At what cost?

Can the world thrive on 100% renewable energy?

A transition away from fossil fuels is necessary, but it will not be painless

A WIDELY read cover story on the impact of global warming in this week’s New York magazine starts ominously: “It is, I promise, worse than you think.” It goes on to predict temperatures in New York hotter than present-day Bahrain, unprecedented droughts wherever today’s food is produced, the release of diseases like bubonic plague hitherto trapped under Siberian ice, and permanent economic collapse. In the face of such apocalyptic predictions, can the world take solace from those who argue that it can move, relatively quickly and painlessly, to 100% renewable energy?

At first glance, the answer to that question looks depressingly obvious. Despite falling costs, wind and solar still produce only 5.5% of the world’s electricity. Hydropower is a much more significant source of renewable energy, but its costs are rising, and investment is falling. Looking more broadly at energy demand, including that for domestic heating, transport and industry, the share of wind and solar is a minuscule 1.6% (see chart). It seems impossible to eliminate fossil fuels from the energy mix in the foreseeable future.

But all energy transitions, such as that from coal to hydrocarbons in the 20th century, take many decades. It is the rate of change that guides where investments flow. That makes greens more optimistic. During the past decade, solar photovoltaics (PV) and wind energy have been on a roll as sources of electricity. Although investment dipped slightly last year, the International Energy Agency, a global forecaster, said on July 11th that for the first time the amount of renewable capacity commissioned in 2016 almost matched that for other sources of power generation, such as coal and natural gas. In some countries the two technologies—particularly solar PV in sunny places—are now cheaper than coal and gas. It is no longer uncommon for countries like Denmark and Scotland to have periods when the equivalent of all their power comes from wind.

Ambitions are rising. The Senate in California, a state that is close to hitting its goal of generating one-third of its power from renewables by 2020, has proposed raising the target to 60% by 2030; Germany’s goal is to become 80% renewable by 2050. But whether it is possible to produce all of a country’s electricity with just wind, water and hydro is a subject of bitter debate.

In 2015 Mark Jacobson of Stanford University and others argued that electricity, transport, heating/cooling, and industry in America could be fully powered in 2050-55 by wind, water and solar, without the variability of the weather affecting users. Forswearing the use of natural gas, biofuels, nuclear power and stationary batteries, they said weather modelling, hydrogen storage and flexible demand could ensure stable supply at relatively low cost.

But in June this year Christopher Clack, founder of Vibrant Clean Energy, a firm, issued a stinging critique with fellow researchers in the Proceedings of the National Academy of Sciences, the journal in which Mr Jacobson et al had published their findings. They argued that a narrow focus on wind, water and solar would make tackling climate change more difficult and expensive than it needed to be, not least because it ignored existing zero-carbon technologies such as nuclear power and bioenergy. They claimed the models wrongly assumed that hydroelectricity output could continue for hours on end at many times the capacity available today, and pointed to the implausibility of replacing the current aviation system with yet-to-be-developed hydrogen-powered planes. In their view, decarbonising 80% of the electricity grid is possible at reasonable cost, provided America improves its high-voltage transmission grid. Beyond that is anyone’s guess.

Others take a wider view. Amory Lovins of the Colorado-based Rocky Mountain Institute, a think-tank, shrugs off the 100% renewables dispute as a sideshow. He takes comfort from the fact that it is increasingly common for renewables sustainably to produce half a location’s electricity supply. He believes that the share can be scaled up with ease, possibly to 80%. But in order to cut emissions drastically, he puts most emphasis on a tripling of energy efficiency, by designing better buildings and factories and using lighter materials, as well as by keeping some natural gas in the mix. He also sees clean-energy batteries in electric vehicles displacing oil demand, as petroleum did whale oil in the 19th century.

Some sceptics raise concerns about the economic ramifications if renewables’ penetration rises substantially. In an article this month, Michael Kelly of Cambridge University focused on the energy return on investment (EROI) of solar PV and wind turbines, meaning the ratio between the amount of energy they produce to the amount of energy invested to make them. He claimed that their EROI was substantially lower than those of fossil fuels; using renewables to generate half of the world’s electricity would leave less energy free to power other types of economic activity.

Critics note that his analysis is based on studies of PV returns in Spain from more than half a decade ago. Since then solar and wind costs (a proxy for EROI) have plunged, raising their returns. What is more, other studies suggest returns from fossil-fuel-derived energy have fallen, and will decline further as they incur increased costs associated with pollution and climate change. A high share of renewables may be less efficient at powering economic growth than fossil fuels were in their 20th century heyday. But if the climate doomsayers are to be proved wrong, a clean-energy system must be part of the solution.

Trump Gives Beijing a Lesson in the Art of the Deal

The president’s moves are neither capricious nor naive, though they lack a certain diplomatic finesse.

By Michael Auslin

President Trump and Chinese President Xi Jinping at the G-20 summit in Hamburg, Germany, July 8. Photo: pool/Reuters

With only six months in office, President Trump has put his signature on America’s China policy. A strategy that may appear capricious to his critics in fact has a logic consistent with Mr. Trump’s guiding beliefs. He sought a deal with China, then concluded he would not get one, and so acted in what he believes is America’s best interest.

Mr. Trump’s approach is undoubtedly transactional, but it’s surprisingly realistic given China’s kid-glove treatment by most U.S. presidents. In potentially putting Beijing and Washington at loggerheads, it is also undeniably risky.

In June, the White House delivered three blows to China. First, it imposed sanctions on a Chinese bank and two individuals for abetting North Korea’s financial transactions. Second, it listed China in the category of worst offenders in human trafficking. Finally, it announced a $1.4 billion arms sale to Taiwan. The Trump administration also made several lesser-order jabs, among them calling for more freedom in Hong Kong and conducting another freedom-of-navigation operation near the contested Spratly Islands in the South China Sea. It did all this as Chinese President Xi Jinping tried to celebrate the 20th anniversary of the return of Hong Kong to China from Britain.

Any one of these actions would normally be enough to rock Sino-U.S. relations, at least for a while. Taken together, they constitute a significant break from the past two decades of diplomatic engagement between the two powers. Is this an enduring shift on the part of the Trump administration? Or simply shots across Beijing’s bow to get China to cooperate more with Washington and behave better abroad?

