Markets beware as central banks begin to admit defeat


If central banks pass baton to governments to stimulate growth then the bond rally is over
 
 
 
Investor positioning is as extreme as it has been since the dotcom bubble. In a neat bit of symmetry, it is some of the assets that were so detested at that time that now look most overinflated. Low volatility, high quality and defensive, with a yield, please — nothing else will do.
 
Investors are continually having to convince themselves that these lofty valuations and record-low yields are merited because growth is anaemic, deflationary forces abound and rate rises are years away. Nevertheless, we believe that changing perceptions over monetary and fiscal policy could overwhelm these factors and cause a meaningful and painful rotation within markets.

Base rate rises might be deemed necessary to cause such a shift in investor sentiment and positioning. But even then, as we have seen in the US, a rate rise in the world’s biggest economy has not thus far derailed the unquenchable search for stability and yield.

The two best performing sectors in the US year-to-date are by some margin utilities and telecoms services — not sectors you might expect to outperform in a “normal” tightening environment. Meanwhile, the US two-year government bond yield has gone from 1.05 per cent in December to 0.55 per cent at its July low.

While we do not think rate rises are on the agenda outside the US, we do see a realistic chance that bond yields everywhere will start to rise. This will probably be caused by the growing acknowledgment that having moved from QE to ZIRP to NIRP, monetary policy is now exhausted and has arguably failed in its aim of stoking nominal GDP growth. Crucially, at the same time, we expect to see a general renaissance in fiscal expansion, which has a better chance of achieving this elusive goal.

Japan is at the forefront of this evolution. Fiscal policy was always one of Shinzo Abe’s Three Arrows, but the noteworthy lack of meaningful action from the Bank of Japan in recent months leads us to believe that Japan’s hopes are now pinned on government spending. Governor Haruhiko Kuroda has all but passed the baton back to Prime Minister Abe, who understands that — with apologies to Chief Brody in Jaws — he’s going to need a bigger bow.

Central bankers will clearly keep talking the talk, reviewing their options, not ruling anything out, but essentially they have no bullets/arrows left — and know that some of their previous salvos proved to be the monetary equivalent of friendly fire, inflicting wounds on their nation’s banks through the adoption of negative interest rates. Meanwhile, there are almost no more bonds to buy. The Bank of Japan will own 50 per cent of JGBs by 2018 on its current trajectory.

The Bank of England presumably feels duty bound to act but we would question the efficacy of cutting rates further. A 0.25 per cent cut in base rates equates to £20 per month in the pockets of a typical floating rate mortgage holder. Big deal. It also further undermines the profitability of our beleaguered banks, the lifeblood of the economy, and hurts savers.

In Europe, Mario Draghi has been crying out for political leaders to do their bit on structural reforms and pro-growth policies, with little effect. But we are seeing a moderation of the fiscal constraints and penalties that were imposed in recent years to control deficits in the periphery.

Might this relaxation evolve into full blown stimulus in core Europe? With elections looming in France and Germany, incumbent governments might decide that they must fight fire with fire against their populist rivals, and fiscal policy must count as a decent bet to win votes. Fiscal rectitude, while apparently sound, has proven to be politically life threatening.

Meanwhile in the UK, the Brexit vote has given Chancellor Philip Hammond carte blanche to ramp up borrowing (at record-low interest rates) to invest and spend. An early election together with a bigger Tory majority would only increase his boldness.

To us, traditional fiscal policy seems like a more likely scenario than so-called helicopter money. Its premise, in its various theoretical guises, appears more fraught with risk in terms of acting as an outright currency debasement or of simply being a convoluted form of government balance sheet expansion.

This apparent exhaustion of central bank ammunition will inevitably give investors pause for thought. Remember what happened when Ben Bernanke first tabled tapering in May 2013?

There was a major rotation — within a protracted sell-off — across assets. The perception that other central banks are done could have a similar impact. We think it is time to ensure that portfolios are not too exposed to this one, albeit very large, monetary dynamic — one which appears to have run its course.


