Trump’s Last Stand

By: Peter Schiff

General George Custer met his doom charging into a battle he thought he could win, against an opponent he did not understand. Based on his views about the fast-emerging trade war with China, it looks to me that Donald Trump, another blonde with a very high opinion of himself, is charging into an economic version of the Little Bighorn. By mistaking the real nature of international trade, the costs of tariffs, the effects of currency movements, and the supposed ease with which the United States could quickly re-establish itself as a low-cost manufacturer, Trump risks shredding the safety nets that have undergirded the U.S. economy for decades and plunging us into a war we are ill-equipped to fight.

The prevailing view is that a trade war hurts both sides, but in a war of attrition, we can both outpunch and outlast the competition. Many argue that based on its smaller economy, the spotty performance of its stock market, and its vital need for American customers, China is in a weaker position. With our larger economy, surging stock market, strong currency, and prodigious borrowing capacity they believe that the U.S. can pressure China to capitulate, albeit with some short-term pain.

But President Trump goes much further, and asserts that a trade war itself, not just the results that may flow from it, will be a boon to America. He believes that tariffs are currently boosting growth and are restoring our manufacturing prowess. Based on his rhetoric, it’s hard to imagine why we would ever want a trade war to end. CNBC’s Jim Cramer went one step further, arguing that tariffs may place a small burden on U.S. consumers but Chinese manufacturers will cut prices in order to preserve U.S. market share. In other words, China will throw itself on a grenade meant for us by bearing the cost of the tariffs, and their expenditures will flow directly into U.S. coffers.

Many are also arguing that China’s potentially heaviest weapon, its ability to dump more than $1 trillion in U.S. Treasury Bonds onto the open market, is unlikely ever to be used. They argue that such selling could cost China too dearly as it would reduce the value of China’s own Treasury holdings and strengthen China’s currency against the dollar, thereby further disadvantaging Chinese exporters looking for U.S. market share.

Before I delve into the emptiness of these arguments about tariffs and Treasuries, a quick word about Trump’s negotiating skill and his potential motivation. For weeks, he has been saying that the Chinese have been dragging their feet because “they were being beaten so badly” in the negotiations. Basic tactics would suggest that a way to get your adversaries to agree to a deal that is not in their interest is to convince them that it is in their interest. By saying loudly that the deal favors the U.S., Trump is not exactly pushing them over the finish line. In my mind, Trump may not want the agreement. He may just want the war instead. More importantly, the economic uncertainty could force the Federal Reserve to cut interest rates, which may be his most desired outcome.

While it is true that the Chinese have illegally appropriated huge quantities of American intellectual property, I believe that we have received greater benefits in return. Without the cheap goods produced in China, prices may very well have been much higher for vast quantities of key products for U.S. consumers. And without Chinese purchases of U.S. debt, interest rates could have been much higher, making borrowing more expensive for both businesses and consumers. It’s hard to quantify just how important these benefits have been for an economy such as ours, which has been driven for decades by borrowing and spending.

Trump believes that tariffs are weapons, and that since there are many more Chinese products than American products to target, that we have an inherent advantage. But tariffs are weapons that hurt your own people. Slapping federal taxes on imported products simply means that U.S. consumers will pay more for the things they want. (Contrary to Jim Cramer’s wild optimism, the Chinese will not discount for Americans when other customers can pay in full.) Trump downplays these fears by saying it would be very easy for Americans to avoid higher prices by bringing manufacturing back home, where tariffs won’t apply. He seems to believe American firms that have relied on foreign production for decades can just start producing domestically. This is a fantasy.

Take for instance an American company like Nike. The Oregon-based footwear behemoth employs 70,000 American workers in product design, sales, marketing, finance, operations, strategic development, and R&D. But the company hasn’t mass-manufactured footwear in the U.S. in decades. That task has fallen largely to the Chinese and other South East Asian nations. What would it take for Nike to begin manufacturing millions of pairs of athletic footwear in the U.S?

Currently no such facilities exist domestically, so they would have to be built. That would take years, and be a real cost. Where would Nike get the money? It might have to cancel its share buybacks, or issue new share offerings to raise money to fund the capital expenditures. If this were to happen at a time of falling profits, its share price might drop. If all U.S. companies now relying on imports did likewise, what impact might that have on the stock market?

But more importantly, factories don’t exist in a vacuum. They need to be linked to a supply chain. Large quantities of rubber, leather, vinyl and cotton would need to be delivered to the factory. And if those materials don’t exist in adequate supply, other factories that could produce them would need to be built as well, substantially raising the cost to the U.S. economy. But more than just the cost, it’s the time it would take. This is not something that happens quickly. And when Nike gets up and running, assuming it had survived years of low production, it would be very hard-pressed to produce its shoes at its current costs. If all U.S. companies did this at once, consumer prices could surge and retail sales fall. But the long hoped-for manufacturing jobs could be slow to materialize.

In contrast to how difficult and painful it could be for the U.S. to ramp up domestic production, it may prove relatively easy for China to ramp up domestic consumption. Suppose Nike stopped producing sneakers in China, and abandoned the facilities it once used. The workers, the factory and the supply chain would still exist. New owners could move in, take over, and begin producing sneakers. If the U.S. market were closed to that production, the new owners would have to find customers elsewhere. I assume that Chinese consumers have feet (maybe a bit smaller), and would appreciate cool-looking sneakers.

Mainstream analysts argue that China simply doesn’t have the purchasing power to replace America’s consumptive capacity. But purchasing power is largely a function of currency valuation. And if the Chinese currency were to rise in value, Chinese consumers would then be able to buy more. Which brings us to the next issue, Chinese dollar reserves. By selling their reserves, China can strengthen its currency, and help to build the domestic economy that it has long desired.

