Crisis Watch

Doug Nolan

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.

EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey's 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil's dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico's dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We'll begin with Italy:

May 17 - UK Guardian (Jon Henley): "Italy's new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces. From the EU's perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government 'contract' include provision for a 'conciliation committee' to settle expected disagreements. Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership… But as they approach power, the historical Euroscepticism of the M5S and the League is resurfacing. An incendiary early version of their accord called for the renegotiation of EU treaties, the creation of a euro opt-out mechanism, a reduction in Italy's contribution to the EU budget and the cancellation of €250bn (£219bn) of Italian government debt."

Italian 10-year yields surged 36 bps this week to 2.23%, the high since the spike last July. Perhaps even more dramatic, after ending last week at negative 29 bps, Italian 2-year yields surged 37 bps to a near 22-month high eight bps. The Italian to German two-year yield spread widened 36 bps this week to a 13-month high 68 bps.

Bonds throughout the euro zone periphery were under pressure. Greek 10-year yields surged 50 bps to a 2018 high 4.50%. Portuguese yields jumped 19 bps to 1.87%, and Spanish yields gained 17 bps to 1.44%. Elsewhere, Australian 10-year yields rose 12 bps to 2.90%, and New Zealand yields rose 14 bps to 2.86%.

Even with Friday's six bps decline, 10-year Treasury yields ended the week up eight bps to 3.06%. Thursday's 3.13% yield was the high going back to July 2011. With two-year yields adding a basis point this week, the two to 10-year spread widened seven bps to 51 bps. It's worth noting that 30-year yields jumped 10 bps this week to 3.21%, the high since June 2015, and benchmark MBS yields rose 10 bps to 3.76%, a high going back to July 2011.

May 17 - Bloomberg (Selcuk Gokoluk): "Debt levels that quadrupled in a decade have made emerging markets vulnerable to tightening financial conditions in the era of rising U.S. interest rates, Fitch Ratings said. Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier... Despite the development of local-currency bond markets, borrowers will be hobbled by higher external borrowing costs, a stronger dollar and slowdown of capital inflows, it said… 'If easy financial conditions tighten more sharply than expected, EM debt would come under pressure,' said Monica Insoll, the head of the credit market research team at Fitch. 'If investor appetite for EM risk reverses, issuers may face refinancing challenges even in their home markets, while capital outflows could put pressure on exchange rates or foreign exchange reserves.'"

It's worth repeating (from above): "Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier." Analysts this week were keen to note that EM market tumult has been less disruptive than the (soon passing) 2016 episode. Give it time. We're still in just the initial phase of Risk Off. Only a few weeks back, universal bullishness held sway over the emerging markets and economies. Buy one ETF and own them all!

It's worth recalling that the 2016 de-risking/de-leveraging episode was nipped in the bud by an upsurge in global QE (especially courtesy the ECB and BOJ) and a corresponding extension of easy money by the Federal Reserve. And let us not forget the commanding contribution from Beijing policymaking. After a modest slowdown in 2015, China's Credit growth surged in 2016 and that acceleration continued well into 2017. Two additional fateful years of surging global Credit and financial flows are now coming home to roost.

Today's backdrop is more conducive to a protracted EM crisis backdrop, along with, I would argue, an especially destabilizing global market liquidity crunch. For one, the overheated U.S. economy has the Fed rather hamstrung. Their timid baby-step approach has worked to sustain excessively loose financial conditions. And while central bankers dilly-dallied, extreme fiscal stimulus coalesced with extreme monetary stimulus - creating a most potent concoction way too late in the economic cycle. Between fiscal stimulus, a capital investment boom and reenergized housing inflation, the Fed today confronts extraordinary uncertainty as it attempts to gauge the amount of economic stimulus and inflationary juice in the pipeline.

Fed rate hikes, rising market yields and the resurgent dollar receive most of the attention when analysts contemplate EM vulnerabilities. Issues related to China are deserving of more prominence in the analysis. Chinese officials have finally become more assertive in cracking down on financial excess. China's system Credit growth has slowed meaningfully, and there are indications that tighter financial conditions have begun to bite.