James de Bunsen is a multi-asset fund manager at Henderson Global Investors


The Republican Bankruptcy Illusion

Simon Johnson
. Newsart for The Republican Bankruptcy Illusion



WASHINGTON, DC – There is now near-unanimity that the United States’ Dodd-Frank financial reform legislation, enacted in 2010, did not end the problems associated with some banks being “too big to fail.” When it comes to proposed solutions, however, no such consensus exists. On the contrary, financial regulation has become a key issue in November’s presidential and congressional elections.
 
So who has the more plausible and workable plan for reducing the risks associated with very large financial firms? The Democrats have an agreed and implementable strategy that would represent a definite improvement over the status quo. The Republican proposal, unfortunately, is a recipe for greater disaster than the US (and the world) experienced in 2008.
 
On the Democratic side, Hillary Clinton’s campaign materials and the party platform point to a detailed plan to defend Dodd-Frank and to go further in terms of pressing the largest firms to become less complex and, if necessary, smaller. Banks must also fund themselves in a more stable fashion. If Clinton wins, she will draw strong support from Congressional Democrats – including her rival for the Democratic nomination, Bernie Sanders, and his fellow senator, Elizabeth Warren – when she pushes in this direction.
 
Some commentators claim that Clinton has been “pulled to the left” on financial regulation during the campaign. But if you look carefully at her statements during this election cycle, they have been, from the very beginning, almost identical to what Warren has been seeking for the past half-dozen years.
 
And these goals are perfectly aligned with what all responsible officials want. Everyone in their right mind wants to prevent the largest banks from getting out of control, shifting risk into shadowy, unregulated activities (on or off their balance sheet), and fleecing consumers.
 
This is an entirely responsible and sensible agenda. It is opposed, of course, by people who are paid – one way or another – to represent the largest banks.
 
On the Republican side, Donald Trump’s precise intentions are less clear, though he proudly calls himself the “king of debt,” which is not particularly encouraging. Huge mountains of debt may help enrich individual property developers or financiers, but they typically add up to trouble for the macroeconomy. It was precisely those mountains that collapsed on the US and global economy in 2008. Many were buried in the Great Recession that followed; many more are still digging out.
 
Unlike Trump, House Republicans have formulated and published detailed plans that can fairly be compared to what the Democrats have presented. And, in the event of a Trump presidency, financial policy would likely be crafted in large part by the House Financial Services Committee, whose chairman’s clearly stated priorities are to reduce consumer protection and remove any effective constraints on big banks’ activities.
 
At the heart of the House Republican strategy is a simple idea: all financial firms should be able to go bankrupt without damaging the rest of the economy and without the government becoming involved. That is fine as a campaign slogan. But there is a major problem with the logic.
 
In September 2008, Lehman Brothers did go bankrupt – and no form of government support was provided. There were catastrophic consequences for the rest of the financial sector, for the non-financial economy, and for employment.
 
The House Republicans propose to fix that by amending the bankruptcy code. This, too, sounds good, but what exactly does it mean?
 
Just promising not to provide a bailout is not credible. The US is a large and powerful country and, when danger hits, investors buy up federal government debt – driving down interest rates. America has a “fortress” balance sheet, as well as one of the most credible central banks in the history of the world.
 
If the policymakers of the moment think that government or central-bank support will help prevent a global economic meltdown, they will act accordingly. That is what Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and President George W. Bush (all Republicans) did after the full impact of the Lehman collapse became apparent.
 
The viability of the Republican bankruptcy proposal boils down to this: who will provide financing to a large complex financial institution – operating globally – while it is being restructured in bankruptcy? The private sector won’t provide it. The courts themselves cannot borrow. If there is no financing, the scheme collapses – and we have another “Lehman moment,” or worse.
 
So we must be talking about a scenario in which some part of the federal government, with or without express legislative approval, scrambles to provide an ad hoc loan in the range of tens or hundreds of billions of dollars, via a judge. This is mind-boggling and deeply disturbing.
 
Think of the business mistakes that will be made and the political backlash. Add the economic distortions implicit in providing so much free downside insurance.
 
The Democrats are lined up behind an approach to finance that will make the financial system safer, so that it never comes to this point again. The Republicans’ plan would only help too-big-to-fail banks. And that help would make them more dangerous.
 
 
 

Cold, Hard Cash Will Soon Be A Distant Memory


coldcash
 
 
The ‘blockchain’ technology, the very basis on which the bitcoins were created, is likely to become the backbone of the future digitization of money. The importance of the technology was asserted in the 16th Annual International Conference on Policy Challenges for the Financial Sector; a three-day convention which was held on June 1st through June 3rd in Washington, D.C.
 
