Sprott Precious Metals Watch, August 2017
 
Trey Reik, Senior Portfolio Manager
 
 
Is the Fed Done (Tightening) for this Cycle?

Spot gold has spent the past seven months in a tight trading range between $1,200 and $1,300 per ounce. Given the stored force inherent in such a trading pattern (Figure 1, below), history suggests a breakout, whether up or down, is likely to be characterized by steep slope.  The question remains, which direction will gold follow?  Given that a prominent macroeconomic development during the past several months has been perceived central-bank hawkishness, consensus appears to favor pending gold-price pressure.  On the other hand, spot gold is now flirting with the $1,300 upward-trading-bound for the third time in five months.  We command no clairvoyance about future gold prices, but we offer in this note a few observations suggesting current market positioning may be significantly offside in a number of asset classes, including gold.  Out of respect for August schedules, we will skew our comments toward visual exhibits.  
 
 
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Figure 1: Spot Gold (4/18/16-8/17/17) [Bloomberg]
 
 
First-up, what is driving current equity market ebullience?  In the context of uninspiring economic statistics, we would suggest a significant force powering stocks has been unprecedented central bank asset purchases during 2017.  Since the Fed’s final taper in October 2014, there has been a common misconception that global QE has been winding down.  As shown in Figure 2, below, nothing could be further from the truth.  In fact, aggregate asset purchases by the Bank of Japan (BOJ) and European Central Bank (ECB) during the past two years have dwarfed prior rates of Fed QE.  Separately, Bank of America’s Michael Hartnett calculates that the BOJ, ECB, Swiss National Bank (SNB) and Bank of England (BOE) purchased $1.5 trillion of assets during the first five months of 2017, or at an annualized rate of $3.6 trillion, far exceeding any historic rate of global QE.  Our concern is that reigning confidence among equity investors seriously underestimates the vulnerability of asset markets to any incremental central bank tightening.
 
fig2.gif Figure 2: Monthly Central Bank Asset Purchases (2008-June 2017) [Torsten Slok; Deutsche Bank]
 
 
In recent weeks, we have even noted resurgent espousal of the perpetual-bull-market hypothesis from various commentators in the financial media.  In the “what could possibly go wrong” category, we would site the dramatic decoupling since mid-March of soaring equity averages from souring U.S. economic performance.  
 
In Figure 3, below, we plot the S&P 500 Index versus the Citi Economic Surprise Index (which aggregates sequential beats-and-misses-versus-estimates for prominent U.S. economic statistics).  Riding surges in post-election sentiment and soft economic data, the Citi Index mirrored the ascent of the S&P 500 Index through the spring.  Since mid-March, however, the realities of hard economic statistics have weighed heavily on the Citi Index while the S&P 500 Index has advanced unfazed. 
 
Something has to give.
 
 
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Figure 3: S&P 500 Index versus Citi Economic Surprise Index (5/11/16-8/17/17) [Citibank; Bloomberg]
 
 
Another market dynamic worthy of reflection has been investors’ face-value acceptance of the Fed’s telegraphing of three-or-so rate increases in each of the next few years.  We plot in Figure 4, below, midpoint FOMC dot-plot projections for fed-funds-rates at every FOMC (projection) meeting since January 2012.  Below the cavalcade of skyward pyrotechnics rests the horizontal realities of FOMC rate movements.  We would query, exactly what has changed in the economic landscape to suggest the Fed can now raise rates when they have felt unable to do so in the past? 
 
 
fig5.gif 
Figure 4: FOMC Midpoint Dot Plots for Fed Funds Rates (2012-June 2017) [Torsten Slok; Deutsche Bank]
 
 
Pulling this all together, equities continue to set new highs while investors ratchet up expectations for Fed tightening, all against a backdrop of deteriorating U.S. economic performance.  Amid this unequivocal optimism, we offer a contrary precis of developing fundamentals.  We believe recent FOMC rate hikes have already begun to crimp a debt-addled and growth-starved U.S. economy. 
 