To Mr. Trump’s critics, the moves represent a recognition of his initial naiveté regarding China. When the president tweeted on June 20 that China’s efforts to help on North Korea had not worked out, he was derided for his apparent faith in Beijing’s promises and for flipping his opinion so quickly. The latest turnaround was seen as part of a pattern stretching back to the campaign and transition, when candidate and President-elect Trump warned that he would not shrink from putting economic and political pressure on China. Then, soon after taking office, the president radically shifted to a far more cooperative stance, going so far as to host Mr. Xi at Mar-a-Lago for a family-style summit.

But Mr. Trump’s moves are neither capricious nor naive, even if they do lack a certain diplomatic finesse. His interest has always been in the bottom line, and diplomatic niceties of the kind that have suffused Sino-U.S. relations since Richard Nixon’s epochal 1972 visit to Beijing are useful to him only if progress is being made.

Last month’s actions put Beijing on notice that Mr. Trump’s transactional approach is real, and so are the potential consequences for failing to make a deal. Moreover, each move serves some larger U.S. purpose, whether strategic (Taiwan) or tactical (North Korea). Chinese leaders have long been accustomed to strong words and no action from Washington; now they will have to consider how far the Trump administration may go.

By publicly calling out China, Mr. Trump risks chipping away at Beijing’s carefully polished image as a global leader and contributor to stability. Beijing, already upset by criticism leveled by Defense Secretary Jim Mattis about China’s militarization of the South China Sea islands, lashed back at the administration’s moves, especially the arms sale to Taiwan.

With a critical Communist Party Congress coming up in the fall, Mr. Xi will be loath to be seen as unable or unwilling to combat an activist U.S. policy in Asia. He may look for ways to check Mr. Trump’s recent moves, such as ratcheting up economic and diplomatic pressure on U.S. allies like South Korea, which is already in Beijing’s doghouse for accepting a new U.S. missile defense system. Mr. Xi may also try to regain some standing by challenging the U.S. Navy in the South China Sea.

Mr. Trump has made clear that he means what he says about deal-making. China said it would help and did not. That’s enough for Mr. Trump to put the world’s two most powerful countries on a potential collision course. He might be bluffing or he might be in earnest. Either way, the American president’s sharp dose of realism has the potential to reshape the world’s most important relationship.

Mr. Auslin is a fellow at the Hoover Institution, Stanford University.

China in Africa: A Different Kind of Military Theater

By Allison Fedirka

China has been trying to show the world just how militarily capable it is by expanding operations to other continents. This time, it’s focused on Africa. With much fanfare, Chinese military personnel set sail July 11 from the port at Zhanjiang for Djibouti, where they will help set up China’s first permanent overseas military base. China says the base will provide support for peacekeeping, anti-piracy and humanitarian operations. But media and military analysts have claimed that the Djibouti base is part of China’s so-called “string of pearls” strategy, which is meant to develop a network of military and commercial assets and relationships along the India Ocean to project power abroad. The base, however, is not an example of China’s military prowess but rather an attempt to boost China’s image at home and abroad.

China chose Djibouti as the location for its base because Beijing has an interest in ensuring the flow of trade from the Persian Gulf to China. Eighty percent of China’s seaborne oil imports pass through this route through the India Ocean, so it’s a vital part of keeping the country running.

And the need to ensure access to this route is the motivation behind the “string of pearls” strategy. China figures it can secure access to the Indian Ocean and through various chokepoints by building military and commercial facilities throughout the South China Sea, the Bay of Bengal and, to a lesser degree, the Arabian Sea. Facilities have already been developed in Bangladesh, Myanmar, Pakistan and Sri Lanka.

But these efforts are more a case of grandstanding than effective protection of Chinese interests. With a relatively weak navy, at least compared to the U.S. Navy, China lacks the ability to secure this route militarily. So instead, it is trying to portray an image of strength to distract from its actual weakness.

This photo taken on Dec. 23, 2016 shows Chinese J-15 fighter jets being launched from the deck of the Liaoning aircraft carrier during military drills in the Yellow Sea, off China’s east coast. STR/AFP/Getty Images

Few details about the facility have been made public, and what little is known suggests that the base has no military significance. Reports indicate that navy warships have been sent to the base, but there is no available information on the number of personnel to be stationed there, the length of their deployment or a timetable for operability. Some estimates suggest that 2,000 soldiers – likely marines and special operations forces – will eventually be stationed at the base.

By the end of the year, the facility will hold weapons and ammunition and will include wharves for stationing Chinese navy ships. It will cost the Chinese $20 million annually to rent the base, which covers 36 hectares near a commercial port owned by Chinese companies. There are plans to build an airfield, although they exist only on paper. There is one helicopter pad that should be completed by the end of the year. Notably, military expert Zhou Chenming told the South China Morning Post that the facility “is not a military base in the full sense” but that its capacity could be expanded later to repair ships and accommodate planes. From this, we suspect that the base has no aircraft and cannot service vessels. This doesn’t say much about the facility’s capabilities, and since so little is known about the nuts and bolts of the base, it would be difficult for anyone to reasonably conclude that it can help China project power abroad.

But more important is the fact that China’s navy lacks blue-water capabilities – the ability to operate in the deep waters of the world’s oceans. The navy has ambitious plans to develop these capabilities, but doing so takes a long time – at least one or two generations, assuming no major disruptions or pauses in the process. The navy does not currently have any operational aircraft carrier battle groups. Its sole operational aircraft carrier, the Liaoning, is a refurbished ship that initially launched in 1988. The Liaoning can carry about half the number of planes a U.S. aircraft carrier can. Its first live-fire exercises were held in December 2016, and its accompanying fighter pilots are only now graduating from initial training. The crew has little experience and requires years more training before the ship can be operationally effective. The Chinese navy, moreover, has yet to overcome basic logistical problems, including refueling. Most of the country’s naval vessels are not nuclear powered and must therefore stop at ports to refuel, limiting their capabilities and reach.

China can’t project power globally. It has to be selective in setting its priorities, and Africa isn’t at the top of this list. China’s real concerns are much closer to home. Any imports coming through the Indian Ocean destined for China must pass through the Strait of Malacca, a major chokepoint bordered by Malaysia, Indonesia and Thailand. Passage through the strait is secured by the U.S. Navy, but the Chinese don’t want to rely on the U.S. for access to such an important route. Chokepoints are also an issue in the South China Sea, where China and several other East Asian states are competing for territory. What capabilities and resources Beijing does have will be focused on this region rather than the Horn of Africa.

