flight.



One reason outflows have slowed is that companies seem to have paid down a fair amount of their foreign-exchange liabilities. That eases fears that a substantial depreciation could hurt China’s businesses. Another is that households are facing restrictions on taking money offshore.

But there are signs that more is flowing out than meets the eye. An estimated $170 billion of yuan has, according to Goldman Sachs, gone to the offshore Hong Kong market since last October. Put another way, since last October, about $500 billion net has flowed out. That is 50% more than the $330 billion implied by central bank data, according to Goldman Sachs.


Despite the positive month, Beijing hasn’t halted the flight of capital out of China.

viernes, julio 15, 2016

LYING AND LEADERSHIP / PROJECT SYNDICATE

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Lying and Leadership

Joseph S. Nye
. Boris Johnson Donald Trump Michael Gove

CAMBRIDGE – This election season has been marked by frequent charges of dishonesty.
 
During Britain’s “Brexit” debate, each side charged the other with distorting the truth, though the speed with which the “Leave” camp has been disowning its campaign promises, and the “Remain” camp’s claims have come true, suggests which was telling it like it is. In the United States’ presidential election campaign, Donald Trump, the presumptive Republican nominee, seldom referred to his closest competitor in the primaries without calling him “Lying Ted Cruz.”
 
Similarly, Trump rarely misses an opportunity to refer to Hillary Clinton, the presumptive Democratic nominee, without attaching the prefix “Crooked.” When she recently delivered a careful speech on foreign policy, Trump responded by calling her a “world-class liar.” But, according to PolitiFact, a Pulitzer prize-winning organization that checks the veracity of political statements, 60% of the claims by Trump that it investigated since he began his campaign have been deemed false or “Pants on Fire” false, versus 12% for Clinton.
 
Some cynics shrug off such exchanges between candidates as typical behavior by politicians. But that is too facile, because it ignores serious questions concerning how honest we want our political leaders and our political discourse to be.
 
In fact, we may not want our political leaders to tell the literal truth all the time. In wartime or during a counterterrorism operation, deception may be a necessary condition of victory or success – which clearly is in our interest.
 
Other cases are less dramatic but no less important. Sometimes, leaders have objectives that differ from those of a large part of their followers; rather than revealing the differences, they deceive their followers. When such actions are self-serving, as in cases of corruption or narcissistic ego gratification, moral censure is easy and appropriate. In contrast, other leaders with different objectives from their followers invest heavily in educating those who would oppose them to a different point of view.
 
In some instances, leaders find it impossible to educate their followers adequately in time, or their followers are too deeply divided to reach a consensus that will sustain collective action. In such circumstances, some leaders may take a paternalist view and decide to deceive their followers for what they see as their larger or later good.
 
For example, as Senate Majority Leader, Lyndon B. Johnson deceived his southern supporters in order to pass the 1957 civil rights act. Charles de Gaulle did not reveal his strategy for Algerian independence when he came to power in 1958, because he knew that doing so would doom it to failure. John F. Kennedy misled the public about the withdrawal of US nuclear warheads from Turkey in the deal that peacefully ended the Cuban Missile Crisis in 1962.
 
Moreover, Franklin D. Roosevelt lied to the American public about a German attack on a US destroyer, in an effort to overcome isolationist resistance to helping Britain before World War II. And Winston Churchill once said that the truth may be “so precious that she should always be attended by a bodyguard of lies.”
 
The fact that leaders’ ends may sometimes justify violating norms about honesty does not mean that all lies are equal, or that we must suspend our moral judgment in such cases.
 
Machiavellian deception is often part of a strategy, for example, in bargaining or even in bringing a group to accept new goals. But intentions matter. Deception that is purely self-serving turns from a strategy that may benefit others into selfish manipulation.
 
Even if one admits that deception may sometimes be necessary, one can still ask about the importance of the goal, the availability of alternative means to achieve it, whether the deception is likely to spread through precedent or example, the damage done to various victims, and the deceivers’ accountability (whether their behavior can be discovered and explained later). In his book, When Presidents Lie, the historian Eric Alterman concludes that presidential lies “inevitably turn into monsters that strangle their creators.”
 
And presidents may set bad precedents. When Roosevelt lied about the German attack on the destroyer Greer in 1941, he set a low bar for Johnson’s highly embellished description of a North Vietnamese attack on US naval vessels, which led to the Gulf of Tonkin Resolution of 1964.
 
It is all too easy for leaders to convince themselves that they are telling a noble lie for the good of their followers, when in fact they are merely lying for political or personal convenience. That makes it all the more important in a democracy that we carefully examine the nature of the tradeoffs between ends and means that leaders make. There may indeed be situations where we would approve a political leader telling us a lie, but such cases should remain rare and subject to careful scrutiny.
 
Otherwise, we debase the currency of our democracy and lower the quality of our political discourse.
 
This is why it is a mistake for cynics to shrug off Trump’s rhetoric as simply one of the things politicians do. If PolitiFact and other similar organizations are correct, politicians are not all the same when it comes to lying. Trump has made many more false statements than any of his opponents, and few (if any) could pass the test of not being self-serving. An independent and vigorous press that checks the truth is crucial to preserving the integrity of democracy; but so is an electorate that resists cynicism and the debasement of political discourse.