May 18 - Bloomberg (Carrie Hong): "Zhongyuan Yuzi Investment Holding Group Co. became the second Asian investment-grade company that failed to price a dollar-denominated bond offering this week after the 10-year U.S. Treasury yield hit the highest level since 2011. The Chinese local government financial vehicle decided not to proceed with a plan to sell dollar bonds on Thursday because of unfavorable market conditions… A day earlier, developer China Overseas Grand Oceans Group Ltd. also postponed a sale of five-year bonds… With the global borrowing benchmark surging this week combined with rising Libor funding cost, appetite for Asian dollar new issues is weakening…"

May 16 - Bloomberg (Lianting Tu, Carrie Hong and Denise Wee): "A slump in prices of higher-yielding bonds sold by Chinese banks risks spurring margin calls that will exacerbate the declines. Capital instruments sold by Bank of Qingdao Co. and other small Chinese lenders sank below 90 cents on the dollar this month, tumbling faster than other securities as a rise in Treasury yields sent jitters through Asian credit markets. Because the notes were marketed to wealthy individuals as part of structured products and those investors tend to be heavily leveraged, buyers may face margin calls when prices decline to between 80 cents and 90 cents on the dollar, said three people familiar with the debt…"

May 17 - Bloomberg: "The days when only obscure Chinese companies defaulted on their debt are ending. Four of the five issuers that have defaulted for the first time in 2018 are companies with public listings, which used to be regarded as assuring better governance and information disclosure. That's as many by this type of firm as happened in 2014 through 2017… For investors, the change means it's dangerous to make assumptions. 'Our first and foremost task now is to avoid stepping on mines,' says Wang Ming, chief operating officer at Shanghai Yaozhi Asset Management LLP, which oversees 12 billion yuan ($1.9bn) in assets. 'It's increasingly difficult to tell which one will default, which not.'"

China would not face today's degree of fragility had it not fatefully resuscitated Bubble Dynamics back in 2016. EM, as well, would be in a sounder position if it had begun to deal with excess and mounting vulnerabilities. Instead, for both China and EM it's been a case of extending Terminal Phase Excess, with an additional two years of rampant Credit expansion, extraordinary international "hot money" flows, and even deeper structural impairment.

May 17 - Bloomberg (Richard Frost and Emma Dai): "Hong Kong intervened to defend its currency peg for a second day after the city's dollar fell to the weak end of its trading band The Hong Kong Monetary Authority bought HK$9.5 billion ($1.2bn) of local dollars overnight, the third-biggest intervention since the defense began last month. The HKMA mopped up HK$1.57 billion on Wednesday. Lower rates than the U.S. have made the Hong Kong dollar an attractive target for shorting. The de facto central bank has now spent $7.95 billion protecting its currency system, which has the effect of tightening liquidity in a city that's grown fat on ultra-low borrowing costs."

From my vantage point, EM contagion has reached critical mass. There will be ebbs and flows, but we're now on Crisis Watch. De-risking/De-leveraging Dynamics have attained momentum, and the focus will be on waning global market liquidity and the next domino. The process of unwinding EM "carry trade" leverage has commenced. I ponder how much leverage has accumulated throughout Asian debt markets. Hong Kong's Monetary Authority has significant international reserves (over $400bn) to support its faltering currency peg. But I would expect the reversal of "hot money" flows to accelerate, pressuring central banks throughout Asia and EM more generally. To fund outflows, central bankers will be forced sellers of Treasuries (and other sovereign debt). It's worth noting that custody holdings held by the Fed for foreign Treasury holders have dropped $63bn over the past five weeks.

Back in 2015 and 2016, the monthly change in China's international reserves garnered significant market interest. Recall that after peaking at almost $4.0 TN in June 2014, reserves were down to about $3.0 TN by the end of 2016. But between January 2017 and January 2018, China's reserves recovered $160 billion, a significant quantity but still only a fraction of the previous decline. Hinting of a return of outflows, reserves have dropped $36 billion over the past three months.