A New Course for Economic Liberalism

Sebastian Buckup
 France's new economic policy

GENEVA – Since the Agrarian Revolution, technological progress has always fueled opposing forces of diffusion and concentration. Diffusion occurs as old powers and privileges corrode; concentration occurs as the power and reach of those who control new capabilities expands. The so-called Fourth Industrial Revolution will be no exception in this regard.
Already, the tension between diffusion and concentration is intensifying at all levels of the economy. Throughout the 1990s and early 2000s, trade grew twice as fast as GDP, lifting hundreds of millions out of poverty. Thanks to the globalization of capital and knowledge, countries were able to shift resources to more productive and higher-paying sectors. All of this contributed to the diffusion of market power.
But this diffusion occurred in parallel with an equally stark concentration. At the sectoral level, a couple of key industries – most notably, finance and information technology – secured a growing share of profits. In the United States, for example, the financial sector generates just 4% of employment, but accounts for more than 25% of corporate profits. And half of US companies that generate profits of 25% or more are tech firms.
The same has occurred at the organizational level. The most profitable 10% of US businesses are eight times more profitable than the average firm. In the 1990s, the multiple was only three.
Such concentration effects go a long way toward explaining rising economic inequality.

Research by Cesar Hidalgo and his colleagues at MIT reveals that, in countries where sectoral concentration has declined in recent decades, such as South Korea, income inequality has fallen. In those where sectoral concentration has intensified, such as Norway, inequality has risen.
A similar trend can be seen at the organizational level. A recent study by Erling Bath, Alex Bryson, James Davis, and Richard Freeman showed that the diffusion of individual pay since the 1970s is associated with pay differences between, not within, companies. The Stanford economists Nicholas Bloom and David Price confirmed this finding, and argue that virtually the entire increase in income inequality in the US is rooted in the growing gap in average wages paid by firms.
Such outcomes are the result not just of inevitable structural shifts, but also of decisions about how to handle those shifts. In the late 1970s, as neoliberalism took hold, policymakers became less concerned about big firms converting profits into political influence, and instead worried that governments were protecting uncompetitive companies.
With this in mind, policymakers began to dismantle the economic rules and regulations that had been implemented after the Great Depression, and encouraged vertical and horizontal mergers. These decisions played a major role in enabling a new wave of globalization, which increasingly diffused growth and wealth across countries, but also laid the groundwork for the concentration of income and wealth within countries.
The growing “platform economy” is a case in point. In China, the e-commerce giant Alibaba is leading a massive effort to connect rural areas to national and global markets, including through its consumer-to-consumer platform Taobao. That effort entails substantial diffusion: in more than 1,000 rural Chinese communities – so-called “Taobao Villages” – over 10% of the population now makes a living by selling products on Taobao. But, as Alibaba helps to build an inclusive economy comprising millions of mini-multinationals, it is also expanding its own market power.
Policymakers now need a new approach that resists excessive concentration, which may create efficiency gains, but also allows firms to hoard profits and invest less. Of course, Joseph Schumpeter famously argued that one need not worry too much about monopoly rents, because competition would quickly erase the advantage. But corporate performance in recent decades paints a different picture: 80% of the firms that made a return of 25% or more in 2003 were still doing so ten years later. (In the 1990s, that share stood at about 50%.)
To counter such concentration, policymakers should, first, implement smarter competition laws that focus not only on market share or pricing power, but also on the many forms of rent extraction, from copyright and patent rules that allow incumbents to cash in on old discoveries to the misuse of network centrality. The question is not “how big is too big,” but how to differentiate between “good” and “bad” bigness. The answer hinges on the balance businesses strike between value capture and creation.
Moreover, policymakers need to make it easier for startups to scale up. A vibrant entrepreneurial ecosystem remains the most effective antidote to rent extraction. Digital ledger technologies, for instance, have the potential to curb the power of large oligopolies more effectively than heavy-handed policy interventions. Yet economies must not rely on markets alone to bring about the “churn” that capitalism so badly needs. Indeed, even as policymakers pay lip service to entrepreneurship, the number of startups has declined in many advanced economies.
Finally, policymakers must move beyond the neoliberal conceit that those who work hard and play by the rules are those who will rise. After all, the flipside of that perspective, which rests on a fundamental belief in the equalizing effect of the market, is what Michael Sandel calls our “meritocratic hubris”: the misguided idea that success (and failure) is up to us alone.
This implies that investments in education and skills training, while necessary, will not be sufficient to reduce inequality. Policies that tackle structural biases head-on – from minimum wages to, potentially, universal basic income schemes – are also needed.
Neoliberal economics has reached a breaking point, causing the traditional left-right political divide to be replaced by a different split: between those seeking forms of growth that are less inclined toward extreme concentration and those who want to end concentration by closing open markets and societies. Both sides challenge the old orthodoxies; but while one seeks to remove the “neo” from neoliberalism, the other seeks to dismantle liberalism altogether.
The neoliberal age had its day. It is time to define what comes next.

This Is How The U.S. Market Might Crash

by: Raphael Rottgen

- We could see a non-linear break in the market.

- This would be caused by a number of potential vicious circles of selling.

- Some of these potential vicious circles are the result of recent changes in market participant structure and activity.

I have developed the conviction that we will have a non-linear break in the market in the near future, say the next 3-12 months. "Non-linear" in the sense that it will not be along the lines of losing a few percent or so every week to enter a bear market over the period of a few months, but an exponentially accelerating sell-off, similar to 1987, for example, whereby we could lose 20%+ in one trading day. This is less based on arguments along the lines that certain valuation metrics for the (U.S.) market are high (an argument that could have been made years ago) and more on arguments that a number of mechanistic pieces are now in place that could cause this type of sell-off.
So, what would we need to see such a scenario?
1. We need a trigger
We need something that tips us into selling territory far enough. Far enough to overcome the vested interest of market participants to keep the party going (this, by the way, was one of the typical pre-crash characteristics that John Kenneth Galbraith identified in his book The Great Crash, 1929. Far enough to overcome the price thresholds above which armies of automated algorithms (and also human traders) simply buy on the dip. Like in a chemical reaction, there is an activation energy threshold to overcome to get it going, and, again like in a chemical reaction, you need a catalyst.
What could be that catalyst?
First, we could have a cataclysmic event. For sure, it would have to be something very traumatic - 9/11 was on obvious example (the Dow was down approx. 14% for the week after the market reopened). If it happens, it may well be something that we did not expect at all - if we had expected it, we would have been prepared for it psychologically, practically (hedging), etc. I recently got reminded of this when the Qatar crisis started to unfold, and I contemplated the remote possibility of a war involving Saudi Arabia (I am not saying this is likely).