In the context of outstanding debt levels, the Fed is already too tight, and we suspect Fed “tightening” for this cycle has largely concluded.  If we are correct in our significantly non-consensus analysis, many financial assets are likely to be repriced aggressively in coming months, to gold’s tangible benefit.
 
Our longtime study of U.S. debt levels has convinced us of one incontrovertible relationship:  the U.S. economy cannot bear rising interest rates, on either the long or short end, without an immediate surge in financial stress.  This past spring, Trump optimism and the Fed’s more hawkish tilt began to steepen global rate structures. 
 
We wrote at the time that the 35-year history of 10-year Treasury yields has demonstrated that any backup in 10-year yields has inevitably catalyzed a crisis (Figure 5, below).  We predicted 10-year Treasury yields could not sustain their post-election rally, and, indeed, they have not.  With debt levels now considerably higher than financial-crisis peaks, why would any investor believe rates can rise without inflicting widespread financial damage? 
 
 
 fig5.gif
 Figure 5: 10-Year U.S. Treasury Yields (1973-Present) [MacroMavens]
 
 
With respect to gold’s prospects during the next six-to-twelve months, we believe the single greatest catalyst will be consensus recognition that the Fed cannot truly tighten without significant harm to global financial conditions.  We would suggest two critical variables will provide the strongest clues to future FOMC policy:  inflation statistics and commercial-bank lending trends. With respect to inflation, CPI measures have now posted five straight months of shortfalls to consensus estimates, a very rare sequence. 
 
July CPI core statistics marked the weakest 6-month performance since August 2010.  The Fed’s preferred PCE-measure registered 1.4% in June, a far cry from its stated 2% objective.  We view recent Fed jawboning about temporary factors restraining inflation as little more than tacit admission of the Fed’s ebbing confidence in their own policy decisions.  As usual, Saint Louis Fed President James Bullard pushed the jawboning envelope (8/7/17), “It is hard to find good explanations for the low-inflation era being experienced by the U.S.” 
 
 
fig6.gif 
Figure 6: U.S. Commercial Lending (Y/Y % Change) vs. Fed Funds (1987-Present) [MacroMavens]
 
 
With respect to commercial-bank lending, we suspect accumulating data are touching some nerves at the Fed.  Bank lending is the lifeblood of economic activity, and prominent U.S. lending measures have been swooning throughout 2017. 
 
We believe consensus does not recognize how unorthodox recent Fed rate hikes have been in relation to bank-lending trends.  As shown in Figure 6, above, the Fed generally raises rates into a trend of accelerating commercial-bank lending. 
 
The most recent “liftoff,” in contrast, has been floated into the headwinds of a sharp falloff in lending growth.  Even more troubling for the Fed, as shown in our Addenda Graph, nominal GDP has a very tight correlation with U.S. bank lending trends.
 
 
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Figure 7: DXY Dollar Index (1/20/14-8/17/17) [Bloomberg]
 
 
All in all, we perceive a notable change in confidence at the Fed.  Recent struggles in the automotive, retail and restaurant industries appear to be at least partially related to recent Fed tightening. 
 
To us, weak trends in CPI and bank lending are all but telegraphing an imminent change in Fed policy.  
 
In our view, one of the most reliable forward indicators of Fed policy is relative strength in the U.S. dollar. 
 
Beneath headlines, the U.S. dollar has performed miserably during 2017 (Figure 7, above), with the DXY Index declining 11% (from a 1/3/17 high of 103.82 to a 8/2/17 low of 92.58).  It seems only a matter of time before consensus recognizes that the Fed is back in a bind.  Gold should respond enthusiastically.
 
  
Addenda
 fig8.gif
Figure 8: U.S. Commercial Bank Lending (Y/Y %age Change) versus Nominal GDP (Y/Y %age Change)  (1987-Present) [MacroMavens]   


Germany repatriates gold stashed abroad during cold war

Bundesbank ships back 53,780 gold bars from vaults of NY Fed and French central bank

by: Claire Jones in Frankfurt
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The Bundesbank said it ‘thoroughly and exhaustively’ tested all the bars after they arrived back in Frankfurt © AFP


Germany has successfully repatriated 674 tonnes of gold that was squirrelled away in New York and Paris at the height of the cold war, in one of the biggest operations of its kind.

