German surplus hands eurozone dilemma to France
     
Washington should forge an alliance with Paris to confront Berlin
      
by: Wolfgang Münchau
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Within two or three months, President Donald Trump and the new president of France will both be confronted with an important question of economic diplomacy: what to do about the German current account surplus? Last year it reached 8.6 per cent of gross domestic product, an extreme number for the world’s fourth-largest economy. The surplus will probably fall a little this year and next, but its size and persistence constitutes one of the biggest sources of imbalance in the global economy, and within the eurozone.

If outsiders decide to confront the issue, they will need to do so intelligently. So far, Germany has brushed off all criticism. The European Commission presents reports on macroeconomic imbalances each year. The dustbins of Berlin are filled with them. Successive French presidents chose not to raise the issue either. Their priority during the eurozone crisis was to keep their heads down and avoid appearing on the radar screens of the bond vigilantes. As long as they could fund their sovereign borrowing, all was good.

The imbalances in the global economy, and Germany’s in particular, are not driven by trade. Germany is not subsidising its exports, or manipulating its currency. The problem is an excess of savings over investments. This is due to bad policies and an ageing population.

Trade sanctions cannot fix a savings imbalance. My guess is that Germany would respond to punitive tariffs by trying to lower production costs further, which would make the problem worse. Instead, the world should make Germany tackle the causes of the savings surpluses: over-regulated service industries; low growth levels of public and private sector investment; damaging and unnecessary fiscal surpluses.

A good starting point would be to exploit the internal contradictions of Germany’s defence of the surpluses. Ahead of last week’s spring meetings of the International Monetary Fund and the World Bank in Washington, the Berlin government produced a paper that made the point that the US should not worry about its bilateral relationship with Germany, but with the eurozone.

The private paper argued that Germany cannot logically be a currency manipulator as it no longer has its own currency. If the euro is undervalued, it is not Germany’s fault, but a consequence of the European Central Bank’s monetary policies. The message seems to be: don’t call us, call Brussels or Frankfurt.

This is an extraordinary defence. If Germany blames the eurozone, then surely the US and the other members of the single currency should insist that the bloc be given the powers to address the problem more effectively.

Last year, the eurozone had a current account surplus of 3.4 per cent of gross domestic product, lower than Germany’s in relative terms, but still extremely large for the world’s second-largest economy. It means that the eurozone will have to acquire at the very least a joint fiscal capacity and the right to impose policies on member states to influence the relationship between savings and investments.

Since the German government rejects those policies, Berlin’s eurozone argument is bogus. The other member states should not allow Germany to point the finger at them because it runs massive imbalances with them as well as the rest of the world.

So what should they do? I am writing this column before the result of the first round of the French election is known. What I do know is that the French political class would set itself up for failure if it did not put pressure on Germany to address the issue.

If Germany either accepts policies to correct the imbalances, or agrees to reforms of eurozone governance, or ideally both, then the most intelligent French strategy would be to seek a close partnership with Berlin and forge the next stages of European integration. That would be my preferred scenario. The euro’s survival necessitates such a step.

If Germany continues to refuse to address the issue, it would be the job of the next French president to convey to Angela Merkel or her successor as German chancellor that the eurozone is not a tenable construction, and that the euro will over time lose the support of the public, in France in particular.

There is no guarantee that Germany would be impressed by such a threat. But a eurozone break-up would constitute such an economic disaster for Germany that it would be in the country’s interest to tweak policy, rather than risk another crisis with potentially disastrous consequences.

Only France is in a position to force the issue because it holds the key to the future of the euro. Thus the smartest strategy for the US should be to forge a strategic alliance with France to confront Germany, rather than opt for unilateral trade sanctions, which are, at best, a diversión.


Macron’s Mission

Harold James
. emmanuel macron

PRINCETON – The centrist Emmanuel Macron’s success in the first round of the French presidential election is likely to re-energize Europe. Unlike the other candidates, Macron does not just recognize the need for radical change to the European Union; he supports bringing it through Europe-wide cooperation. But Macron’s plurality of the popular vote was narrow, and a much larger share of French voters showed support for a very different political vision.
 
It is a vision of nostalgia and isolation espoused by Macron’s rival in the second round, the far-right National Front’s Marine Le Pen. Her slogan – “on est chez nous” (we are at home) – underscores her focus on enclosing France in a national cocoon that resists “wild globalization.”
 
But Le Pen was not alone in promoting this vision. One of the candidates who finished fourth, the far-left Jean-Luc Mélenchon, also built his candidacy on simplistic economic populism. For example, like Le Pen, he promised a radical reduction in the retirement age, without explaining how to finance it.
 