Second, and I think more likely (we should of course hope this will be the trigger rather than the first option), we could see a stark sell-off in some remote-seeming corner of the world of financial assets. A remote corner, but one that is sufficiently connected to the overall network of financial assets that it has the potential to spread its "sell virus" via contagion. This, of course, was the example of the crisis of 2008, which started with seemingly localized blow-ups like that of two internal Bear Stearns MBS hedge funds in June 2007. As Galbraith put it, in an eerily prescient article in January 1987: "For the loss will come. The market at this stage is inherently unstable. At some point, something - no one can ever know when or quite what - will trigger a decision by some to get out."
Or, do we need such a hard, human-rationalize-able trigger after all? Remember the flash crash of May-10 (Dow down 9% at its worst)? Remember the weird price action in tech stocks that Friday a few weeks ago? I tend to think that kind of "catalyst" would not be enough, though, as it would not push us down far enough and/or fulfill the other two conditions for the crash to which we shall now turn our attention.
2. We need perpetuation of the selling
Ideally in a self-reinforcing "vicious circle" way, where selling triggers further selling. This, too, may happen in various ways.
First, with humans as investment decision-makers in the middle. As Edwin Levèfre already said in Reminiscences of a Stock Operator, "the greatest publicity agent in the wide world is the ticker tape" and "never argue with it [the tape]." People who see prices dropping like a stone may just sell themselves, too, and ask questions later - especially if they have reasonable justifications for doing so (see next point "We need absence of significant supportive buying" below). This is also true as selling right now can be easily rationalized: we are almost eight years into a bull market (one of the longest ever in the U.S.), market valuations are high (again, in the U.S.) on most traditional metrics, QE seems to be ending, growth in many sectors is unexciting, etc. Note that against many of these points, one could elaborate counterarguments - e.g., who cares how long the bull market has gone on for? Or, regarding market valuations: high multiples are justifiable, given the ultra-low interest rates.

I, for one, will place my bet that, once a sell-off starts, few investors will stop to argue that the equity risk premium is actually correct; more likely, the majority will simply remember that the CAPE of U.S. stocks is near 30 and that we might just go back to something in the teens (the long-run mean and median) and that this will not happen via earnings catching up with prices. Lastly, with human decision-makers in the middle, most of which also tend to be employed rather than self-employed, Keynes's famous quote applies: "it is better for reputation to fail conventionally than to succeed unconventionally." Selling will be the conventional thing to do (just like continuing to buy is the conventional thing to do for now).
Second, via good old-fashioned contagion and forced selling. Once the crash starts, even if it is in some remote corner of the asset network, it will often force investors who commingle some of the affected assets with "good" assets to sell the latter ones, too, and soon, the selling may reverberate through the entire financial asset network. The exact extent and speed of contagion will depend on where the contagion starts and on the network topography, which is virtually impossible to know, but I would bet that the markets are more interlinked now than they were during the last crisis.
The more leverage, obviously, the worse, as assets pledged as collateral (including and in particular margined stocks) lose value, which then generates margin calls and, if those calls are unmet, forced sales of the collateral, leading to another vicious circle.
Third, in some perverse hard-wired, machine-driven way - which is really the same forced selling as above, but on steroids, as there are no humans in the middle and things may unfold extremely quickly. Remember the role of portfolio insurance in the 1987 crash? (Now, I am dating myself). In brief, in case of price falls, portfolios were programmed to sell a portion of the portfolio value short, via futures. That sounded like a great idea at the time until it entered a vicious circle, whereby a fall in cash equities caused the future to fall (via the portfolio insurance programmed actions) which in turn caused cash equities to fall further which in turn caused the future to fall further, which - you get the point. Here, we note that a "financial innovation" was another typical pre-crash characteristic that John Kenneth Galbraith identified in this book. The 1929 and 2008 innovations were investment trusts and MBS/CDO/etc. What could be current financial innovation that may become a culprit?
How about a class of instrument that grew at 20%+ CAGR over the last 12 years (and keeps going) and of which there are now more types (almost 6,000) than U.S. stocks of at least some reasonable size (using the Wilshire 5000 as a proxy)? I am talking about ETFs, of course (and ETPs).

Unless I am missing something, I can see how ETFs and their underlying assets could develop the same unhealthy, vicious interplay (i.e., another vicious circle) as happened between futures and underlying shares in the 1987 crash. Selling pressure may start in either place, ETF or underlying assets, but then the other instrument(s) will get dragged down via hedging activity which in turn will drag down the initial instrument(s), and so on - yet another vicious circle. Arguably, this same effect may have just happened on the way up, albeit in a slower and more controlled way as is likely on the way down.
An ETF, of course, is also often an excellent way to promote contagion, as they nearly always rather indiscriminately mix "good" with "bad" assets, interlinking them in a rigid, mechanical way, allowing the good to be dragged down with the bad (or the bad to rise jointly with the good). Although I cannot prove it, I sensed this happening recently, when in May 2017 the Brazilian market was shocked by the release of wiretaps implicating the Brazilian president in potentially criminal activities. The prominent Brazil-tracking ETF EWZ was down more than 15%, and pretty much all of its component stocks were also down roughly this percentage, albeit they represent a wide variety of companies that even cursory fundamental analysis would show to be of rather diverse quality and valuation.
The growth of ETFs has been a major, major change in market structure and may well be the cause for many a hedge fund manager's frustrated proclamations about how the market is not rational anymore. Of course, it really probably just means the market is not rational anymore on the previous time frames, now that many ETFs reinforce the prevailing trend and hence extend the trend's lifetime. But, considering how many hedge fund investors have tended to become more short-term oriented, you can see how this dichotomy between increasing periods of market irrationality (read: drawdowns/losses) and decreasing investor patience can drive hedge fund managers into returning outside money.