The Bundesbank took four years to ship back 53,780 gold bars — each weighing 12.5kg and worth €440,000 — from the vaults of the New York Federal Reserve and the French central bank.

Germany built up its gold reserves at the New York Fed, the Bank of England and Banque de France as the Deutschemark appreciated on the back of strong exports following the revival of the economy after the second world war. It was left abroad for safekeeping during the cold war for fear of a Russian invasion through East Germany.

The Bundesbank, one of the world’s biggest holders of gold, unveiled its plan to repatriate the bullion in 2013 after public concerns surfaced about having so much of the nation’s wealth stashed abroad. It said the €7.7m operation was completed without any glitches.

The German central bank said it “thoroughly and exhaustively” tested all the bars after they arrived back in Frankfurt, adding that “no irregularities came to light with regard to the authenticity, fineness or weight of the bars”.

It had previously repatriated 940 tonnes of the precious metal back to Frankfurt from London to save on storage fees. That secretive operation only came to light years after it was completed in 2001.

The Bundesbank will continue to hold more than a third of its bullion reserves in New York because the US dollar is the world’s gold currency. About 13 per cent will remain in London, which is still the biggest market for selling gold. The bank now holds no reserves in France.

Central banks are among the biggest holders of gold reserves, a legacy of the era of the gold standard. After the second world war, western powers tied their currencies to gold under the Bretton Woods agreement. That changed when the US ended the convertibility of dollar to the precious metal in 1971.

The US Federal Reserve holds the most bullion. In total, the US’s official gold reserves amount to 8,134 tonnes, according to the World Gold Council. Germany ranks second with 3,374 tonnes, of which 1,710 tonnes is now held in Frankfurt, according to Bundesbank figures.

The UK holds 310 tonnes, and the European Central Bank 505 tonnes.

Some central banks, including the Bank of England, sold large portions of their bullion reserves in the decades following the collapse of the gold standard. But the Bundesbank plans to keep hold of its gold, which is the source of substantial public interest in Germany.


Sentiment Speaks: Why Is The Market Not Trading On Fundamentals Lately?

by: Avi Gilburt


- Recent price action.

- Anecdotal and other sentiment indications.

- Price pattern sentiment indications and upcoming expectations.

- Big Announcement.

Recent price action
 
Last week, I noted that as long as the market maintains support over 2450SPX, we still have potential to strike the 2500SPX region before we see a top to wave (3). Currently, the market has maintained such support, so I must maintain my expectations.
 
Anecdotal and other sentiment indications
“The market is just not trading on fundamentals.” 
“The stock market is detached from the reality of the economy.” 
“Eventually, fundamentals will matter again.” 
“The market just does not make sense.” 
“The fundamentals just don’t seem to matter right now.”

In fact, this past week, I actually got the following comment to one of my articles:
“Avi, with all due respect, while you have been largely right from a technical perspective, the fundamentals are not present . . .”
Yes, I chuckled at that comment. It is almost like this person was saying, “even though you have been making a lot of money on the long side, the market is wrong because the fundamentals don’t agree.”
 
Well, I would imagine the next words out of this person’s mouth should have been “now give back all the money you made on the long side, because the market was wrong to give it to you in the first place.” (smile)
 
Over the last several months, I have heard every single derivative of these sentiments. Yes, many are frustrated because the market is just not making sense to them.
 
They have applied all the common matrices to the market, including P/E ratios, length of market rally, debt ratios, etc. And, no matter what matrix they apply, they all come to the same conclusion that, based upon fundamentals, the market is just not making any sense.
 