Contrary to the current consensus, I think there may be a sharp and sudden selling of U.S. Treasuries by China, which would hurt the U.S. and benefit China. Selling Treasuries could push up long-term interest rates in the U.S. and weaken the dollar, possibly generating inflation and slowing the economy. Americans would face much higher prices for goods and would have to pay more to borrow to buy homes and cars, or to build businesses. This might force the Fed to deliver greater monetary stimulus as the economy slowed, further weakening the dollar, and putting the U.S. into a possibly dangerous inflationary spiral. The countless benefits that accrue to Americans as a result of a strong dollar would be lost.

Conversely, dumping its cache of more than $1 trillion in Treasuries could strengthen the RMB. But a strong currency is precisely what China needs to drive domestic consumption and lessen its “dependence” on exports. This has been its stated economic goal anyway. A cheap currency may help exports, but a strong currency empowers domestic consumption. Such a move could help China mature into a healthier and more balanced economy.

However, there is an added benefit to China from selling Treasuries (or merely allowing them to mature without rolling over the principal). All of those savings currently being loaned to the U.S. government would then be available to finance its domestic projects. The extra capital at home could allow China to increase production even further to meet the increased consumption demands of a rapidly growing middle class enriched by the increased purchasing power of their savings and wages.

But it’s not just China that could dump Treasuries and enjoy the possible twin benefits of increased purchasing power and domestic investment, but the rest of the world as well, particularly South East Asia. That entire region might witness the benefits if local trade, investment, and consumption all rose. Countries might no longer compete to debase their currencies to preserve market share in the U.S., but allow their currencies to rise, engendering the possibility for increased domestic investment and consumption.

So not only does Trump risk blowing America’s great deal with China, but with the entire world. The dollar’s role as the reserve currency could be lost, as would the artificially high living standards it has produced. Americans would finally be forced to live within their highly diminished means. Borrowing would have to be financed from the shallow pool of domestic savings, and consumption would be limited by domestic production, as imports would have to be paid for with exports of real products rather than mere paper dollars.

While Custer believed blindly in his own invincibility, in the end he was only a general with about 300 unlucky cavalrymen under his command. But his defeat was just a temporary setback, as the weight of the American economy ultimately overwhelmed the Native Americans’ ability to defend their traditional way of life. While Trump’s blunder will be equally as foolish as Custer’s, this time it’s the modern American way of life that may be lost.

The trouble with tech unicorns

Tech’s new stars have it all—except a path to high profits

Millions of users, cool brands and charismatic bosses are not enough

INVESTORS OFTEN describe the world of business in terms of animals, such as bears, bulls, hawks, doves and dogs. Right now, mere ponies are being presented as unicorns: privately held tech firms worth over $1bn that are supposedly strong and world-beating—miraculous almost. Next month Uber will raise some $10bn in what may turn out to be this year’s biggest initial public offering (IPO). It will be America’s third-biggest-ever tech IPO, after Alibaba and Facebook. Airbnb and WeWork could follow Lyft, which has already floated, and Pinterest, which was set to do so as The Economist went to press. In China, an IPO wave that began last year rumbles on. Thanks to fashionable products and armies of users, these firms have a total valuation in the hundreds of billions of dollars. They and their venture-capital (VC) backers are rushing to sell shares at high prices to mutual funds and pension schemes run for ordinary people. There is, however, a problem with the unicorns: their business models.

As we report this week, a dozen unicorns that have listed, or are likely to, posted combined losses of $14bn last year. Their cumulative losses are $47bn (see Briefing). Their services, from ride-hailing to office rental, are often deeply discounted in order to supercharge revenue growth. The justification for this is the Silicon Valley doctrine of “blitzscaling” in order to conquer “winner-takes-all” markets—or in plain English, conducting a high-speed land grab in the hope of finding gold. 
Yet some unicorns lack the economies of scale and barriers to entry that their promoters proclaim. At the same time, tighter regulation will constrain their freedom to move fast and break things. Investors should demand lower prices in the IPOs, or stay away. Tech entrepreneurs and their backers need to rethink what has become an unsustainable approach to building firms and commercialising ideas.

Today’s unicorn-breeding industry would not have been possible 25 years ago. In 1994 only $6bn flowed into VC funds, which doled out cheques in the single-digit millions. Before Amazon staged its IPO in 1997 it had raised a total of only $10m. Three things changed. Growing fast became easier thanks to cloud computing, smartphones and social media, which let startups spread rapidly around the world. Low interest rates left investors chasing returns. And a tiny elite of superstar firms, including Google, Facebook and China’s Alibaba and Tencent, proved that huge markets, high profits and natural monopolies, along with limited physical assets and light regulation, were the secret to untold riches. Suddenly tech became all about applying this magic formula to as many industries as possible, using piles of money to speed up the process.

Make no mistake, the unicorns are more substantial than the turkeys of the 2000 tech bubble, such as, which went bust ten months after its IPO. Ride apps are more convenient than taxis, food delivery is lightning quick, and streaming music is better than downloading files. Like Google and Alibaba, the unicorns have large user bases. Their core businesses can avoid owning physical assets by outsourcing their IT to cloud providers. As IPO documents point out, their sales are growing fast.

The big worry is that their losses reflect not temporary growing pains but markets which are contested and customers who are promiscuous. In the key digital monopolies, the network becomes more valuable to each user the more people use it—hence Facebook’s 67% market share in social networking. The unicorns’ dynamics are not as compelling. Despite subsidies, ride-sharing customers are not locked in to one firm. No wonder Lyft’s shares have fallen by over 20% below their IPO price. Anyone can lease an office and rent out desks, not just WeWork. Some unicorns have to fight other richly funded rivals and established firms. Spotify, which listed in 2018, has a 34% share of music streaming in America and is going head-to-head with Apple.

Because the unicorns’ markets are contested, margins have not consistently improved, despite fast-rising sales. Managers are terrified of cutting their vast marketing spending, for fear of losing customers. Many firms are scrambling to develop ancillary products to try to make money from their users. And without deep moats around their businesses a permanent question-mark hangs over the unicorns: if Uber really is worth $100bn, after investing only $15bn or so, why wouldn’t its rivals keep trying their luck, or an established tech giant be tempted in?