Galbraith mentions the emergence of investment trusts as a sign of the pre-1929 froth. I read about the first ETF of ETFs earlier this year.
Another potential source of forced selling may come to us thanks to the same folks that have brought volatility to its knees over the last few years. While again I cannot prove it with hard data, I have by now heard ample anecdotes of large institutions reaching for yield (understandable in our ZIRP world) by shorting vol. This includes, for example, me having had to listen to a senior investment management professional of an insurance company gloating about how he makes lots of yield by basically coming to the office every day writing puts. Let's see - reaching for yield via massively shorting an asset class already trading at historical lows - might we have seen this before? AIG Financial Products Group London writing CDS pre-2008? I listened to that person and thought I was looking at the guy that Steve Eisman had dinner with in Las Vegas in the movie The Big Short.
In any event, that game works fine until the day it does not work anymore. If a market drop is big enough, those institutions that are short puts will want to, and need to, cover their positions - i.e., they will either buy back the puts, which will then cause the counterparty to hedge itself by selling the underlying in the market, or more likely (as in a severe fall there may not be any people around writing puts), the institutions will just sell the underlying assets themselves. In any event, this activity will depress prices and probably set off yet another vicious circle.
3. We need absence of significant supportive buying
If things go down rapidly, where could the bid come from?
Some of them may reinforce the downward trend, by following simplistic trend-following rules. Eventually (but likely not quickly enough), many machines will probably be taken offline - which is arguably correct anyway, even, or, perhaps especially, if the machines are sophisticated machine learning-based ones - as these rely on patterns observed in past data and are plainly unreliable when faced with data points that have never been seen before or only seen very few times.

"Regular human" investors?
Given the speed with which things will unfold, they will probably fall back on time-proven heuristics rather than any sort of deep analysis. I would bet that "don't catch the falling knife" will be a widely remembered and applied heuristic. Note also that investors will be able to rationalize not buying in the same manner they rationalized selling, as elaborated above.
Risk-loving prop desks who can enter a trade early and ride out a draw-down?
Well, thanks to the Volcker rule (not debating its merit here), there are fewer of those around these days.
Central Banks?
Their balance sheets are already full of stocks - just look at the JCB's ownership of the Japanese equity market (it was a top 10 holder in 90% of Japanese shares already as of mid-2016; by the way, they also buy loads of ETFs) or even the staid, quaint Swiss National Bank, who held over $63bn of U.S. shares as of year-end 2016. However, now the trend seems to be to shrink balance sheets.
Private equity?
Yes, they are full of cash but cannot, and do not need to, act quickly enough - but they will come out having a heyday (payday?).
Failed attempt at an upbeat note
The only fact that in theory could counterbalance my pessimist view so far is that there is actually an increasing number of voices that warn about the potential of a sharp downturn in markets - e.g., Jim Rogers or Mark Yusko. If these are just the visible exponents of a much larger, silent group that shares this belief, then maybe in the end, the market is already reflecting actions reflecting that belief, and it is not vulnerable as it actually is not overbought and overvalued? Maybe without these cautious beliefs and the resulting positioning, the CAPE would be in the 30s?
I do not buy it. The difficulty is that for many investors, even if they do share the belief that the market will come down, it is in practice very difficult to act on that belief, especially if they are employed (same Keynes argument as above) and/or managing other people's money - other people who typically do not look kindly on relative underperformance (even in hedge funds!) or things like holding cash reserves (which they have to pay fees on). That is why "as long as the music is playing, you've got to get up and dance," as Citigroup's Chuck Prince famously said in 2007. And, then you are magically supposed to know exactly when to stop dancing and quit the party before drunk people trash the furniture and start a fight.

It is like a multi-player game of chicken, made worse by the high payoffs/incentives to stay in the game. As somebody more eloquent than myself, John Hussmann, has said: "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak." Many a smart person has looked like an idiot before the peak, at least temporarily - e.g., Warren Buffett during the internet bubble and Crispin Odey more recently.
Most people do not have Warren's or Crispin's financial or psychological stamina, though.
I could go on, but I'll stop here. We have not even talked about the links to the real economy yet (the whole reflexivity thing), but that might have to be another article.
So, do you agree? If so, how are you preparing/positioning yourself?

sábado, julio 22, 2017




I’m sure you’ve heard that malls are getting killed. Pretty soon there will be no malls. Except for those with a Planet Fitness!

Source: WZZM

There has been lots of ink (and electrons) spilled over the death of retail.

Everyone knows it is only a matter of time before Amazon puts every department store, every mall, every brick-and-mortar retailer out of business. Amazon gets an infinity market cap and everyone else gets zero. Sound familiar?

That’s the accepted wisdom.

Is Amazon a great business? Yes.

Is a department store a bad business? Probably.

Does Amazon get 100% market share, with department stores getting zero? Probably not.
Amazon has over 80 million Prime subscribers in the US. It’s not quite saturated, but it’s getting close.

I admit to being a Prime member, a late adopter.

It is pretty cool. Stuff shows up on my doorstep in two days, for free. The huge poker chip set I just ordered probably weighs about 40 pounds—free shipping! And I get all the Prime movies and TV shows.

Sometimes, when I reflect on what a good deal Amazon Prime is, I think that I’m picking Amazon off. But they’re probably picking me off! 80 million customers times $100 is a lot of money.

Here is my thesis: Amazon will grow and grow, but there will always be a role for physical retailers.

A reduced role, for sure, but there will always be a role.

From a capital markets standpoint, now might be the time to put on the trade.

The Bottom

This is when I started thinking that we've reached a bottom in physical retailers: Last week, ProShares—a $27 billion ETF manager—registered to list some double short leveraged ETFs on brick and mortar retailers!

According to Bloomberg, “The ProShares UltraShort Bricks and Mortar Retail fund and ProShares UltraPro Short Bricks and Mortar Retail fund will seek to use derivatives to generate daily returns of two or three times the inverse of an index comprising the most at-risk US retailers…”


In my experience, specialty ETFs like this are usually listed at the worst possible times. Plus, you know my thoughts on leveraged ETFs.

When 2x short leveraged ETFs are being listed on physical retailers… it is probably time to buy physical retailers.

This infographic from AEI is a couple of months old. Since then, Amazon’s market cap has increased to $481 billion. Meanwhile, Macy’s market cap has fallen to a little under $6.5 billion.

Amazon is worth around 75 times more than Macy’s? That doesn’t seem right.

I hope by this point in the article I have you thinking.

I am no Macy’s fan. It is a pretty terrible business, they sell middlebrow stuff in middlebrow locations. Although their online business is actually not bad.

I used to buy ties at Macy’s, back in 2001. People laughed at those ties. I no longer buy ties at Macy’s.

But look—at a $6.5 billion market cap, Macy’s is reaching distressed levels. That means we have to put our distressed investor hat on, pick this business apart, and see if there is value—in all parts of the capital structure. Maybe we don’t like the stock, but maybe we like the bonds, for example.
And, Staples was bought by private equity recently for about 0.4 times revenue. Apply that standard to Macy’s and you get to a $10 billion valuation. They’re still kicking.