But, one has to question whether the fundamentals are what really drive the market. I have written this example in the past, as it illustrates why fundamentals really lag the market rather than drive the market:
During his tenure as chairman of the Federal Reserve, Alan Greenspan testified many times before various committees of Congress. In front of the Joint Economic Committee, Greenspan noted that markets are driven by "human psychology" and "waves of optimism and pessimism." Ultimately, as Greenspan correctly recognized, it is social mood and sentiment that moves markets. I believe this makes much more sense when deriving the causality chain. 
During a negative sentiment trend, the market declines, and the news seems to get worse and worse. Once the negative sentiment has run its course after reaching an extreme level, and it's time for sentiment to change direction, the general public then becomes subconsciously more positive. You see, once you hit a wall, it becomes clear it is time to look in another direction. Some may question how sentiment simply turns on its own at an extreme, and I will explain to you that many studies have been published to explain how it occurs naturally within the limbic system within our brains. 
When people begin to turn positive about their future, they are willing to take risks.  
What is the most immediate way that the public can act on this return to positive sentiment?  
The easiest is to buy stocks. For this reason, we see the stock market lead in the opposite direction before the economy and fundamentals have turned. In fact, historically, we know that the stock market is a leading indicator for the economy, as the market has always turned well before the economy does. This is why R.N. Elliott, whose work led to Elliott Wave theory, believed that the stock market is the best barometer of public sentiment. 
Let's look at the same change in positive sentiment and what it takes to have an effect on the fundamentals. When the general public's sentiment turns positive, this is the point at which they are willing to take more risks based on their positive feelings about the future. Whereas investors immediately place money to work in the stock market, thereby having an immediate effect upon stock prices, business owners and entrepreneurs seek loans to build or expand a business, which takes time to secure. 
They then place the newly acquired funds to work in their business by hiring more people or buying additional equipment, and this takes more time. With this new capacity, they are then able to provide more goods and services to the public, and, ultimately, profits and earnings begin to grow - after more time has passed. 
When the news of such improved earnings finally hits the market, most market participants have already seen the stock of the company move up strongly because investors effectuated their positive sentiment by buying stock well before evidence of positive fundamentals are evident within the market. This is why so many believe that stock prices present a discounted valuation of future earnings. 
Clearly, there is a significant lag between a positive turn in public sentiment and the resulting positive change in the underlying fundamentals of a stock or the economy, especially relative to the more immediate stock-buying activity that comes from the same causative underlying sentiment change. 
This is why I claim that fundamentals are a lagging indicator relative to market sentiment. This is also why fundamentalists can be left holding the bag at the top of a market, when the news and fundamentals look the most attractive, right before the market begins to dive, as sentiment turns in the opposite direction well before the fundamentals, just like it did at the bottom. 
This lag is a much more plausible reason as to why the stock market is a leading indicator, as opposed to some form of investor omniscience. This also provides a plausible reason as to why earnings lag stock prices, as earnings are the last segment in the chain of positive mood effects on a business growth cycle. It is also why those analysts who attempt to predict stock prices based on earnings fail so miserably at market turns. 
By the time earnings are affected by a change in social mood, the social mood trend has already been negative for some time. And this is why economists fail as well - the social mood has shifted well before they see evidence of it in their "indicators."
So, rather than consider the obvious conclusion - that fundamentals are not driving the market (God forbid one even consider such heresy) – many would rather entertain perspectives of such outright conjecture as to relegate their perspectives to complete fantasy. You see, a significant number of people believe that the PPT (Plunge Protection Team) has been working overtime to “buy every dip.”
 
Now, in the past, I have presented my perspective as to why I believe that the PPT being able to stop market corrections is complete fantasy in and of itself. And, I use many specific market examples to prove my point.
 
 
As presented in my market history research in the linked article, I don’t believe the PPT has been able to stop any major declines during the years they have supposedly been in action. But, to believe the PPT is going to be involved in the market when it's making new all-time highs weekly is just too ludicrous to take seriously. So, why have ordinarily reasonable people resigned themselves to believing in fantasy?
 