And both appealed to Germanophobia, focusing on the European debt crisis and Germany’s insistence on austerity. Le Pen accuses Macron of aspiring to be Vice-Chancellor of Europe, under German Chancellor Angela Merkel, while proudly declaring herself to be the “anti-Merkel.” Mélenchon claims that Germany is motivated by radical individualism, neoliberalism, and the economic interests of an aging population.
 
Even if Macron wins the second round, as expected, he will have to address what drove more than 40% of French voters to support this anti-European vision in the first round. And if he is to reinvigorate support for Europe, he should consider what made Europe attractive in the past – and how it lost its allure.
 
When Europe was most obviously attractive, it was regarded as a way of purging what was bad and corrupt from national traditions. In the 1950s, as two very old men, German Chancellor Konrad Adenauer and French President Charles de Gaulle, moved to reinvent their respective countries, they examined how their vaunted traditions had been undermined by their own elites.
 
Germany had been devastated by Nazism, which, in Adenauer’s view, had been forced on the country by Prussian aristocrats and militarists. In France, according to de Gaulle, the elites weakened the country, before voting to overthrow the Republic in the aftermath of military defeat.
 
But, unlike today, the post-war anti-elite backlash did not cause countries to turn inward. On the contrary, de Gaulle believed that France’s deep historical wounds could be healed only through engagement with Germany. As he put it, “Germany is a great people that triumphed, and then was crushed. France is a great people that was crushed, and then associated itself in Vichy with the triumph of another.” And he believed that only he could bring about France’s reconciliation with Germany, because only he could “raise Germany from her decadence.”
 
With the euro crisis, however, the limits of that reconciliation came to the fore, as did the issue of national decadence. Germany and France clearly needed one another, but found it difficult to understand each other. European policymaking after 2010 was practically a bilateral affair, involving a dominant France and a more dominant Germany. Much like the events of 1940, the euro crisis reflected bad management and bad judgment, and it came to be viewed as a betrayal by the elites.
 
This time, however, it was the European elites – and the national elites who empowered them – who were blamed.
 
The eurozone became the focus of dispute, owing to the constraints that it imposed on member countries. As the crisis progressed, the single currency began to feel like a straitjacket, and voters increasingly became convinced that escaping it would solve the problems that had emerged while bound by it.
 
Interestingly, the eurozone’s debtors and creditors alike share this sentiment. Of course, southern Europe, including France, feels ensnared in a low-competitiveness scenario of high unemployment and stagnant income growth. But even northern Europe – and especially Germany – feels trapped.
 
Despite being portrayed as the eurozone’s major beneficiary, Germany’s trade gains are lower than many assume, especially when struggling southern European countries are importing fewer German goods. What many Germans see, instead, are the financial claims against southern European countries building up in the eurozone’s TARGET2 payments system.
 
This situation, in which both sides feel trapped, can be viewed as a variant of the famous master–slave dialectic in Georg W.F. Hegel’s Phenomenology of Spirit: both sides are equally bound.

The slave is not recognized as fully human, or as an equal of the master, and is not free. The master is free, but does not feel recognized as a human by the slave. The master is constantly worried by the fragility of the relationship, and by the fact that the slave is building up an alternative universe of values, in which the master is not represented.
 
The task ahead for a President Macron would therefore be to achieve a kind of Hegelian transcendence, through a process much like that which de Gaulle described in the 1960s.

France needs Germany to serve as a model of a social market economy, capable of creating new non-governmental jobs. Germany needs France in order to assert its own place in the world, including from a security perspective.
 
Reconciling these economic and security imperatives is painful, because it means confronting the weaknesses and errors of the past head-on. But it is necessary. France and Germany must again welcome each other chez nous.
 
 


Click to trade

Digitisation shakes up corporate-bond markets

Greater automation promises more liquidity for investors
 
JUST a few decades ago, an asset manager wanting to trade shares, bonds or derivatives almost always had to call up the trading desk at a big investment bank. Today shares and many derivatives can be traded with a few simple clicks (or even in fully automated fashion, using algorithms). But buying and selling bonds, especially corporate bonds, is still an old-fashioned business. Over four-fifths of trading in American corporate bonds still takes place with a dealer, usually over the phone. Yet digitisation is at last beginning to change the structure of bond markets: witness the announcement on April 11th by Tradeweb, an electronic-trading platform, that it is to offer “all-to-all” trading in European corporate bonds, ie, a system in which any market participant can trade with any other.