Is there a big foreign "carry trade" component in Chinese debt instruments - in Hong Kong and the mainland? In the past, I posited "currency peg on steroids" - speculators could leverage in higher yielding Chinese instruments with confidence that Chinese officials would revalue the renminbi higher versus the dollar. The 2015/2016 renminbi devaluation corresponded with huge outflows and the drawdown of China's reserve holdings. Now, for almost 18 months the renminbi has enjoyed another period of managed appreciation - concurrent with a period of global exuberance for EM and Credit more generally. How much "hot money" and leverage was enticed by China's higher yields?

China appears increasingly vulnerable to EM contagion effects. Finance is tightening in EM, in China and globally. Over recent years, China has developed into the prevailing source of EM finance and trade. China and EM interdependency has been instrumental to their respective booms. Now comes the downside. I suspect "hot money" has begun exiting EM at least partially in anticipation of waning trade and financial flows from China. And a faltering EM Bubble certainly has negative ramifications for the increasingly fragile Chinese Bubble. If there is a big "carry trade" in Chinese Credit instruments, it's susceptible.

Previous problems have not gone away - they've instead festered and metastasized. EM debt, the China Bubble, Italy and euro monetary integration, to name just a few. This week was clearly an escalation in global de-risking/de-leveraging dynamics. How much speculative leverage has accumulated (since 2012) in Italian, Greek, Portuguese and Spanish debt? ECB rate manipulation and "money printing" stoked an artificial boom. It's come at a very steep price. Myriad problems associated with a deeply flawed monetary integration are waiting to resurface, as we're witnessing in Italy.

I know it sounds crazy - pure heresy - to most. But there's a shot that the world has commenced a crisis period that will unfold into something more comprehensive and challenging than 2008. And at least in the U.S., financial crisis is the furthest thing from people's minds. Not even on the radar. Not possible.

The VIX closed the week at 13.42. Blue skies as far as eyes can see. But to one that has been chronicling the "global government finance Bubble" now for over nine years, I really worry. Excess became systemic. Deep structural maladjustment - systemic. Global imbalances - unprecedented. The amount of global debt - previously unfathomable. And, deeply concerning, the world has become so much more divisive and hostile over the past decade.

Come the next international crisis, it will not be the U.S. and a group of likeminded global central bankers coordinating a unified policy response. Expect a disparate group of bankers, politicians and strongmen autocrats pointing fingers, making threats and demanding action from others. If they can't after months successfully negotiate trade deals, how are they to respond to crisis dynamics that they are wholly unprepared for.  
But I'm getting ahead of myself. The U.S. economic boom has a head of steam. The small caps traded to record highs this week. To the naked eye, things look sound and sustainable. If only it weren't a Bubble Illusion. The NYT's Kevin Roose this week penned an insightful article, "The Entire Economy Is MoviePass Now. Enjoy It While You Can."

"I've got a great idea for a start-up. Want to hear the pitch? It's called the 75 Cent Dollar Store. We're going to sell dollar bills for 75 cents - no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It'll be huge. You're probably thinking: Wait, won't your store go out of business? Nope. I've got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we'll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we've got plenty of options. If you're still skeptical, I don't blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road. Over all, 76% of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to… Jay Ritter, a professor at the University of Florida's Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81% of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only three had positive earnings per share in the preceding year… The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development… But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential winner-take-all' market."

We've created a Bubble economic structure that will function especially poorly come faltering markets and a tightening of financial conditions.

The Pension Crisis Is Worse Than You Think

by: Lance Roberts
Last year I penned an article discussing the "Unavoidable Pension Crisis."

"Currently, many pension funds, like the one in Houston, are scrambling to slightly lower return rates, issue debt, raise taxes or increase contribution limits to fill some of the gaping holes of underfunded liabilities in their plans. The hope is such measures combined with an ongoing bull market, and increased participant contributions, will heal the plans in the future. 
This is not likely to be the case. 
This problem is not something born of the last 'financial crisis,' but rather the culmination of 20-plus years of financial mismanagement. 
An April 2016 Moody's analysis pegged the total 75-year unfunded liability for all state and local pension plans at $3.5 trillion. That's the amount not covered by current fund assets, future expected contributions, and investment returns at assumed rates ranging from 3.7% to 4.1%. Another calculation from the American Enterprise Institute comes up with $5.2 trillion, presuming that long-term bond yields average 2.6%. 
With employee contribution requirements extremely low, averaging about 15% of payroll, the need to stretch for higher rates of return have put pensions in a precarious position and increases the underfunded status of pensions."