The answer is because they simply have no better resolution for their conundrum as to why the market is not trading on fundamentals. So, they simply assume that someone is controlling the market and preventing it from trading upon fundamentals. Well, as a child, I learned at a young age what happens when one ASS-U-ME’s.
 
Allow me to also remind you about the conclusion of one of the leading economists in the world today. In a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, he noted the following regarding those engaged in “fundamental” analysis for predictive purposes:
The historical data says that they cannot succeed; financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?
So, when you see with your own eyes that the market is not trading on fundamentals, why would you consider that fundamentals ever control the market? Do you even consider that fundamentals really don’t drive the market?
 
Recognize that when the market finally begins to trade in the direction suggested by fundamentals, the fundamentals then are really a coincidental factor, rather than a controlling one. Otherwise, you have to believe that fundamentals only control the market “some of the time.” Does that really make sense? Do you control the action of your arm only some of the time? Either you control your arm or you don’t. Either someone is pregnant, or they are not. There is no such thing as a little pregnant.
 
To believe otherwise is to suspend reason and logic for the sake of clinging to an outdated market perspective simply because it is commonly accepted. So, consider how you did when you adopted the commonly accepted perspective about the market for Brexit, Frexit, terrorist attacks, interest rate hikes, cessation of QE, Trump’s election, etc.!? Remember, the world was once commonly accepted to be flat too.
 
“In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions.”
R. N. Elliott, Natures Law, 1946
 
Price pattern sentiment indications and upcoming expectations
 
Over the past week, the market has provided us with a very overlapping structure that does not provide much in the way of a high probability very short-term expectation. You see, the structure can be considered as a b-wave in a more expanded corrective structure, which can still loop down to the 2450SPX region before starting its final rally to 2500SPX. Yet, the more immediately bullish interpretation already has us in wave v of its final move towards 2500SPX.
 
So, unfortunately, there will be times like this where the market does hide its true short-term intention. But, I believe most market participants should take a step back and recognize where we are in the bigger picture.

Last year at this time, we had our sites initially on the 2300-2330SPX region for 2016, as you can see from the attached re-cap of our market calls through 2016.
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While we certainly struck that region as we expected, we then moved our thoughts for 2017 towards 2410-2440 for wave (iii) of (3), which was also struck as expected, which then elicited a pullback towards 2333SPX, which we expected to be struck for wave (iv) of (3). As you can see from the chart below, the market has been acting in an almost textbook fashion in between our Fibonacci Pinball target regions.
 
 
 
 
We then focused our attention towards our next bigger target in the 2487-2500SPX region, where we expected that wave (3) would complete. Currently, we stand just below the target region we set last year for wave (3).
 
 
 
 
And, as I reminded the members of my trading room this past week:
 
You see, we have now just about struck the 1.618 extension of waves (1) and (2) off the February 2016 lows, which is the most common target of wave (3). Moreover, we are striking the 2.00 extension of waves (i) and (ii) within wave (3), which is also where wave (v) of (3) commonly tops. They are both coinciding around the 2500SPX region, which is what we consider a strong confluence region for a top to be struck in wave (3).

Moreover, as I explained to the members in my trading room several weeks ago, the daily MACD on the SPX has been providing us evidence that strongly supports our expectation for the market to be topping out quite soon in all of wave (3) off the February 2016 lows. We have seen the divergences we would normally see at each stage of this rally, and the current divergences may need one more micro divergence before wave (3) is done. But, the patterns and divergences are matching up quite nicely to suggest that the market is just about done with wave (3).
 
So, my main expectation is that the market will likely be topping out shortly in all of wave (3) off the February 2016 lows, and providing us with a wave (4) pullback, with an ideal target in the 2300SPX region. While it is possible it may shorten and find support as high as 2360SPX (assuming it may trace out as a triangle), I fully expect to see a multi-month consolidation begin shortly. A strong break out over 2525SPX would make me re-evaluate this immediate potential.