Plus, there’s an argument that this whole Internet retailing thing is just a giant bubble, according to the chart below.

Source: @bySamRo

How Do You Play It?

This is a smart trade, but it is also a dangerous trade unless you are smart.

There are two ways to do this:

1) Be a distressed investor: Look at the worst-case scenario, look at all parts of the capital structure, and find value.

2) Be a quant: Buy a basket of physical retailers, sell a basket of Internet retailers, and wait for them to converge.

The worst way to play it is just to naively buy Macy’s (or another retailer) and hope for the best.

Furthermore, I think it’s time to go dumpster-diving in Mall REITs, which is what we’re going to do in the next issue of Street Freak.

One final remark. As you look around for ideas, invest in the things that would get you laughed off the set of CNBC. I assure you, if I went on Fast Money and pitched Macy’s as a long idea, I would get laughed off the set.

Those are the best trades.

How to Squeeze China

Force ruling elites to choose between North Korea and American colleges for their kids.

By William McGurn

If the first Duke of Wellington were alive today, he might advise that the battle for North Korea will be won or lost on Harvard Yard.

Add Stanford, Yale, Dartmouth, Chicago and other top-tier private American universities so popular with China’s “red nobility” i.e., the children and grandchildren of Communist Chinese elites. For if the Trump administration hopes to enlist an unwilling Beijing to check North Korea’s nuclear ambitions, visas for the children of China’s ruling class to attend these universities offer an excellent pressure point.

Beijing has been Pyongyang’s closest ally ever since the Cold War split the peninsula after World War II. According to the Council on Foreign Relations, China provides North Korea with “most of its food and energy.” Though China has warned Kim Jong Un about his nuclear testing (which Mr. Kim has ignored), plainly it fears a free and united Korean peninsula more than a nuclear-armed North.

Revoking visas for Chinese students, of course, would not alone resolve the North Korea problem even if it did force Beijing to act. But Beijing could make life for North Korea difficult if it chose to.
Thus far most talk about U.S. options regarding North Korea has focused on economic sanctions or military action against the Pyongyang regime. The dilemma is that every meaningful option comes with big risks, including the devastation of Seoul, retaliation against U.S. troops and more suffering for innocent North Koreans. The advantage of starting with student visas is twofold: The unintended harm done would be more limited than any military strike, and visas are likely a more effective lever than sanctions.

Today 328,547 Chinese students attend American universities, according to the Institute for International Education. The Chinese represent the largest group of foreign students in America.

How many of these students are children of Chinese leaders is unclear. American universities are disinclined to provide this information. In addition, the children of Chinese government officials sometimes attend U.S. universities under assumed names.

The Chinese taste for prestigious American universities goes right to the top. Although President Xi Jinping rails against the corruption of Western values, his daughter went to Harvard, which Mr. Xi managed to swing on an official annual salary of roughly $20,000. A few years back, the Washington Post noted that of the nine members of the standing committee of China’s Politburo, at least five had children or grandchildren studying in the U.S. There are many, many more.

Officially, of course, China is an egalitarian society. In reality, hereditary favors, which now include access to top U.S. universities, are a fixed perk of Communist Chinese culture.

Put it this way: If China’s ruling elite were forced to choose between supporting North Korea and their children’s access to American universities, is it all that hard to see where they would come down? This might be especially true if we continued to allow ordinary Chinese citizens with no family connections to the party or government to come study here.

Would China retaliate? Probably. Would our universities scream? Without doubt. Would there be unfairness? Absolutely.

But if the U.S. does not act quickly, a despot who executes people with antiaircraft guns will soon have the capability to strike Seattle or Chicago with a nuclear-tipped intercontinental ballistic missile.

A White House unwilling to consider Chinese student visas as leverage to prevent this would signal Pyongyang and Beijing alike that America is not serious.

U.S. visas are the one thing we know people want. Before Ray Mabus served as Barack Obama’s secretary of the Navy, he was Bill Clinton’s ambassador to Saudi Arabia. There he championed the cause of two American women who had been kidnapped as children and taken to Saudi Arabia by their father, after he’d been divorced in the U.S. by his American wife.

To make the pressure real, Ambassador Mabus cut off all American visas for the father and his Saudi relatives. That got their attention. Unfortunately the deal for the girls’ freedom collapsed after Mr. Mabus left Riyadh and his successor lifted the hold on the visas.

China is even more vulnerable to such pressure. Perry Link, a China scholar at the University of California, notes that the family connections that lie just below the surface in Chinese Communist culture are more powerful than outsiders realize. He likens it to the Mafia.

Imposing sanctions on the offspring of China’s rulers “might raise howls in the U.S. but would be perfectly normal and rational—unexceptional—inside the culture of the people we would be sanctioning,” says Mr. Link. “They would ‘get it,’ and the pinch would be felt.

“Whether or not it would be enough to budge them from their 30-year-old position on North Korea is a different question. But I support making the try.”

Preparing for THE Bottom - Gold to Silver Ratio

By: Przemyslaw Radomski

In the first part of the Preparing for THE Bottom series, we emphasized the need to be sure to stay alert and focused in the precious metals market, even though it may not appear all that interesting. We argued that preparing for the big moves in gold that are likely to be seen later this year should prove extremely worth one’s while. In the second part of the series, we discussed when, approximately, one can expect the key bottom in gold to form (reminder: this winter appears a likely target).

In today’s issue, we would like to feature one of the signs that are likely to confirm that the final bottom is indeed in. The thing that a relatively small number of investors follow (mostly those who have been interested in the sector for some time) are the intra-market ratios. One of the most important ones is the gold to silver ratio and to be honest, it’s no wonder that this ratio is so important – after all, gold and silver are the parts of the precious metals sector that practically everyone recognizes.

Due to both metals’ popularity and the fact that different types of investors tend to focus on them (gold is more popular among institutions and, generally, big investors, while silver is particularly desired by smaller, individual investors), their relative performance can tell us quite a lot about the situation in the sector. This includes helping to detect and confirming the major turning points in gold and silver.

Let’s take a closer look at the ratio (charts courtesy of and

The first thing that comes to mind while looking at the above chart is that the tops in the ratio usually correspond to bottoms in the precious metals market - silver tends to underperform gold to a big extent in the final part of the decline. The mid-2003 spike in the ratio doesn’t directly confirm this rule (there was a local bottom at that time, though), but the 2008 spike, 2011 bottom and the 2016 spike certainly do. So, while it is not inevitable, it seems likely that the major bottom in the precious metals will be accompanied by a big upward spike in the gold to silver ratio i.e. silver’s extreme underperformance.