But it is actually worse than we originally thought as Aaron Brown recently penned:

"Today, the hard stop is five to 10 years away, within the career plans of current officials. In the next decade, and probably within five years, some large states are going to face insolvency due to pensions, absent major changes. 
If we extrapolate from the past, rather than use promises in the state budget, current employees plus the state will contribute about $25 billion over those seven years, which could provide another few years before the till is empty. But it will also add around $60 billion of future liabilities to current employees. The system probably breaks down before the pension fund gets to zero, for example if assets were to fall below $30 billion while projected future liabilities exceeded $300 billion. Even the most optimistic people would have to admit the situation is unsustainable. This could happen in three years in a bad stock market, or perhaps 10 with good stock returns. But fund assets are so low relative to payouts that good returns aren't that helpful. 
The next phase of public pension reform will likely be touched off by a stock market decline that creates the real possibility of at least one state fund running out of cash within a couple of years. The math says that tax increases and spending cuts cannot do much."
But the problem is not just in the United States but the mismanagement of assets, combined with irrational and flawed return expectations, has spread globally. Visual Capitalist recently took a look at the global pension problem stating:

"According to an analysis by the World Economic Forum (WEF), there was a combined retirement savings gap in excess of $70 trillion in 2015, spread between eight major economies… 
The WEF says the deficit is growing by $28 billion every 24 hours - and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050, or about five times the size of the global economy today."

"The graphic illuminates a growing problem attached to an aging population (and those that will be supporting it). 
Since social security programs were initially developed, the circumstances around work and retirement have shifted considerably. Life expectancy has risen by three years per decade since the 1940s, and older people are having increasingly long life spans. 
With the retirement age hardly changing in most economies, this longevity means that people are spending longer not working without the savings to justify it. 
This problem is amplified by the size of generations and fertility rates. The population of retirees globally is expected to grow from 1.5 billion to 2.1 billion between 2017-2050, while the number of workers for each retiree is expected to halve from eight to four over the same timeframe. 
The WEF has made clear that the situation is not trivial, likening the scenario to 'financial climate change.' 
Like climate change, some of the early signs of this retirement savings gap can be 'sandbagged for the time being - but if not handled properly in the medium and long-term, the adverse effects could be overwhelming"
While we all want to ignore the problem, it isn't going away. More importantly, there is nothing that can, or will, change the two primary problems fueling the crisis.

Problem #1: Demographics
With pension funds already wrestling with largely underfunded liabilities, the shifting demographics are further complicating funding problems.
One of the primary problems continues to be the decline in the ratio of workers per retiree as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers.) However, this "support ratio" is not only declining in the U.S. but also in much of the developed world. This is due to two demographic factors: increased life expectancy, coupled with a fixed retirement age, and a decrease in the fertility rate.

In 1950, there were 7.2 people aged 20-64 for every person of 65 or over in the OECD countries.

By 1980, the support ratio dropped to 5.1, and by 2010, it was 4.1. It is projected to reach just 2.1 by 2050.
Of course, as I have discussed previously, the problem is that while the "baby boom" generation may be heading towards retirement years, there is little indication a large majority of them will be actually retiring. As Richard Eisenberg recently noted:

"The dark, depressing and sometimes physically painful life of a tribe of men and women in their 50s and 60s who are surviving America in the twenty-first century. Not quite homeless, they are 'houseless,' living in secondhand RVs, trailers and vans and driving from one location to another to pick up seasonal low-wage jobs, if they can get them, with little or no benefits. 
The 'workamper' jobs range from helping harvest sugar beets to flipping burgers at baseball spring training games to Amazon's "CamperForce," seasonal employees who can walk the equivalent of 15 miles a day during Christmas season pulling items off warehouse shelves and then returning to frigid campgrounds at night. Living on less than $1,000 a month, in certain cases, some have no hot showers. 
Many saw their savings wiped out during the Great Recession or were foreclosure victims and, felt they'd spent too long losing a rigged game. Some were laid off from high-paying professional jobs. Few have chosen this life. Few think they can find a way out of it. They're downwardly mobile older Americans in mobile homes."
They, of course, are part of a large majority of individuals being dependent on the various pension systems in retirement, and the ultimate burden will fall on those next in line.