Iron and Copper Rallies Are Getting Overheated

Mining and metals investors: Don’t overlook the data

By Nathaniel Taplin
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     Copper is running ahead of itself. Photo: Carlos barria/Reuters        


After spending the spring fretting over the effect on metals prices of China’s debt crackdown, investors in copper and iron ore are now in full party mode. Reports of capacity cuts and planned curbs on scrap imports by the world’s largest metals consumer have driven copper prices up 7% and iron-ore prices up more than 20% since the end of June.

But July trade data, out today, contained some dispiriting news: year-over-year growth in Chinese imports of copper concentrate slowed from June’s pace, while imports of iron ore and coal declined outright compared with both a month and a year earlier. Overall import and export growth also slowed, hinting that the lift to China from rebounding global trade may be close to its peak.

The message for exuberant traders wowed by better-than-expected second-quarter Chinese growth and breathless analyst reports: Beware—China’s demand for metals is weaker than it looked.

The Chinese real-estate sector—the single biggest source of metals demand—remains in decent shape, but the outlook for infrastructure is worrying. The bulk of growth in investment is coming from water- and environment-related projects, less metals-intensive than their power, road and railway counterparts. Investment growth has stalled in the electric-power and information-technology sectors, the most important infrastructure sectors for copper. June investment was up just 4% from a year earlier, compared with a pace of better than 20% in mid-2016.



Chinese steel-capacity cuts, while real, are unlikely to be sufficient to sustain a strong rally without help from solidly growing demand. Overcapacity remains severe: Margins have rebounded, but only to half the level of the early 2000s. Nonferrous-metals margins show a similar pattern.

The determining factor for metal prices now isn’t capacity cuts, but real estate. A significant fall in housing inventory in China’s interior, after years of overbuilding, is giving property developers and steel demand a big shot in the arm.

If this month’s housing data show prices in China’s interior still moving higher, the metals rally can continue. If not, those red flags—weak power-sector investment and slowing trade numbers—may cast a shadow over commodity-investor exuberance.


When Neutrality Isn’t an Option


George Friedman
Editor, This Week in Geopolitics


The new US sanctions against Russia overwhelmingly passed Congress. But in parts of Europe, they are far less popular. German Foreign Minister Sigmar Gabriel last week called them “more than problematic.” In diplomatese, that means the Germans oppose them. The Association of European Businesses, a nonprofit that advocates on behalf of European businesses with interests in Russia, urged that politics and business be kept apart.

We are thus in a situation where the US Congress has overwhelmingly passed a measure against the Russians, the US president, however reluctantly, signed the bill, and the Europeans are deeply opposed (including, I have to add with some amusement, going to the point where a European business organization wants to keep politics and business separate).

Estimates of the Threat

At the center of this is Germany, of course. Germany has an overriding interest in avoiding conflicts in general and ones with Russia in particular. Should any conflict arise, the Americans and others would immediately pressure the Germans to rearm and participate.

The Germans were willing to agree to sanctions against the Russians during the 2014 Ukraine crisis, but it wasn’t because they wanted to confront Russia directly. Instead, Germany’s partners insisted on taking some action, and the sanctions were both the smallest action possible and of little consequence to Russia. The Americans and the Eastern Europeans saw a serious Russian threat emerging; the Germans did not.

No matter how Germany responded when called upon to stand with its allies against Russia, an already fragmented European Union would come under even more strain. A problem inherent in the EU is that there’s a wide gulf between the national security interests of members. For Poland, national security is fundamental; the Russians are on its border. For other countries, such as Spain or Italy, that border is far away. What happens there means little to them.

It is not easy to maintain European economic integration if some countries are involved in a conflict while others refuse to participate. Apart from the divergence in fiscal policy—war is expensive, after all—how do you hold an economic project together with different nations that have completely different existential focuses?

Germany’s economic well-being depends on an integrated European Union. While other members of the bloc look east toward Moscow, Germany’s focus is on the economy and trade.

It sees Russia as somewhat irritating but on the whole limited in what it can do.