External forces will make blitzscaling harder, too. The earlier generation of firms did not face many rules—few legislators had imagined the internet—so they could charge ahead first and beg forgiveness later. The unicorns followed suit: Airbnb sidestepped taxes on hotels and Uber drove through regulations on taxi-licensing. Today a reaction is in full swing, including over digital taxes and data and content laws. The unicorns’ investor circulars have pages dedicated to their legal dangers and gory regulatory risks.

All this is good for consumers. Money is being thrown at them; the subsidy to the public from the dozen firms amounts to $20bn a year. Whereas the commanding heights of the tech industry, such as search and social media, have been monopolised, the unicorns are at least creating competition in other areas.

Investors, meanwhile, need to hold their nerve. It is tempting to extrapolate the triumph of Google and Alibaba to an entire new group of firms. In fact, most unicorns face a long war of attrition and soggy margins. Eventually, struggling firms may be bought. And here another risk arises: most unicorns cap outside investors’ voting rights (Uber is an exception), and many have “poison pills” too, making takeovers hard and constraining investors’ ability to intervene if the firms do not eventually find a way to make enough profits to justify their IPO valuations.

And what of Silicon Valley and China’s bustling tech hubs, where the unicorn idea was dreamed up? Billions of dollars are flowing to VCs, tech founders and employees. The familiar question is how many luxury homes, philanthropic vanity projects and personal space programmes they will pay for. The urgent question is how this capital will be recycled into new technology firms. The blitzscale philosophy of buying customers at any price is peaking. After the unicorns, a new and more convincing species of startup will have to be engineered.

Bond sales running at record pace

Issuance reaches $747bn, a record in the year to date, on the back of corporate debt sales

Chelsea Bruce-Lockhart in London and Joe Rennison in New York

Bond sales are booming in 2019, running at a record pace globally for the year so far, as a pivot in monetary policy among the world’s central banks prompts a fresh binge in corporate borrowing.

Global corporate bond issuance has reached almost $747bn for the year to Monday, according to data from Dealogic, edging ahead of the previous record of $734bn issued over the same time period in 2017, which ended up being the biggest year on record for new debt sales.

A sharp U-turn in global monetary policy, with the Federal Reserve pausing further interest rate increases in the US and the European Central Bank committing to reviving growth, has breathed life into corporate debt markets.

“It is clear that the credit cycle and debtors have been given a reprieve due to the dramatic reversal from the likes of the Fed and ECB,” said Kristina Hooper, chief global market strategist at Invesco. “Central banks have moved almost in lockstep in terms of changing their policy stance.”

After a period of policy tightening, the shift among central banks spells a return to the ultra-accommodative approach that boosted debt issuance in the years after the financial crisis and prompted companies to take advantage of low interest rates by borrowing more from investors.

The scale of indebtedness has caused concern among some policymakers and investors, with the International Monetary Fund warning this month that it could “amplify” an economic downturn.

In the US, the growth of lower-rated, “triple-B” company debt has caused particular consternation, with some of the most indebted companies committing to a debt diet in 2019 in an attempt to reduce leverage. On Monday, AT&T sold 9.5 per cent stake in television streaming service Hulu back to the company for $1.43bn, committing to use the funds to pay down debt.

The moderation of large US companies issuing new debt has tilted new sales towards the rest of the world, with companies like state-owned oil group Saudi Aramco and Belgian brewer Anheuser-Busch InBev in the market with bumper deals this year.

“It looked like that party had ended but now we have a stay of execution and we are seeing a revival of global bond issuance,” said Ms Hooper.

Oil, Hot Stocks, and Currencies – Part III

Chris Vermeulen
Technical Traders Ltd.

In our continued effort to help skilled traders/investors understand the future risks associated with geopolitical market turmoil, the EU Elections next week and the continued US/China trade war, this Part III of our Sector Rotation article will highlight certain sectors that we believe may continue to perform over the next 12 to 24+ months and help traders/investors survive any extended price volatility/rotation over that same time. Read Part I, and Part II.

Currently, the US stock market has weathered a bit of a jolt in terms of price rotation.  After many stock indexes reached new all-time highs, the news of Iran Oil Sanctions, US/China trade talks failing and the political turmoil in DC as an incredible 2020 US Presidential election cycle heats up,

Investors are watching the markets for any signs of strength or weakness.  Meanwhile, the US Dollar continues to strengthen against other global currencies in an incredible show of “King Dollar” strength and dominance.  All of this plays into one of our favorite narratives that we started discussing over 30 months ago – the Global Capital Shift.

For those of you who remember our many articles about this global market phenomenon and the root causes of it, we’ll try to keep the following example/explanation of it fairly short.  For those of you that are new to our research, please allow us to try to explain the Capital Shift event and why it is important to understand.

The Capital Shift started after the 2008-09 global credit market collapse.  The US and many other nations created an easy money policy that was designed to spark investment and recovery across the globe.  This easy money, at first, supported failing companies and governments in order to maintain social order and structure.  After that process was completed, this capital went to work investing in under-valued global markets and assets.  As prices continued to rise and the easy money policies became rooted into the social structure, the hunt for greater returns rotated throughout the planet – diving into undervalued markets and opportunities, often with no regard for risk.

After 2014, things began to change in the US and throughout the planet.  The US entered a period of extended sideways trading that caused many investors to reconsider the “buy the dip” mentality.  In 2014-15, China initiated “capital controls” in an effort to prevent outflows of capital from a newly rich population and corporate structure.  Just before 2014, the Emerging Markets went through a period of pricing collapse which was associated with over-inflated expectations and $100+ oil.  All of that started changing in 2014~2016 as Oil prices collapsed – taking with it the expectations and promises of many Emerging Market investors and speculators.