The conference was held under the tutelage of the FED, the World Bank, and the International Monetary Fund.

It was attended by representatives of the major Central Banks, across the world. The subject for this year was ‘fintech’ and the first day was dedicated to studying the ‘blockchain’ technology which is the framework on which the popular digital currency bitcoin has been built.

FED Chairwoman Janet Yellen was the introductory speaker and she said that, “central bankers don’t normally like the word “disruption, but it’s not something to fear.

Technology has played a role in solving problems in the financial system in the past, and she encouraged her fellow bankers to learn everything they can about this new technology”, reports the Wall Street Journal, from comments relayed by Perianne Boring, the president of the Chamber of Digital Commerce.

This truly shows the technology has reached the highest levels of society and government,” Ms. Boring said.
 
Simply put, a blockchain is a digital ledger of transactions that have been executed. New data continues to be added in a linear, chronological order through the completed blocks of data which are shared among the computers on the network.

Participants on the network use cryptography to edit the ledger online without the involvement of a central clearing authority. This ledger contains all the data of transactions from the start of the first block to the latest block.

As there is no necessity of a centralized authority to oversee the transactions, it creates a transparent, simple and fast transaction environment. As the data is available to all of the members, and any modification requires the permission of the majority of the members, it is better equipped to handle the onslaught of cybercrimes.


Chart 1

As no one can bypass the rules, the members can be assured that no single authority can deviate from the protocols. Due to direct transactions between two parties, transaction costs will be negligible.

The interbank transactions, which currently take days, can now be cleared in a matter of minutes, 24/7 and without the restrictions on working hours.

“Soon, the phrase ‘cross-border payment’ will make about as much sense as ‘cross-border email’,” said Mr. Adam Ludwin, co-founder and Chief Executive of the ‘blockchain’-focused startup Chain, during his keynote address.
 
The technology which is used in ‘bitcoins’ is unsuitable to be used directly in the various types of transactions like commercial papers, corporate bonds, U.S. Treasuries, etc., as these are issued for various business or policy purposes but there is already a new digital currency working with many of the top banks already which I mention later in this article.

Hence, a new more advanced and complicated system needs to be generated on the same ‘blockchain’ principle which can duplicate the ease of the use of current assets in a newly digitized model.
 
It is unlikely that any government will be willing to part with their powers of which they control most of the monetary and fiscal decisions either directly or indirectly. Although the technology has enough security measures that are in place, the theft that occurred at Mt. Gox, which handled around 70% of all ‘bitcoin’ transactions, until 2013, reveals its’ vulnerability.

The ‘bitcoin’ is a small asset class with only a small quantity of bitcoins in circulation as compared to the trillions of transactions that take place daily, around the world. The computing power needed to handle such vast transactions is humongous. Such a setup requires billions of dollars, in investments, which may not be feasible to many.

Nonetheless, there are a number of entrepreneurs like Todd McDonald, co-founder and Head of Strategy at R3CEV LLC, a consortium of more than 40 financial institutions that are working towards the application of distributed ledger technologies to global financial markets.

“We can monitor compliance in real-time. We can answer questions about collateral ownership and hypothecation that were at root in the run on the system in 2007,” said Mr. Ludwin.
 
The days of cash are numbered and will soon be a mere memory! The revolution in ‘blockchain’ technology has reached the doors of the FED and it is now only a matter of time before the ‘greenback’ is phased out by the general public.

The reason I have started to cover bitcoin and digital currencies (Alt Coins) is because I believe they will become main stream much sooner than you think. In fact, there are already hundreds of new digital currencies available, though many are not and will not become key currencies.

I am watching, tracking and analysing many different digital currencies based on different metrics: how many online communities are focused on various alt coins, which ones have the most search engine searches, growth in market cap, have strong price charts, and which ones are focusing on working with large banks like the one call Ripple.

This new asset class is definitely disruptive, but I believe digital currencies add diversification not found anywhere else in the financial markets. They are a speculative play, safe haven during next financial crisis, and allows many people around the world to transfer money without being tracked and to possibly avoid taxes for those who want to side step government.