Rather, the German fear is that the Eastern Europeans, backed by the United States, will build a force so threatening that the Russians will feel compelled to retaliate. Of course, what is limited ability to Germany looks much more daunting from Eastern Europe… and the Americans just held a presidential election in which they believe Russia interfered.

The Germans distrust their eastern neighbors when it comes to Russia, seeing them as too emotional. They believe the Americans are too aggressive. The Americans, on the other hand, believe Germany is not living up to its commitment to NATO—militarily or politically—in confronting Russia.

More Than Politics

This is not a question of right or wrong. It’s not about Donald Trump’s relationship with Chancellor Angela Merkel. The Americans and the Germans have been moving apart for quite a while, and at an accelerating pace. This has a great deal to do with disagreements over NATO and Germany’s unwillingness to impose further sanctions on Russia. It’s simply not in Germany’s interests to do so.

Germany’s economy is vast but fragile, dependent on exports. However distant the threat, a war between the US and Europe on one side and Russia on the other would create a mess out of the European and global trading systems. This is something Germany can’t risk, regardless of how unlikely the event.

Germany is trying to defuse the situation, but it has almost no influence over the US and surprisingly little over Eastern Europe. For the Eastern Europeans, the threat from Russia is more important than what Germany thinks. For the Americans, Germany’s lack of active participation in matters of interest to the US has rendered Germany mostly irrelevant.

Beneath the surface, in the deep structure of European geopolitics, Germany has always been fascinated and at times frightened by Russia. Russia was critical in the unification of Germany in 1871 and between the First and Second World Wars, when treaties were made and broken.

During the Cold War, Germany was trapped between the Soviet Union and the US. It doesn’t plan to go there again.

Germany is also always wondering what an arrangement between German technology and industry and Russian natural resources would look like. Previous attempts to work together have ended in war, but Russia is weaker this time… and the Germans are considering their options.

The decision of whether to support American sanctions against Russia thus leads to some of the deepest issues of German history: how to evade US war plans, how to take advantage of Russian resources without getting trapped in Russia’s grasp, and so on. The Germans don’t really care about the sanctions beyond the fact that they force Germany to make a decision before it is ready. History, of course, has placed Germany in this position before. Germany has frequently wound up the worse for it, along with the rest of Europe.


The Madhouse

by Jeff Thomas




In the late 17th century, we British decided that, as a humanitarian effort and public service, we’d collect up all the people from the towns and countryside who were bonkers and confine them in institutions, so that society could be protected from them.

As so often proves the case, the idea of a collective solution to an individual problem is doomed to failure from the start.

There are many problems with madhouses. First, they need funding and, of course, the entity that receives the funding is likely to prefer skimming off whatever they can, rather than spending it on the inmates. Second, the sort of people who apply to become staff are often not the most desirable, and in fact are often dangerous. Third, one madman might be a social problem, but what happens when you throw them all in together? Are conditions likely to make them less mad or more mad? (I would suggest the latter.)

When I was a teenager, I had the dubious pleasure of visiting a state-run madhouse—the maximum-security ward, where all the most violent inmates were kept.

I’d been asked to visit a short-term inmate named Billy, who’d been committed to the mental institution for a month as punishment for a petty crime. My purpose was to hopefully raise his spirits, but my one visit there provided me with insight that I couldn’t have gained otherwise and has stayed with me for life.

I was taken through several layers of security before being led through a series of heavy steel doors into a large room. There were tables and chairs in the middle and beds along the walls.

About fifteen men were talking congenially in small groupings.

I sat down with Billy. Although we weren’t friends, he was glad to have a visitor, and the men with him were also glad to see a new face. One man was having a lunch that had been sent by a relative, and he insisted that I have his dessert, a cupcake. He seemed quite a nice guy, although I later learned from Billy that he had been a schoolteacher and was sentenced for life, having butchered his mother and a female pupil.

Billy advised me that all of the inmates were easy to get along with, but most were relatively paranoid and could “go off.” He said that there had recently been a bloodbath in the ward, so everyone was enjoying a week or two of calm, hence the friendliness of my reception.