Electronic bond-trading is not in itself new. Tradeweb’s platform, initially limited to trading of American Treasuries, was unveiled in 1998. Around half of Treasuries, and nearly 60% of European government bonds, are now traded electronically, reckons Greenwich Associates, a consultancy. But for corporate bonds, progress has been slower: only 25% of global trading volume in investment-grade bonds, and merely 13% of that in high-yield ones, is electronic. The market is huge—with over $50trn outstanding globally, and over $1.5trn-worth issued last year in America alone. But corporate bonds vary in maturity, issue date and in where they stand in the issuer’s hierarchy of debt. Unlike, say, most sovereign debt, it is traded only rarely; 90% of all corporate bonds change hands fewer than five times a year. The shares of a company, by contrast, usually come in at most two types (common and preferred), and are traded frequently on centralised exchanges.
 
The traditional way of matching buyers and sellers has been for dealers to take on the risk.

They name a price, buy bonds and hold them in their inventory until a buyer emerges. This explains why personal relationships still matter so much in the bond market. The model is deeply entrenched: even most electronic platforms have adopted it, in the form of “request for quote” (RFQ) systems, where dealers have the exclusive right to quote prices. But when dealers are unwilling to hold onto bonds, as many have been since the financial crisis, because of tighter capital requirements, then such systems offer no more help than phone trading. Some bonds trade so rarely that a sell- or buy-query may elicit no responses at all.

One new source of liquidity has come from exchange-traded funds (ETFs). Shares in bond ETFs, like those composed of equities, track indices, allowing investors access to a basket of bonds. But the impact for bonds is more significant, because bonds are otherwise traded so rarely. Indeed, bond ETFs are more liquid than the assets the funds own. But ETFs still need dealers: the institutional investors that create and redeem ETF shares have so far had to rely either on voice-trading or RFQ systems.

All-to-all trading, by contrast, has the potential to change bond-market dynamics more fundamentally. Pioneered in 2012 by MarketAxess, the second-largest bond-trading platform after Bloomberg, it allows any user of a network to trade with another directly, whether asset manager or dealer. Asset managers, who provide 39% of the liquidity in MarketAxess’s all-to-all system, are thus in direct competition with dealers (who provide 29%). As Richard Schiffman of MarketAxess puts it, all-to-all makes it possible for asset managers to move from being price-takers (having to accept dealer quotes) towards being price-makers (setting their own prices).

We’re all dealers now
 
Momentum is gathering as all-to-all catches on with other platforms, too. Smaller ones, such as Liquidnet and Trumid, already offer it. But Tradeweb’s announcement this month carries particular weight because it is a sizeable force—the third-largest in the market, thus leaving only Bloomberg, the market leader, with no all-to-all offering as yet. At MarketAxess, the new system already represents 16% of trading volume in American investment-grade corporate bonds, and fully 34% of that in American high-yield bonds.

Some argue that even all-to-all systems, let alone RFQ, do not tackle one big difficulty: that buyers and sellers are not always present at the same time. Algomi, a bond-market data firm, seeks to match buyers and sellers across time. Its interface for dealers allows traders easily to keep track of inquiries into a particular bond; it also suggests similar bonds if that one is not available. For investors, the company provides data on trading activity in particular bonds.

And for trades where a dealer cannot match buyers and sellers, it has, in partnership with Euronext, an exchange provider, set up a trading venue for corporate bonds that will link up dealers in its network. So dealers should be able to graduate from risk-taking to matchmaking.

Another factor that will change the structure of the bond market is regulation. From January 2018 MiFID 2, a wide-ranging European financial-market regulation, will require market participants to report the prices and approximate volumes of all completed bond transactions—an unprecedented level of detail (earlier American rules required more limited price disclosure). Such transparency is expected to weaken dealers’ market power. The sheer complexity of this undertaking will also push more trading onto electronic platforms, which are busy embedding automatic reporting.

Amid all this change are tantalising hints of another potentially transformative trend: full automation. Tradeweb has already introduced a number of protocols that allow the preprogramming of a series of trades: eg, selling one bond and buying another with the proceeds; or arranging currency hedging.

MarketAxess has even seen expressions of interest from hedge funds wishing to trade bonds using algorithms. Such moves have brought a lot more liquidity (and volatility) to other markets. In the sleepier world of corporate bonds, the impact could be far-reaching.