Either way, more people and companies are accepting digital currencies and the demand and value they offer will eventually be priced into each each currency.

I have learning and slowly identifying some exciting opportunities in this new asset class which I feel everyone should some exposure to in their portfolios. Soon I will unveil some of my top currencies and where to buy and store them – Stay Tuned!


Paradise, the New Muslim Utopia

By KAMEL DAOUD   
.

       Credit Edel Rodriguez       

 
ORAN, Algeria — Future writing project: a topography of paradise in the medieval Muslim imagination. But not only medieval, for among Muslims today paradise is also at the center of political discourse, sermons and the contemporary imagination. Paradise as a goal for the individual or the group has gradually replaced the dreams of development, stability and wealth promised by postwar decolonization in the so-called Arab world. These days, one imagines happy tomorrows only after death, not before.

“Paradise decks itself in delights,” an editorial writer mused in an Algerian Islamist newspaper during the most recent Ramadan, the month of fasting. The declaration was followed by descriptions of the charms, the delights, the joys that await the faithful after death. This fantasy of paradise, amply depicted as a place of pleasures, with sex and wine, golden adornments and silk apparel, is the opposite of earthly life — and of the frustrations experienced in Arab countries afflicted by economic failures, wars and bloody dictatorships.

Firdaus (a remote ancestor of the word “paradise,” derived from the Persian) was promised by the Quran and has been abundantly described in religious literature for centuries. But in recent years, paradise has also become the country dreamed of by the poor, the unemployed, the believer — and the jihadist, thanks to certain religious elites who promote it as a means of recruitment.

This is a fascinating renewal of the concept of happiness that was dominant a half-century ago.
 
Back then, the countries of the Maghreb and the Middle East — born out of decolonization often violently wrested from occupying forces that had imposed on them war, poverty and misery — advocated for a vision of the future based on independence, egalitarianism, development, wealth creation, justice and coexistence.

That vision of utopia within human reach, which was taken up by the socialist or communist elites and even some monarchies, was a shared political dream, and it gave legitimacy to those new regimes in the eyes of both their own peoples and foreign governments. Decolonization was the era of grand slogans about the advancement of peoples and modernization through massive infrastructure projects.
 
But that dream has aged badly, because of the bloody-mindedness of those authoritarian regimes and the political failures of the left in the Arab world.

Today, one has to be a Muslim – by faith, culture or place of residence – in order to experience the full weight of the new post-mortem utopia of the Islamosphere circulating on the internet and the media. It conditions people’s imaginations, political speech, coffee-shop daydreams and the desperation of the younger generations. Paradise has come back into fashion, described in mind-boggling detail by preachers, imams and Islamist fantasy literature.
 
Its main selling point: women, who are promised in vast numbers as a reward for the righteous.
 
The women of paradise, the houris, are beautiful, submissive, languorous virgins. The idea of them feeds a barely believable form of erotico-Islamism that drives jihadists and gets other men to fantasize about escaping the sexual misery of everyday life. Suicide bombers or misogynists, they share the same dream.

What about the women allowed into the eternal garden? If men can have dozens of virgins, what of the women, especially considering the machismo of those earthbound dream-makers?

The preachers’ responses can be amusing: The woman’s heavenly reward is to be her husband’s happy wife throughout eternity, the two of them destined to enjoy perpetual conjugal felicity, at the symbolic age of 33 and in good health. And if the woman is divorced? A preacher replies that she will be remarried to a dead man who was also divorced. 

Curiously, this dream of a Muslim paradise finds itself confronted with another dream at once antagonistic and similar: the West. Generating passion or hatred for the Muslim believer and the jihadist alike, the West and its indulgences represent another facet of the post-mortem Muslim paradise. One dreams of going there, whether as migrant or as martyr. One dreams of going to the West and of living and dying there, or of subjugating and destroying it.

The new Muslim utopia weighs heavily on today’s Arab world. What motivates the masses, gives sense to their despair, lightens the weight of the world and compensates for sorrow no longer is the promise of a rich and happy country, as was the case after decolonization; it’s a vision of paradise in the afterlife. But this fantasy of eternal bliss also causes uneasiness: For however much one wishes to ignore this, the fact remains that in order to get to heaven, one first has to die.