Problem #2: Markets Don't Compound
The biggest problem, however, is the continually perpetrated "lie" that markets compound over time.

Pension computations are performed by actuaries using assumptions regarding current and future demographics, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries, among other variables. The biggest problem, following two major bear markets, and sub-par annualized returns since the turn of the century, is the expected investment return rate.
Using faulty assumptions is the linchpin to the inability to meet future obligations. By over-estimating returns, it has artificially inflated future pension values and reduced the required contribution amounts by individuals and governments paying into the pension system.
It is the same problem for the average American who plans on getting 6-8% return a year on their 401k plan, so why save money? Which explains why 8 out of 10 Americans are woefully underfunded for retirement.
As shown in the long-term, total return, inflation-adjusted chart of the S&P 500 below, the difference between actual and compounded (7% average annual rate) returns are two very different things. The market does NOT return an AVERAGE rate each year and one negative return compounds the future shortfall.

This is the problem that pension funds have run into and refuse to understand.
Pensions STILL have annual investment return assumptions ranging between 7% and 8% even after years of underperformance.
However, the reason assumptions remain high is simple. If these rates were lowered 1-2 percentage points, the required pension contributions from salaries, or via taxation, would increase dramatically. For each point reduction in the assumed rate of return would require roughly a 10% increase in contributions.
For example, if a pension program reduced its investment return rate assumption from 8% to 7%, a person contributing $100 per month to their pension would be required to contribute $110. Since, for many plan participants, particularly unionized workers, increases in contributions are a hard thing to obtain. Therefore, pension managers are pushed to sustain better-than-market return assumptions which requires them to take on more risk.
But therein lies the problem.
The chart below is the S&P 500 TOTAL return from 1995 to present. I have then projected for using variable rates of market returns with cycling bull and bear markets, out to 2060. I have then run projections of 8%, 7%, 6%, 5%, and 4% average rates of return from 1995 out to 2060. (I have made some estimates for slightly lower forward returns due to demographic issues.)

Given real-world return assumptions, pension funds SHOULD lower their return estimates to roughly 3-4% in order to potentially meet future obligations and maintain some solvency.
They won't make such reforms because "plan participants" won't let them. Why? Because:
  1. It would require a 40% increase in contributions by plan participants which they simply cannot afford.
  2. Given that many plan participants will retire LONG before 2060, there simply isn't enough time to solve the issues, and;
  3. The next bear market, as shown, will devastate the plans abilities to meet future obligations without massive reforms immediately.
In a recent note by my friend John Mauldin, he discussed an email Rob Arnott, of Research Affiliates, sent regarding this specific issue.

"If our logic is sound, we earn 0.8% from our bonds (40% allocation x 2% return) and 2% to 3.2% from our stocks (60% x 3.3%, or 60% x 5.4%). Add up the return from stocks and the return from bonds, and we get 2.8% to 4% from our balanced portfolio.
Bottom line … US public service pensions are toast. One of three constituencies gets nailed:
  • The taxpayer (keeping in mind that the affluent are mobile!),
  • The current and/or future pensioners (keep in mind that private-sector pensions are now far less generous than public pensions … there's an inequity here!), or;
  • The public services that are on offer to our citizenry, net of sunk costs from servicing past generations.
Most likely, it'll be a blend of the three."
Exactly right, and the chart above of projected stock market returns agrees with that assumption.

We Are Out Of Time
Currently, 75.4 million Baby Boomers in America - about 26% of the U.S. population - have reached or will reach retirement age between 2011 and 2030. And many of them are public sector employees.
In a 2015 study of public sector organizations, nearly half of the responding organizations stated that they could lose 20% or more of their employees to retirement within the next five years.
Local governments are particularly vulnerable: a full 37% of local government employees were at least 50 years of age in 2015.
It is no surprise that public pension funds are completely overwhelmed, but they still have not come to the realization that markets do not compound at an annual return of 8% annually.