This shifting of capital in search of “returns with a moderate degree of risk” is what we are calling the “Capital Shift Event”.  It is still taking place and it is our opinion that the US stock market will become the central focus of global capital investment over the next 4+ years.  We believe the strength of the US Dollar and the strength of the US Stock Market/US Economy will drive future capital investment into US and other US Associated major markets in an attempt to avoid risks associated with the foreign market and currency market valuations.  In other words, when the crap starts flying across the globe, cash will rush into the US and other safe-haven investments to protect real value.

Currently, the potential for another price decline in Crude Oil is rather strong with our research expecting a move back below $55 ppb over the next 4+ months.  We believe a further economic contraction across the globe with a very strong potential for increased price volatility will drive Oil prices back below $55 with a very strong potential for prices to settle near $46~48 before the downward trend is completed.

The potential for some type of price contraction over the next 12+ months will be related to how the global and localized economic concerns play out over the next 24+ months.  Yet, investors can prepare for these extended price rotations now by becoming aware of weakening price trends and the potential that certain sectors will likely be hit harder than others.  For example, the most recent price weakness in the US stock market appears to be focused in certain sectors:

Technology, Semiconductors, Scientific Instruments, Financials, Asset Management, Property Management, Banking (Generally all over the US), Consumer Goods – Electronics, Airlines, Mail Order Services, Industrial Goods, Aerospace/Defense, Farming and Farming Supply, Medical Laboratories, Medical Appliances, Oil & Gas and others.  This type of market contraction is fairly common in an early stage Commodity and Industrial economic slowdown.

The sectors that are improving over the past week are : Healthcare, Electric Utilities, Diversified Utilities, Gas Utilities, Consumer Personal Products, Consumer Confectioners, Cigarettes, Entertainment, Beverages and Soft Drinks, Meat Products, Specialty Eateries, REITS (almost all types), Credit Services, Telecom and Telecom/Communication Services.

All of these are protectionist rallies based on the US/China trade war and the market rotation away from Technology/manufacturing growth and into more consumer protectionist spending mode – where the consumer and larger firms focus on core items while expecting a mild recession within the economy.  All of this is very common at this time within the US Presidential Election cycle.  In fact, our researchers have shown that nearly 80% of the time when a major US presidential election is taking place, the US stock markets will decline within the 24 months prior to the election date.

The Monthly S&P heat map is not much different.  It is still showing weakness where we expect and strength in sectors that have been somewhat dormant over the past 4+ years.  The key to success for skilled traders is to be able to play this future price rotation very effectively as the different sectors continue to rotate headed into the 2020 US Presidential Elections and with all of the external foreign market factors taking place.

It is quite likely that the US Dollar will continue to push high, possibly well above $102, before finding any real resistance.  It is very likely that most of the US stock market will fair quite well over the next 24+ months – yet we do expect some extended price rotation over this time and we believe Technology, Financials, Real estate, and Industrial/Consumer related stock sectors could take a hit over the next 16 to 24 months.  These rotations are, again, common for this type of US Presidential Election cycle.  Skilled traders are already aware of this cycle and have begun to prepare for this event to unfold.  The unknowns of the current global market is China and the EU at present.

And with that last US Dollar chart, there you have it.  Our three-part article about how the Global Capital Shift is about to intensify and continue to drive a US Sector rotation that many traders have failed to consider.  The EU elections, the US/China trade wars, and the US Presidential Election event are all big factors in what we believe will drive in an increased level of uncertainty over the next 16~24 months.  Additionally, we are very concerned that China is very close to experiencing what we are calling a “broken backbone” over the next 12+ months.  We believe the pricing pressures in combination with a slowing economy and a consumer move into a protectionist stance could create a waterfall event in China/Asia.

Our advice for traders is to protect open long positions and to prepare for 16 to 36 months of “repositioning” of the global markets.  The US elections are certain to drive an incredible range of future expectations throughout the world.  Combine that with the EU elections, the BREXIT effort and the continued repositioning of US/China/Foreign market relations and we are setting up for a big shock-wave event in the near future.

US vs. Global Sector Rotation – What Next? Part 1


Our research team, at, have been pouring over the charts and data to identify what is likely to happen over the next 60+ days in terms of global stock market volatility vs. the US stock market expectations.  Recently, we posted a research article highlighting our Adaptive Dynamic Learning (ADL) predictive modeling system on the Transportation Index (  This research suggests we are still going to experience increased price volatility over the next 30 to 60+ days and that price rotation may become somewhat of a normal expectation throughout the rest of 2019.

We believe the key to understanding price volatility over the next 30+ days lies in understanding the potential causes of uncertainty and capital shifts that are taking place around the globe.

Next week, On May 23~26, 2019, the European Elections take place (  This voting encompasses all 26 EU nations where all 753 European Parliament seats may come into question.  The biggest issues are BREXIT and continue EU leadership and economic opportunities for members.  The contentious pre and post-election rancor could drive wild price swings in the global markets over the next 10+ days.

A tough stance between both nations, the United States and China, have left trade talks completely unresolved (  At this point, the currency market is attempting to absorb much of the future expectations while the US/China stock markets react to immediate news events and perceived future economic outcomes.  Overall, until this issue is resolved for both nations, the news cycles will likely drive increased price volatility across the global markets.

The US 2020 Presidential Elections are ramping up with over 24 Democratic potentials attempting to unseat President Trump.  The current new from DC regarding the continued DOJ investigations and political posturing regarding Barr, Nadler and a host of other DC actors is setting up for a “cliff hanger” outcome over the next 12+ months.  This will likely become one of the most hotly contested US Presidential election events in decades.  The news of investigations, political corruption, and a potential US political “coup” attempt is certain to keep everyone guessing over the next 2+ years.