However, soon, each inmate would begin to wonder if any of the others had managed to make or find a weapon. The more they worried, the more they’d try to get a hold of a weapon or make one themselves. After a month, it would be assumed that most of the men had a weapon of some sort.

After two months, it was assumed that they all now had hidden weapons, and tension would be building. Conversations would diminish over time, and each man would become increasingly withdrawn.

At some point, the paranoia would become so great that some errant word or small gesture by an inmate would inadvertently trigger violence in another inmate. When this happened, it became every man for himself immediately. They’d all reach for their weapons, and there would be a bloodbath. Some would try to hide in corners, whilst others would attack whoever might be near to them.

Afterward, the weapons would be collected by the orderlies and those wounded would be taken to hospital. For a time, the survivors would return to congeniality—happy that there were no more weapons, allowing them a “normal” social life with each other.

My visit was brief, only an hour or so and, during that time, all the inmates were quite calm and polite to me. I was perhaps nineteen at the time and, later, I mentally compared my rather privileged upbringing with the life of those committed to the asylum. I decided that, if I were ever in a situation that might result in my becoming an inmate in such a place, I’d exit the situation as quickly as possible, before I was trapped in such a deplorable institution.

So. Fast-forward to the present day, and we witness the US government providing a regular stream of misinformation on the Middle East, Russia, China, and pretty much any nation that poses any economic threat to the present American hegemony.

The network news in the US is clearly eating this up and expanding upon it—not only crying wolf, but using a bullhorn to do it. The US has more 24-hour news programmes than any other nation, and many of them spend over 90% of their time warning of the dangers of Russia and other “enemies.”

It can truthfully be said that, when an empire slides into decline, the leaders almost always opt for war, partially because it creates a distraction from political misdeeds and partially because most people will get behind their government, no matter how flawed, if there’s a war on.

This is clearly the case in the US today. The rhetoric-attack against other nations has largely succeeded in convincing Americans that Russia, China, the Middle East, etc. are “out to get us.”

Russia and China, in particular, have consistently tried to expose the lie of this rhetoric, but their efforts are never reported on the US programmes, so the average American has no idea that he’s being lied to on a wholesale basis by his government and the complicit media.

Virtually every news item that’s reached the American ear as to developments in Ukraine and Syria has been falsely reported by the US news, to the point that many Americans believe the US should “go in and straighten them out.”

The creation of islands in the South China Sea by the Chinese, which they have held claim to for hundreds of years, has allowed US military “experts” to declare repeatedly on the news that “We can’t allow the Chinese to expand into the South China Sea.”

And, of course, the US, in the last sixteen years, has invaded or bombed Afghanistan, Iraq, Syria, Libya, etc., under the dubious claim of “keeping the world safe for democracy.”

Again, cooler heads on the other side of this equation have done all they can to calm down the rhetoric. Even US allies in Europe, such as the French and Germans, have refused to endorse US sanctions against the Middle East and Russia, for fear that they might be dragged into not only a trade war, but possibly a shooting war.

In such an atmosphere, it’s no wonder that the world in general is ramping up its storehouse of weaponry. As America celebrates the creation of a new aircraft carrier, the rest of the world does what it can to quietly build up its own arsenal, “just in case.”

This, of course, is what foments wars, even world wars.

When all the inmates begin to realise that tension is building and the other inmates now have lethal weapons, the question is no longer, “Can I win against them?” but, “Can I afford not to do all I can to protect myself, no matter the outcome?”

This reveals a basic failing of empires—the assumption that they’ll force other nations to cave in to their threats. The opposite is in fact true. Once everyone is trapped in the madhouse together, the moment the violence is finally triggered, all the inmates reach for their weapons. And what happens after that is anybody’s guess.

I’ve spent the balance of my life avoiding madhouses by living in countries that are not rooms within the madhouse. Today, the US is heating up the world to a dangerous degree, and those who don’t wish to be trapped in the madhouse when the tension boils over might be advised to seek a safer place to live before the panic occurs.