Having said the above, let’s move to the current trend. Despite the decline in 2016, the main direction in which the ratio is heading is still up. We marked the borders of the rising trend channel with blue lines and the ratio is still closer to the lower line than the upper one – meaning that the upside potential remains intact.

If the ratio is to continue to move higher (it’s likely, because an uptrend is intact as long as there is no confirmed breakdown below it), then we can expect the upper border of the trend channel to be reached (or breached – more on that in just a moment) before the top is in. If this is to be seen in 6 months or so (as we indicated in our previous article in this series), then we can expect the ratio to move to about 94.

This target is additionally supported by Fibonacci extensions based on the 2016 bottom, 2016 top and the 2015 top. The Fibonacci extensions work similarly to the Fibonacci retracements – they differ, because the latter provide targets between the levels that were already reached, while the former are usually used to provide targets outside of the previous trading range. In this case, we get another confirmation of 94 as an upside target.

One might ask that if the above is the case, then why didn’t we draw the target area around the 94 level, but between 94 and 100. There are two good reasons for it.

The first reason is visible on the above chart. Namely, history tends to repeat itself to a considerable extent, and during the previous steady uptrend (the 2008 lack-of-liquidity-driven spike was far from being steady) at the beginning of this century, the gold to silver ratio moved temporarily above the upper border of the trend channel (marked with dashed lines) and formed a top above it.

Consequently, the upper border of the current rising trend channel may not stop the rally in the following months. Instead, a breakout above it might indicate that the key top in the ratio and the key bottom in the precious metals market are just around the corner.

The second reason for a higher target is visible on the chart below that includes even more data than the previous one.

The tops that you saw on the previous chart appear to be the key long-term tops, but in reality, the key long-term tops are at / closer to the 100 level, while the ones from this century are not as important. Surely, they all are important long-term tops, however, we need to keep in mind that the strongest resistance will not be provided by the 2003 or 2008 tops, but by the 100 level.

Moreover, please note that round numbers tend to be important support and resistance levels as they tend to attract more attention (for instance, gold breaking below $1,000 will definitely get more attention than a breakdown below $1,032) – it would be difficult to find a rounder number for the ratio to reach than the 100 level.

Additionally, if the final bottom in the precious metals market was not reached in late 2015 / early 2016, because too many investors were still bullish at that time, then perhaps the extreme that the gold to silver ratio reached at that time was not extreme enough. The next resistance above the 2015 / 2016 tops is provided by the very long-term tops at or a little below 100.

So, should one ignore everything else and wait with the purchases until the gold to silver ratio spikes to 100? Of course not. That’s just one of the tools that one can use in order to determine the optimal entry prices. On a side note, please note that we wrote “optimal” instead of “final” lows. The reason is that it is not 100% certain that a bottom is in at a specified price (it can only be certain when one looks at the past prices after a longer while), so while it may be tempting to wait for the perfect target to be reached, it might be more prudent to place the buy order above the target price to greatly increase the chance of filling it at all – however, these details go beyond the topic of this essay.

When the ratio approaches its target area, all other signals will become more important – for instance gold reaching important support levels without the same action in silver or mining stocks - but with the gold to silver ratio at exactly 100 or only a bit below it and a couple other confirmations, it might be wise to invest at least partially in the entire trio (gold, silver and miners), as the confirmations would make gold’s reaching its target much more important for the entire sector than it would be without the confirmations. In other words, the gold to silver ratio serves as yet another tool in the investors’ arsenal that can help to determine whether or not the final bottom is in or at hand. It’s not a crystal ball, but one of the things one needs to keep in mind when investing capital in this promising sector. 

Summing up, the gold to silver ratio can provide us with an important confirmation that the final bottom in the precious metals is indeed in and while it seems that the bottom is still ahead of us, it doesn’t mean that it’s a good idea to delay preparing yourself to take advantage of this epic buying opportunity.

Donald Trump’s clash of civilisations versus the global community
Human affairs are too interwoven to be the product of purely national decision-making      
by: Martin Wolf


Donald Trump seemed to declare a clash of civilisations, in Warsaw last Thursday. Thereupon, he participated, uncomfortably, at the summit of the group of 20 leading economies. The G20 embodies the ideal of global community. A war of civilisations is the opposite. So which will it be?

The central remark in Mr Trump’s Warsaw speech was this: “The fundamental question of our time is whether the west has the will to survive. Do we have the confidence in our values to defend them at any cost? Do we have enough respect for our citizens to protect our borders? Do we have the desire and the courage to preserve our civilisation in the face of those who would subvert and destroy it?”

The speech took further the stance of two of Mr Trump’s senior advisers, HR McMaster and Gary Cohn, in an article published in May: “The world is not a ‘global community’ but an arena where nations, non-governmental actors and businesses engage and compete for advantage.” They argued that “America First does not mean America alone”. Yet the US was alone at the G20. Despite papering over of the cracks, the US was alone on climate and protectionism.

If the west is asked to unite for a war of civilisations, it will fracture, as it did over the Iraq war.

It is easy to agree that what Mr Trump calls “radical Islamist terrorism” is a concern. But to judge it an overriding existential threat is ludicrous. Nazism was an existential threat. So was Soviet communism. Terrorism is just a nuisance. The great danger is that of overreaction. This could poison relations with 1.6bn Muslims worldwide.

We must beware the self-fulfilling prophecy of a clash of civilisations, not just because it is untrue, but because we have to co-operate. The ideal of a global community is not airy-fairy. It reflects today’s reality. Technology and economic development have made humans masters of the planet and dependent upon one another. Interdependence does not stop at national borders.

Why indeed should it? Borders are arbitrary.

People are increasingly using the word “Anthropocene” to describe our epoch: this is the era when humans transform the planet. The important point about the notion of the Anthropocene is that humanity causes the harms and only humanity can deal with them. This is one reason why the idea of global community is not empty. Without it, harms will go unmanaged.

Consider peace, as well. In a nuclear age war should be unthinkable. But that does not make it is impossible. Managing frictions among nuclear-armed powers is an inescapable necessity.