The markets are reacting to this volatility by attempting to adjust valuations expectations and future economic outcomes in multiple forms; currency price valuations (attempting to adjust to a shifting future economic landscape as well as to attempt to mitigate risk/capital/credit issues), Stock Market price valuations (attempting to further mitigate risk/capital and credit issues, and debt rates (attempting to effectively price risk and output expectations for the future).

Here is a map of the Currency Market over the past 12 months.  We can see the dramatic shift that has taken place since the price peak in February 2018.

Overall, the US Dollar has continued to strengthen over the past 12+ months and is regaining the “King Dollar” status as the global uncertainty continue to plague foreign and EU markets. 

We don’t expect this to change in the near future.

Our continued research into the current price rotation in the US and global markets suggest that we are going to continue to experience moderately high price volatility across all markets over the next 30 to 60+ days – possibly well into the end of 2019.  As we suggested, above, the uncertainty relating to the multiple election events and global trade/geopolitical events do not present a foundation of calm and collected future guidance.  The only thing we can suggest regarding these future expectations is that the US and more mature global markets should be able to navigate these uncertain times much more effectively than emerging or “at risk” foreign markets.

Below, you will see a global Heat-Map spanning one week.  Traders should take special notice that certain EU countries are surviving the recent global price rotation quite well (France, Netherlands, Switzerland, Ireland, Germany, and others).  We believe this is the result of the fact that these economies are rather mature and consistent in their output and expectations. 

Pay attention to the South American, Asian and Caribbean nations.  It would appear that a fairly strong price contraction is taking place throughout much of these nations as the focus shifts towards the more mature markets.

The following One Month global Heat-Map highlights a slightly different economic picture for some nations, yet confirms the shorter-term (weekly) trends for many others.  Bermuda, Cayman, Germany, and Switzerland appear to be the Bullish Leaders over the past 30 days while the rest of the globe appears to be slipping into Bearish price trends.  Canada and the UK appear moderately mixed with some green showing on the heat-map – which would be expected as both of these nations are considered mature global economies with strong economic ties to the US.

We believe the next 10~30+ days are going to be filled with moderate price volatility and we expect a setup in the global markets, near the end of June 2019, where a massive price volatility explosion may take place.  This could be correlated with some trade issue, some fallout of the EU elections or some breakdown in credit/debt risks taking place between now and September 2019.  We’ll go into more detail in Part II of this research post.

This is proving to be an incredible trading year for traders who follow our trade alerts newsletter.

Contactless spending continues to soar

Nearly £6bn worth of ‘tap and pay’ transactions in February alone

James Pickford

What does the chart show?

It illustrates the onward march of contactless card transactions, the now ubiquitous technology which allows “tap and pay” payments to be made using a debit or credit card. In the past five years, the number of monthly contactless transactions in the UK has rocketed from 14m in February 2014 to 644m in February 2019.

The latest monthly figures for contactless transactions, published this week by UK Finance, were 20.6 per cent up on February last year. A similar rise was registered for the value of transactions, which jumped by 19.8 per cent to £5.9bn compared with February 2018.

Is it likely to continue going up?

The trend is rising in the medium term, but the February figures are slightly lower than those for December. Some believe the growth in contactless will fall off as people get used to using their smartphones to make payments and other financial tasks.

UK Finance, which represents banks and other financial services providers, has no truck with this. It thinks the rise will continue for a lot longer yet and predicts that 36 per cent of all payments will be made via contactless cards by 2027, up from 15 per cent in 2017.

Eric Leenders, UK Finance managing director of personal finance, said in March: “Many of us are now reaching for our cards or mobiles rather than cash to make low-value purchases, as customers opt for the convenience and security of paying with contactless.”

How much is debit vs credit card spending?

The great majority of contactless payments — 85 per cent is spent via debit cards. The rise in debit card usage has also come alongside a fall in the use of cash to make payments, with debit cards overtaking cash for the first time in 2017 as the most frequently used means of payment. Debit card usage is expected to grow faster than any other payment method over the next decade.

UK Finance noted this year that there had been an increase in credit card use, but the slowing growth in outstanding balances suggested consumers were using credit cards for day-to-day spending rather than borrowing.

Is fraud a problem?

Yes, and the sheer variety of card frauds is sobering. Thieves could steal cards, using them up to the £30 contactless limit as often as possible before the card is stopped. Card details may also be extracted by criminals when the owner makes an online payment or responds to an unsolicited email or telephone call, usually as they are fooled into thinking the respondent is a trusted person such as a police officer or solicitor.

Hackers may also be able to tap into a network or computer and siphon off card details.

Fraudsters may also skim details from a card reader, clone cards or open an card account in someone else’s name, having stolen their personal information.

So-called remote purchase fraud, carried out when the card owner still has the card in their possession, account for most card fraud, covering 72 per cent of the total in 2017.

However, the most recent industry figures showed an 8 per cent fall in fraud losses on UK-issued cards, which totalled £566m in 2017 — the first decline for six years. At a time when total spending on all debit and credit cards hit £755bn, the industry says this reflected its efforts to combat fraud through high-tech security tools and quicker responses when fraud is reported.

China’s Job Market Blues

Weak employment indicators complicate the task of investors looking to play the rebound in Chinese growth

By Nathaniel Taplin

American politicians have complained for years about China and other low-cost producers stealing U.S. jobs. Now the shoe is on the other foot, complicating the task of investors looking to play a Chinese growth rebound.

The U.S. job market is at its best, by some measures, since the 1970s. Meanwhile, Chinese workers are being hit by a slowdown in labor-intensive exports and the lagging impact of last year’s shadow-banking crackdown, which particularly punished the private-sector companies that drive job growth. Small companies probably bore the brunt, but big layoffs at highfliers in the tech sector like JD.comand Tencent are adding to the sour mood.