This has led to a continued degradation of funding levels as liabilities continue to pile up.
If the numbers above are right, the unfunded obligations of approximately $4-$5.6 trillion, depending on the estimates, would have to be set aside today such that the principal and interest would cover the program's shortfall between tax revenues and payouts over the next 75 years.
That isn't going to happen.
With rates pushing higher, economic growth slowing and Central Banks extracting liquidity, we are already closer to the next major bear market than not.
The next crisis won't be secluded to just sub-prime auto loans, student loans, and commercial real estate. It will be fueled by the "run on pensions" when "fear" prevails benefits will be lost entirely.
It's an unsolvable problem. It will happen. And, it will devastate many Americans.
It is just a function of time.

Populism Bites Back

Chris Patten

A family of West Indian immigrants arrive to Britain

LONDON – This spring, British Prime Minister Theresa May’s Conservative government is being reminded of just how powerful – and long-lasting – the unintended consequences of policies can be.

Two problems concerning the United Kingdom’s borders – one relating to immigration, the other linked to the frontier with the Republic of Ireland – have lately erupted. While they have not yet weakened support for the government, they probably will. And they are almost certain to diminish what is left of Britain’s soft power.

The immigration problem goes back some seven decades, to the arrival of the first waves of Caribbean immigrants in the UK. They had been invited by the government in the wake of World War II to help offset a labor shortage, taking hard-to-fill jobs in the National Health Service (NHS) and other sectors.

Named “the Windrush generation,” after the first ship that brought them, these immigrants entered the UK on their original passports. As citizens of British colonies, they were legally regarded as citizens of the UK as well. Thus, they did not need to take additional steps to acquire specifically UK citizenship; nor did their children, whose arrival was recorded only on paper landing cards.

Yet the UK government has now decided that these long-time British citizens are not citizens at all, because they lack the proper documentation. An administrative blunder seems to have resulted in the destruction of the old landing cards, which had been stored in crates somewhere at the Home Office.

May’s government is now scrambling to deal with one shameful incident after another. Elderly people have been refused re-entry to the UK – a country that they regard unquestionably as home – after visiting relatives back in countries like Jamaica. Others have been inhumanely detained and denied free NHS treatment, even for cancer.

Britain may not be fundamentally a racist country, but over the last several decades, right-wing nativist politicians have used inflammatory rhetoric to whip up anti-immigrant sentiment, targeting those from South Asia and the West Indies in particular. To name a particularly notorious example, 50 years ago this spring, Enoch Powell, a Conservative member of parliament, delivered his abhorrent “rivers of blood” speech, in which he warned that, within 15 or 20 years, “the black man will have the whip hand over the white man.”

Powell’s inflammatory rhetoric aside, his speech reflected the regular build-up of pressure on politicians to take a tough line on immigration – a process that continues to this day. May’s government now promises not just to reduce illegal immigration, but also to cut overall annual immigration to less than 100,000.

That figure is ludicrously low, amounting to about half the current level of immigration from outside the European Union (another 90,000 per year come from the EU). As if achieving that goal were not already impossible, May insists on counting foreign students as migrants, even though they are in the UK only for the duration of their studies.

But May’s problematic approach to immigration extends back further. In 2013, when she was Home Secretary, she advocated creating a “hostile environment” for illegal immigrants – a policy that many argued poisoned the atmosphere for anyone with darker skin. Political embarrassment mounts.

As for other government ministers, their shame-faced apologies for the Windrush scandal have been all the louder, because the story broke the same week that the heads of government of the Commonwealth met in London for their biennial conference. With reports of Home Office mistreatment of non-Caribbean Commonwealth-born citizens proliferating, indicating that the problem is likely to spread beyond the Windrush group, we can probably expect more apologies.

But managing immigration is hardly the May government’s only border-related challenge. It also must navigate the question of what to do about the UK’s land border with the Republic of Ireland after Britain withdraws from the EU.

When the May government announced its commitment to follow through with Brexit, it made clear that it would also depart the Single Market and the customs union, without thinking through the implications for the UK’s borders. That decision was in no way required by the result of the Brexit referendum in June 2016. Instead, that self-imposed red line, like the referendum itself, was meant simply to appease the Conservative Party’s most right-wing elements.