Irrational Exuberance

By: Captain Hook


Remember the time you might have first heard the term 'irrational exuberance'? I will never forget it. It was in December of 1996. Alan Greenspan tried to warn people the stock market was getting 'carried away' at the time, which is rich considering the bubbles he was responsible for afterwards. Fast forward to today, and we have the same situation essentially, given the larger degree credit cycle is much closer to an end than a beginning, if not done. Thing is, you can never trust these people, central bankers, because they are in the business of expectations management in order to keep their bubbles inflated, where they will say anything to get the desired results, including telling boldfaced lies.

And last week's episode is a classic example of this, because given the fragility of the economy and markets these days, there is no way the Fed will actually shrink it's balance sheet in coming days - no way. Some think the Fed wants to get rid of Trump, which is why they are they are raising administered rates, where Trump would own the chaos. Thing is, raising administered rates can be countered by other means, part of the game that's played at times like these. No, if they really wanted to crash the economy and markets to this end, then they would in fact shrink their balance sheet, but they are not - at least not to any appreciable degree - see here.

Of course it could be argued the economy and markets are so fragile the Fed might be able to get away with jawboning in this regard too, and such an assessment could be correct. Because what usually happens when the Fed starts talking like this is the speculators / hedgers short stocks (again), which provides new fuel for the perpetual short squeeze. And that's likely the ploy here on the part of the Fed again. They get to talk tough here while raising administered rates, which is expected in the first half of a new Presidential term, providing them with ammo for when the markets finally break.

So again, make no mistake about it, there's no way the Fed is about to shrink its balance sheet - no way. You've got the most overvalued stock market in history, and the Fed knows this, and that it must attempt to continue managing their asset bubble dependent economy or parish themselves. And that's the rub, because eventually a mistake will be made, and the air will come out of the balloons despite all the clever scheming in the world. Certainly Trump starting World War III (WWIII) last week is evidence of this sentiment and likelihood. As surmised several weeks back now, like his predecessors, he's just another boldfaced sellout liar.

What's more, because of his apparent unstated avarice, he may in fact turn out to be worse than Hillary in the end, because at least with her, you knew what you were getting. Trump, appears to be hiding his true aspirations, where based on his actions last week (not just Syria), he's just as liable to continue debasing his behavior to get what he wants (a legacy) as anybody else. He's nothing special. He's no JFK - that's for sure. He's no friend of the public or republic.

Global debt is exploding higher and it appears he will be doing his 'status quo' part in adding to it in coming years. Of course such concerns might be moot with WWIII just around the corner because again, as it turns out, he's just another idiot sellout.

Apparently, like the rest of the neocons, they won't realize they are traveling down the wrong road until they've got a nuke shoved half way up their collective butt.

Of course you would never know the nukes are about to fly in looking at silver, the ultimate barometer of the state of 'what is' for the status quo, because needless to say, it remains on 'lockdown'. And short of the nukes actually flying, this will not change anytime soon with open interest (OI) on COMEX silver at 221,000 contracts, just short of multiyear highs. The speculating fool hedge funds that play this crap will find a reason to sell en mass again at some point, and what is known as the silver price will plunge again. It's amazing watching this lunacy happen, from Trump, to silver, to the stock market - where all an educated observer can do is shake your head - as you know this will all end badly. Because it's all relative, and traders have the memory of a goldfish these days, so if the world doesn't end next week, they won't have a reason to keep their positions.

Under such conditions, which we will label 'relief', all the COMEX silver futures buyers, SLV call buyers, CBOE Volatility Index (VIX) call buyers, and so on, will no longer have 'good reason' to continue holding their positions, where contango related reversals (volatility) would arrive. What does that mean? It means 'relief' would lead to speculator related weakness in silver (precious metals) and strength in stocks as events continue to unfold in coming days, with the mainstream media changing 'the focus' to keep societies mindless goldfish entertained. We should have to wait long to test this thesis, which of course will be followed by increasingly compelling news to cause these same mindless speculators to go out and repeat the negative behavior they've already forgotten about. (See Figure 1)

Figure 1
SPX/VIX Monthly Chart


Because as history has proven, like goldfish who have seven-second attention spans, these idiots will be back time after time until they have their toys (cash) taken away, because although they've already forgotten, the news is getting worse by the day. And a look at the daily VIX chart, which shows prices are itching to blow above the 200-day moving average, is proof of this situation, not that anybody will remember this by Monday morning, which is why stocks could be higher yet again. It wouldn't be so bad if most players remained constrained to the cash markets like the old days (VIX, silver, etc.), however today's traders are so desperate (because they are either insane or can't afford to trade the cash markets anymore), the focus is in the options markets, which is how prices are managed so easily via the machines.