China’s official unemployment rate, even after recent revisions, is still widely considered unreliable. The employment components of China’s purchasing managers’ indexes are a better gauge. They tend to move in sync with other key metrics like industrial profits and the so-called Li Keqiang index—an average of electricity, freight and lending growth named for the current premier, who reputedly considered it more reliable than official GDP figures. At the moment, both China’s manufacturing and nonmanufacturing employment PMIs remain firmly in the doldrums, about two index points below mid-2018 levels.

Leading indicators for China’s economy are starting to pick up but will take a while to work their way down into more jobs and spending power. Photo: Tomohiro Ohsumi/Bloomberg News 

Leading indicators for China’s economy such as credit growth are starting to pick up after a brutal 2018. But that will take a while to work its way down into more jobs and spending power, especially since rebounding inflation is also eating into incomes.

It is tempting to take advantage of a recovering Chinese economy by buying consumer stocks—particularly given last year’s big tax cut. But investors might be wiser to wait for more compelling evidence that the job market has bottomed before diving in.

System D: 2.5 Billion People Can’t Be Wrong

By Mark Nestmann

Nearly two billion people work in it. And it accounts for perhaps 20% of the world’s total economic activity.

“It” is the black market, or System D, a slang phrase adapted from the French word débrouillard. A débrouillard is a resourceful and self-reliant person. A débrouillard figures out how to get what they need regardless of the obstacles. The obstacles are usually the laws or price controls put in place by the state.

There are a lot of débrouillards in the world. In 2009, the Organization for Economic Co-operation and Development (OECD), estimated that around 1.8 billion people – at the time, half the world’s working age people — had unofficial jobs that weren’t registered, regulated, or (in many cases) taxed. The OECD estimated that by 2020, two-thirds of the world’s workforce would be part of System D.

The OECD considers anyone between the ages of 15 and 64 to be “working age.” As of mid-2018, about 65% of the world’s 7.7 billion people were working age; that’s about 5 billion people. If half of them rely on System D to support themselves and their families, that comes to 2.5 billion people.

Most of these 2.5 billion people are débrouillards by circumstance rather than choice. They live in countries like Venezuela, Zimbabwe, or Nigeria where the only way to buy the goods and services they need is by breaking the law. Venezuela is a great example. Consumer basics like food and medicine are no longer available in stores or pharmacies. The only way to get them is through System D.

A 2012 study concluded that collectively, the black market accounts for more than one-fifth of global GDP. Today’s global GDP comes to about $80 trillion. System D, then, adds another $16 trillion of economic activity to the global economy. If the black market were a country, it would have the world’s second largest GDP, second only to the US ($19.3 trillion).

Most of us have participated in System D transactions, whether we were aware of it or not. If you’ve bought tickets from a scalper, you’ve participated in the black market. Or if you pay your maid or landscaper with cash. And there’s no guarantee the seller of that curio you bought in a market on your last vacation reported their income.

Governments hate black markets because they can’t control them. In Venezuela, where inflation has reached nearly one million percent annually, the government has responded with strict price controls. Since it’s unprofitable to sell goods or services at state-sanctioned prices, they’ve become largely unavailable. They’re still available in the black market, thanks to débrouillards. But buyers pay steep premiums compared to the prices the government officially allows merchants to charge. Even though the government blames the black market (along with the US) for Venezuela’s economic woes, ironically, débrouillards may be the only reason the economy hasn’t collapsed entirely.

Of course, not all black markets are benign. Human trafficking, slavery, cybercrime, and counterfeiting all are part of the $16 trillion black market. Counterfeiting alone amounts to about $1.1 trillion of black-market activity; human trafficking for another $150 billion. Black markets where there are identifiable victims account for about 10% of the global black market or around $1.6 trillion annually.

By focusing on black markets in which there are identifiable victims, governments seek to tar all black markets with the same brush. Don’t fall for that bogus conclusion. Most System D activity involves voluntary transactions between willing buyers and willing sellers. The majority of System D transactions are part of the gray- or black-market categories in the chart below.

One important factor encouraging the growth of black markets is the rise of the “darknet,” a restricted area of the internet invisible to ordinary search engines and accessible only through specialized browsers like Tor, with transactions carried out in cryptocurrencies like bitcoin. The most famous example of a darknet market is the ill-fated Silk Road website, which, among other activities, allowed users to buy and sell illegal drugs. Uncle Sam shut down Silk Road in 2014. And in 2015, a judge sentenced the man behind it, Ross Ulbricht, to two consecutive life sentences plus 40 years and a fine of nearly $200 million.

But the Silk Road takedown hardly shut down the darknet. When it was taken down, Silk Road’s transaction volume came to about $400,000 daily or $150 million annually. Today, the total darknet volume is around $1 billion annually. That’s a tiny fraction of the global black-market total, but it’s increasing fast.

Governments have many tools at their disposal to fight the black market. Price controls and exchange controls, such as those in effect in Venezuela, are two common strategies. Another is to ban, restrict, or regulate the most popular forms of money débrouillards use to exchange value. For instance, in the ongoing “War on Cash,” dozens of countries have restricted the use of cash or (as in India) even banned large-denomination bills. Many countries have also banned or restricted the use of cryptocurrencies.

The struggles of ordinary people to overcome obstacles to obtain the goods and services they need to survive are heroic. For many, System D is quite literally their only means of survival.

Remember that the next time you read a sensationalist article in the mainstream media suggesting that cash be banned, that black marketeers be imprisoned, or that the darknet is used only for criminal activity.

US vs. Global Sector Rotation – What Next? Part II

In Part One of this research post, we highlighted and discussed the many geopolitical and economic factors that are driving the market price volatility over the past 30+ days in addition to highlighting some of the key elements/factors of the next 15+ days that may continue to drive market volatility higher.  The three key elements we discussed were the US Presidential Elections, the European Elections (European Union Elections) and the US/China Trade Discussions.  Each of these components is big enough to reflect many trillions of dollars in economic output and, individually, each of these components could drive increased price volatility over the next 30+ days.  Combined, should these events somehow combine into a massive disruption event, they could break the backbone of the global markets in such a way that many investors are simply not prepared to discuss or trade.