Such a “hard Brexit” would have serious consequences for the British economy. Customs unions typically bring together neighboring countries, which then trade across tariff- and quota-free frontiers and apply common tariffs for trade with other countries. There have been several customs unions around the world, but none as successful as the EU’s.

May’s government has said that leaving the customs union will enable the UK to make its own trade deals. But, as an EU member, it already has access to about 70% of the world’s markets on favorable terms. It is unclear how May’s government thinks the UK can do better on its own.

Making matters worse, as May herself declared when she was campaigning for the Remain camp ahead of the referendum, there is no such thing as a virtual border between countries with different tariffs. If the UK, including Northern Ireland, is out of the customs union, and the Republic of Ireland is still in, there will have to be a hard border.

Yet such a border risks undermining the Good Friday Agreement that has underpinned peace in Northern Ireland for two decades. And May’s government has proposed no plausible alternative solution for managing the relationship between two different customs regimes without a border.

Political posturing is often expedient. But May’s government is now being reminded daily of the far-reaching consequences of staking out positions that lack any meaningful regard for the future.

Chris Patten, the last British governor of Hong Kong and a former EU commissioner for external affairs, is Chancellor of the University of Oxford.

How Strenuous Exercise Affects Our Immune System


     Credit Michal Klag/EPA, via Shutterstock 

If you have ever run a marathon, you know that the effort can cause elation, exhaustion, achy legs, blackened toenails and an overwhelming urge to eat.

But it is unlikely to have made you vulnerable to colds or other illnesses afterward, according to a myth-busting new review of the latest science about immunity and endurance exercise.

The review concludes that, contrary to widespread belief, a long, tiring workout or race can amplify immune responses, not suppress them.

For decades, most researchers, coaches, athletes and athletes’ mothers have been convinced that a single long, hard distance race or other strenuous activity can leave the body so fatigued that it becomes unable to fight off cold viruses and other microbes that cause infections. 
Science supported this idea. Beginning in the 1980s, a number of studies of marathon and ultramarathon runners had found that many of them reported developing colds in the days and weeks immediately after their race. Their incidence of illness was much higher than among their nonrunning family members or the general population.
With those findings as a backdrop, other scientists began to look at the working of the immune systems of athletes during and after draining events. Their research showed that changes occurred, some of them drastic. During an event such as a marathon, for instance, immune cells would begin to flood the bloodstreams of the athletes, apparently flushed there from other parts of the body as heart rates rose and blood sluiced more forcefully through various tissues.

By the time the race ended, the runners’ bloodstreams would teem with extra immune cells.

But within a few hours, the numbers of many such immune cells in the bloodstream would crash, researchers found, typically falling to levels far lower than before the event.

The scientists interpreted these findings to mean that the runners’ physical exertions had killed large numbers of their immune cells and created what some researchers dubbed an “open window” of immune suppression that could allow opportunistic germs to creep in, unopposed.

That idea became established doctrine in exercise science and sports.

But recently, health researchers at the University of Bath in England grew skeptical. From an evolutionary standpoint, they reasoned, immune suppression after strenuous exercise made little sense. Early humans often had to chase prey or flee predators, opening themselves to injury. If they experienced a weakened immune response at the same time, they were in serious jeopardy.

The researchers also suspected that scientific techniques developed since the 1980s might offer updated insights into what was going on inside the bodies of tired athletes.

So for the new review, which was published this month in Frontiers in Immunology, they gathered and analyzed a wide variety of recent studies and used those findings to reconsider what exercise does to immunity in the short term.

Their first conclusion was that athletes are lousy at identifying whether and why they are sniffling. The original 1980s studies had relied on runners’ self-reports of illness. But newer experiments that actually tested saliva showed that less than a third of marathon runners who thought they had caught a cold actually had. Statistically, their odds of becoming sick were about the same as for anyone else in the race’s host city.

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The athletes probably had misinterpreted allergies or short-term scratchiness in their airways after the race as a cold, says John Campbell, a professor at the University of Bath who was a co-author of the new review.
Meanwhile, the researchers found, technically sophisticated new studies using animals undercut other aspects of the dogma about exercise and immunity.