Consider also prosperity. Global economic integration is not a malign plot. It is a natural extension of market forces in an era of rapid technological innovation. Such a world inevitably exposes countries to the policy decisions of others. As we all learned in 2008, the global financial system is no stronger than its weakest links. Those who depend on international trade need confidence in the terms of access to the markets of other countries.

This is why the G20’s concern over financial regulation, notably at the London summit in 2009, and the ongoing worries about protectionism are justified. Sovereignty is not the same as autarky. As the 2009 G20 communiqué rightly noted, “We start from the belief that prosperity is indivisible”.

Moreover, we are also rightly interested in the fate of other people. Development is a moral cause.

But it is also essential if migration is to be managed.

The decision to call the initial summit of G20 leaders in Washington in November 2008 was therefore inescapable. The western-dominated group of seven countries had neither the right nor the power to co-ordinate global economic affairs. The rise of the rest, above all of China and India, had made that increasingly clear. Moreover, the west contains far too small a proportion of humanity to lay any moral claim to global management.

Global co-operation will always be both imperfect and frustrating. It cannot escape differences of opinion and clashes of interest. Nor can it replace the vital foundation of good domestic policies and legitimate domestic institutions. Indeed, both are essential,

Yet humanity’s affairs are now too interwoven and their impact far too profound to be the byproduct of purely national decision-making. This truth may be painful. But it is a reality.

Within that system of global co-operation the west may still have, for a while, the loudest voice.

But even that is only possible if it is united. If the cause Mr Trump’s US now wishes the rest of the west to embrace is that of a clash of civilisations, in which the US aligns with the most reactionary and chauvinistic of contemporary European opinions, then there can be no west. If necessary, the Europeans will have to align themselves, on some vital issues, not with the US, but with the more enlightened of the rest.

How, one might ask, has this clash of civilisations now emerged, not so much between the west and the rest as within the west — a clash symbolised by the contrasting perspectives of Germany’s Angela Merkel and Mr Trump? For that tragedy I blame the rise of US “pluto-populism”. Behind this is something remarkable: the US income distribution is now more like that of a developing than an advanced country. Populism (of both left and right) is a natural consequence of high inequality. If so, Mr Trump may be no temporary anomaly.

The transformation of the US we are seeing might prove enduring. If so, the world has moved into a dangerous era. “The US”, argues former state department official Richard Haass, “is not sufficient, but it is necessary.” He is right. If the one “necessary” player is absent, disorder would appear to be inevitable.

The New Abnormal in Monetary Policy

Nouriel Roubini
. New monetary policy

NEW YORK – Financial markets are starting to get rattled by the winding down of unconventional monetary policies in many advanced economies. Soon enough, the Bank of Japan (BOJ) and the Swiss National Bank (SNB) will be the only central banks still maintaining unconventional monetary policies for the long term.
The US Federal Reserve started phasing out its asset-purchase program (quantitative easing, or QE) in 2014, and began normalizing interest rates in late 2015. And the European Central Bank is now pondering just how fast to taper its own QE policy in 2018, and when to start phasing out negative interest rates, too.
Similarly, the Bank of England (BoE) has finished its latest round of QE – which it launched after the Brexit referendum last June – and is considering hiking interest rates. And the Bank of Canada (BOC) and the Reserve Bank of Australia (RBA) have both signaled that interest-rate hikes will be forthcoming.
Still, all of these central banks will have to reintroduce unconventional monetary policies if another recession or financial crisis occurs. Consider the Fed, which is in a stronger position than any other central bank to depart from unconventional monetary policies. Even if its normalization policy is successful in bringing interest rates back to an equilibrium level, that level will be no higher than 3%.
It is worth remembering that in the Fed’s previous two tightening cycles, the equilibrium rate was 6.5% and 5.25%, respectively. When the global financial crisis and ensuing recession hit in 2007-2009, the Fed cut its policy rate from 5.25% to 0%. When that still did not boost the economy, the Fed began to pursue unconventional monetary policies, by launching QE for the first time.
As the last few monetary-policy cycles have shown, even if the Fed can get the equilibrium rate back to 3% before the next recession hits, it still will not have enough room to maneuver effectively.
Interest-rate cuts will run into the zero lower bound before they can have a meaningful impact on the economy. And when that happens, the Fed and other major central banks will be left with just four options, each with its own costs and benefits.
First, central banks could restore quantitative- or credit-easing policies, by purchasing long-term government bonds or private assets to increase liquidity and encourage lending. But by vastly expanding central banks’ balance sheets, QE is hardly costless or risk-free.
Second, central banks could return to negative policy rates, as the ECB, BOJ, SNB, and some other central banks have done, in addition to quantitative and credit easing, in recent years.

But negative interest rates impose costs on savers and banks, which are then passed on to customers.
Third, central banks could change their target rate of inflation from 2% to, say, 4%. The Fed and other central banks are informally exploring this option now, because it could increase the equilibrium interest rate to 5-6%, and reduce the risk of hitting the zero lower bound in another recession.
Yet this option is controversial for a few reasons. Central banks are already struggling to achieve a 2% inflation rate. To reach a target of 4% inflation, they might have to implement even more unconventional monetary policies over an even longer period of time. Moreover, central banks should not assume that revising inflation expectations from 2% to 4% would go smoothly. When inflation was allowed to drift from 2% to 4% in the 1970s, inflation expectations became unanchored altogether, and price growth far exceeded 4%.
The last option for central banks is to lower the inflation target from 2% to, say, 0%, as the Bank for International Settlements has advised. A lower inflation target would alleviate the need for unconventional policies when rates are close to 0% and inflation is still below 2%.
But most central banks have their reasons for not pursuing such a strategy. For starters, zero inflation and persistent periods of deflation – when the target is 0% and inflation is below target – may lead to debt deflation. If the real (inflation-adjusted) value of nominal debts increases, more debtors could fall into bankruptcy. Moreover, in small, open economies, a 0% target could strengthen the currency, and raise production and wage costs for domestic exporters and import-competing sectors.
Ultimately, when the next recession strikes, central banks in advanced economies will have no choice but to plumb the zero lower bound once again while they choose among four unappealing options.
The choices they make will depend on how they weigh the risks of bloating their balance sheets, imposing costs on banks and consumers, pursuing possibly unattainable inflation targets, and hurting debtors and producers at home.
In other words, central banks will have to confront the same policy dilemmas that attended the global financial crisis, including the “choice” of whether to pursue unconventional monetary policies. Given that financial push is bound to come to economic shove once again, unconventional monetary policies, it would seem, are here to stay.