In our opinion, there are a number of elements to the unfolding global market economics that play into our future expectations.  China becomes one of the biggest unknowns simply because we believe the best information we have at the moment is shaded and hidden in terms of true values.  Let’s take a minute to discuss a few of them…

First, the currency markets are the first area that moves to protect against fears and risks (  The FOREX ratios operate as an immediate hedge against debt, credit and future expectations.  The recent decline of the Chinese Yuan represents a massive danger for the Chinese government.  Not only does this create an issue for the population of China, seeing their purchasing power diminish, but it also creates a debt servicing issue for business, corporations, and government on a massive scale.  Servicing their foreign debts just became much more expensive as the Yuan value decreases compared for other foreign currency levels.

Second, falsified corporate accounts/book and statements of cash balances are not something new for the Chinese (  We have first-hand experience from back in the early 1990s that these false books are fairly common “standard operating procedures” for many Chinese.  It would not surprise our research team is many of the economic numbers and corporate balance sheets are completely made up.  We believe this practice of creating a false economic support system will implode and more and more pressure is exerted onto China’s economy.

Third, the pressures put on the Chinese economy not only by the US trade tariffs but also by the Chinese people and government may open up massive cracks in the Chinese population in terms of trust and support for Xi and the bigger plans for China.  Our sources are suggesting that much of the animosity currently in China is directed at the US and President Trump for the current trade issues. 

Our belief is that as more and more evidence becomes available and more and more Chinese people see what their government has created in terms of real opportunity and leadership, we believe an “awakening process” will take place to expose corruption, criminal activities and much more. 

Simply put, the Chinese people are mostly unaware of the levels of corruption and falsified numbers. 

They have been running on the premise that Xi and the Chinese leadership were executing a flawless success plan.  When the real numbers come out, pushed into reality because of a contraction in economic “slush money”, the likelihood of a populous revolt is fairly strong (

Lastly, it appears many of the bigger Chinese firms have enough reserve capital to weather the Trade issues and survive (, yet our resources are telling us the people in the bigger cities of China are already feeling the pain of the trade tariffs.  Many are reporting being suddenly laid-off as the very real threat of consumer inactivity sets in throughout most of China.  One of the first things to happen when an economy is under threat or contracts is that consumers move into a protectionist stance.  Consumers cut back spending, investment, and many external activities while attempt to protect their capital from unknown risks.  As the contraction continues, consumers cut back even further attempting to protect assets that are valuable or essential.  Their natural reaction is to spend only on essential items and to protect value in assets.

Should some unsettling economic event push the Chinese markets into a collapse mode, we are certain the US market would react as well.  The strength of the US Dollar may come under some pricing pressure as investors revalue the true strength of the US Dollar as well as the continued global economic outcome.  It is very likely that the US stock market would retrace lower as this even unfolds and that the US Dollar would rotate a bit lower as global investors search to identify true valuation levels for the global markets.

We don’t expect the Chinese markets to collapse over the next 10 to 20+ days,  as we are suggesting, but we do expect continued political positioning and news to become a driving a force of extended market volatility.

The VIX has settled into a Pennant/Flag formation that suggests a July/Aug 2019 breakout may be very likely.  This aligns with much of our other research to suggest that a July/Aug rally in Precious Metals is very likely as well.  The combination of a VIX rally along with a Precious Metals rally suggests a moderately strong downward price rotation in the US and global stock markets that may begin near the end of July or early August 2019.

The likelihood of a continued increase in price volatility seems like a sure thing over the next few months.  EU Elections, US/China trade issues, the US Presidential elections, and many additional geopolitical events seem to coalesce into a new perfect storm for price volatility.

Why Donald Trump is great news for Xi Jinping

The US president has disarmed America in the battle of ideas

Gideon Rachman

Donald Trump has been in office long enough for certain patterns to emerge in his behaviour. The US president likes to create a crisis, let it run a while and then announce that he has solved it. He will frighten friend and foe alike with dire threats, before striking an agreement that he self-certifies as “tremendous”. In reality, the new deal will often be superficial and the underlying issues will remain largely unaddressed.

This is the model that the Trump administration has followed with North Korea, as well as with Mexico and Canada. And it is the model that is pretty clearly going to emerge in Mr Trump’s “trade war” with China.

In a few weeks time, the US president will declare a great victory. His loyal aides will play along. But the underlying reality will be that not much has actually changed in the economic relationship between the US and China — in the same way that not much changed in the trade relationship between the US, Canada and Mexico after Mr Trump’s team renegotiated the North American Free Trade Agreement.

Just as North Korea has not actually scrapped its nuclear weapons, so China will not actually scrap its system of state subsidies for industry, the most fundamental way in which Beijing disadvantages foreign competitors.

Instead, the Chinese are likely to buy off Mr Trump with pledges to purchase lots more American goods. They will also open up more sectors of their economy to US investment and tighten laws on intellectual property. This will probably not affect America’s trade deficit with China. And it will certainly not impair China’s drive for dominance in the technologies of the future.

But calling off the trade war will not be the only gift from Mr Trump to Chinese president Xi Jinping. For Mr Trump has already disarmed America in an even more important battle — the battle of ideas.

That matters because America’s most potent weapon in its emerging contest for supremacy with China is not its economy, nor its aircraft carriers, but its ideas. The notion that abstract principles like “freedom” and “democracy” are powerful American assets is sometimes dismissed as liberal wishful-thinking. But Chinese actions suggest otherwise. The government of Mr Xi does its utmost to suppress the circulation of liberal and western ideas, censoring the internet and cracking down on dissidents, students and human rights lawyers.

The fact that previous US presidents spoke up for human rights was more than an irritant to the Chinese one-party state — it was a threat. There was no better symbol of this than the “Goddess of Democracy”, built by pro-democracy demonstrators in Tiananmen Square in 1989, which bore an uncanny resemblance to America’s Statue of Liberty.