In these studies, mouse immune cells were dyed, allowing scientists to track their location. When the mice subsequently ran, many of the cells moved out of various tissues and into the bloodstream, as happens in people.

But after exercise, these cells did not die off in massive numbers. Instead, the tracking revealed, they moved elsewhere, migrating to the animals’ guts or lungs, portions of the body that might be expected to need extra immune help after hard exercise. A few immune cells also flowed into the bone marrow, where they were thought to spark specialized stem cells into creating additional immune cells.

In essence, the rodents’ immune systems had bolstered their defenses in vulnerable areas of the body after exercise by redirecting cells from the blood.

Whether the same migrations take place inside of us is still unknown.

“Live tracking of immune cells after exercise has not been done in people,” says James Turner, the review’s co-author and also a professor at the University of Bath.

But he and Dr. Campbell suspect that this scenario would explain how immune-cell levels in marathoners’ blood rise back to normal within about 24 hours after a race.

“The body can’t replace cells that quickly,” Dr. Turner says. So they must be returning to the blood from elsewhere.

He and Dr. Campbell hope that future experiments will follow human athletes’ peripatetic immune cells after exercise and track how they influence health.

But for now, the researchers would like their review to help to recalibrate our ideas about strenuous exercise and illness.
“People should not be put off exercising for fear of it suppressing their immune system,” Dr. Campbell says. “Exercise is good for the immune system.”

What Sparked Russia’s Gold Buying Spree?

By Charles Benavidez


Russia has scooped up another 300,000 ounces of gold the past month, according to Gold Seek, boosting is ever-growing reserves to 1,890 tonnes and coming that much closer to colluding with China to destabilize the dollar by dumping dollar-denominated assets.

China now has 1,842 tonnes of gold in reserve, based on official reported figures, but Beijing and Moscow aren’t the only dollar-targeting gold holders on the planet. It’s a trend now—and a growing one.

Globally, some 30 percent of all developed country reserves are stored in gold, with the U.S. holding 8,000 metric tonnes, followed by Germany with 3,000 metric tonnes and France and Italy with 2,500 metric tonnes each. That puts Russia in fifth place and China in sixth.

(Click to enlarge)

Russian gold miners produce some 300 tonnes a year, and the Central Bank buys almost all of that.

Russia has been on a major gold-buying spree for nearly a year, and it usually follows sanctions, and it’s all about developing a system in which the dollar won’t be necessary, as Russian news agency Pravda puts it.

“Interestingly, both Russia and China publicize and promote their accumulations of gold and publicly refer to gold as a strategic monetary asset. They make no secret of this. But on the flipside, the US does the opposite, and constantly downplays the strategic role of gold,” Singapore’s BullionStar precious metals expert Ronan Manly told RT in December.

Last year, Russia’s gold hoarding hit fever pitch:

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Source: Bloomberg

This year will be more of the same, and all the more reason.

Countries aren’t just hoarding gold as a hedge against fears of financial collapse and geopolitical upheaval, they are also—amid increasing interest rates--withdrawing it from the U.S. Federal Reserve System—bringing it all back home.

The Turkish Central Bank has been withdrawing its gold reserves from the US Federal Reserve System and repatriating it, according to the World Gold Council. Turkey is among the top 10 gold reserve holders in the world, and the second-largest sovereign buyer now, after Russia. 

This is something new for Turkey, which has traditionally tried to keep its gold reserves at a fixed level and boost foreign exchange. The shift in strategy might be indicative of fears of possible U.S. sanctions, particularly over the Iran sanctions-busting case surrounding banker Reza Zarrab.

In the first week of April, according to Al-Monitor, Turkey’s central bank’s gross foreign exchange reserves dropped to $83 billion from $84.7 billion the previous week, while gold reserves stood at around $25.3 billion.

Earlier this month, the Turkish president said that international loans should be based on gold rather than dollars: “Why do you have to make the loans in dollars? Let’s base the loans on gold. We need to rid states and nations of exchange rate pressure. Throughout history, gold has never been a means of pressure.” 

Others are also repatriating their gold, including Germany and the Netherlands, and many believe it’s because there’s fear in the air, and widespread anxiety about the dollar’s outlook under the Trump administration.