The Tiananmen uprising was bloodily repressed and the “Goddess” was torn down. But Chinese liberals have continued to look to America for inspiration and support. Human rights were only one item on the US agenda when dealing with China. But they were a crucial part of what America stood for in the world.

Sadly, that has now changed. As a candidate, Mr Trump gave a very ambiguous reply when asked about the Tiananmen massacre of 1989, stating: “they were vicious, they were horrible, but they put it down with strength.” As president, he has made it clear that he is an admirer of authoritarian strongmen around the world.

The US state department continues to issue an annual report on human rights worldwide, which has strong things to say about China. But the message coming from the Oval Office is rather different. On various occasions, Mr Trump has praised Mr Xi as “a great leader” and a “very good man”.

This matters because Mr Xi is actually the most authoritarian leader of China since the death of Mao Zedong in 1976. Mr Trump’s over-the-top praise for him risks giving the American stamp of approval for repression in China. When Mr Xi abolished presidential term limits, making it possible for him to rule for life, Mr Trump’s response was to joke that America should consider that model of government.

But repression in Mr Xi’s China is no laughing matter. Controls on the media, the internet and universities have all been tightened significantly since he came to power in 2012. And there has been an unprecedented crackdown in the province of Xinjiang, with up to 1m Uighurs confined to “re-education camps”.

Compared to China, America still provides an inspiring example of a free society in action. But the fact that the US president regularly trashes the “fake news” media, and that his administration has separated thousands of illegal migrants from their children at the US border, blurs what should be a bright line between the practices of a democracy and those of an authoritarian state.

The resolution to the trade dispute may do further damage. Mr Trump shows every sign of wanting to move on from his battle with China, and to declare a new trade war on the EU and Japan. In doing so, the president will drive a wedge through the middle of the western alliance, making it all but impossible to take a co-ordinated approach to China.

If that happens, Mr Trump will look less like China’s toughest adversary and more like the answer to Mr Xi’s prayers.


Beneath the dull surface, Europe’s stockmarket is a place of extremes

The gap between value and quality stocks has widened into a chasm

T WOULD BE hard to tell a story about America’s stockmarket without mention of at least one company that listed this century—Google or Facebook, say. Europe is rather different. Its bourses are heavy with giants from the age of industry but light on the digital champions of tomorrow. It is telling, perhaps, that its character can be captured in the contrasting fortunes of two companies, Nestlé and Daimler, with roots not even in the 20th century, but in the 19th.

Nestlé began in 1867 when Henri Nestlé, a German pharmacist, developed a powdered milk for babies. The firm, based in Switzerland, is now the world’s largest food company. It owns a broad stable of well-known brands, including Nescafé and KitKat. Its coffee, cereals and stock cubes are sold everywhere, from air-conditioned supermarkets in rich countries to sun-scorched stalls in poor ones. Daimler was founded a bit later, in 1890. Its Mercedes-Benz brand of saloon cars and SUVs is favoured by the rich world’s professionals and the developing world’s politicians.

Though the two companies have lots in common, their stockmarket fortunes could scarcely be more different. Nestlé is the sort of “quality” stock that is increasingly prized in Europe for its steadiness. It is expensive: its price-to-earnings, or PE, ratio is 29. In contrast Daimler is a “value” stock, with a PE of eight. The disparity has steadily grown in recent years (see chart). Indeed the gap between the dearest stocks and the cheapest across the continent is at its widest in almost two decades, says Graham Secker of Morgan Stanley.

The valuation gap in Europe is related to a similar divide in America. For much of stockmarket history, buying value stocks—with a low price relative to earnings or to the book value of tangible assets, such as equipment and buildings—has been a winning strategy for stockpickers. But the past decade has been miserable for value stocks in America. The rapid rise of a handful of tech firms—the Googles and Facebooks—and other “growth” stocks has left them in the shade.

Value stocks are, by definition, cheap. In the past they might have been cyclical stocks, those that do well when the world economy is picking up steam, but which suffer in downturns. These days the cheap stocks are in industries, such as carmaking and branch-based banking, that are ripe for disruption. But in Europe, they are especially cheap.

It is hard for banks to make money when yields on the safest of government bonds, the benchmark for lending rates, are negative, as they are in Europe. Banks face an additional threat from financial-technology firms, which do not share their burden of costly branches or surplus staff. Carmakers need pots of capital to equip them to make electric and self-driving cars. The returns are far from certain. It is easy to imagine a future in which status is less entwined with car ownership. People may not care whether the robo-taxi they fleetingly occupy is a luxury car or a bog-standard saloon. Before then, the prospect of punitive American tariffs on European-made cars is looming.

The value-growth axis is different in Europe, because there are no home-grown tech giants. The big stockmarket winners have been quality stocks. This is a category that combines stable profits and high return on capital with sensible debts and low staff turnover. Many are consumer firms with strong brands, such as Nestlé, Diageo (a British drinks giant) and LVMH (a French luxury-goods firm).

Value investors, however chastened, believe there is an opportunity here. For them, the Daimler-type stock is the one to buy. True, carmakers (and banks) have their troubles. But value stocks usually do. The trick is to buy them when everyone shuns them, because that is when they are cheap. The Nestlé-type stock is the sort of fad that the giddier sort of investor piles into, only to rue overpaying as it falls back to earth. Well, perhaps. But why be a hero? An investor in a low-cost index fund can own both types of stock without worrying too much about relative value.

A lot of stockpicking Americans stay away altogether. The cheap stocks look hopeless; the dear stocks look expensive. So they don’t buy at all, says Robert Buckland of Citigroup. The Nestlé-Daimler breach mirrors the divide within property markets in cities such as London. You could try to make a killing on a fixer-upper in a down-at-heel suburb. That bet requires patience and luck. Or you could buy a nice house in a ritzy neighbourhood. It will not be cheap. But it may never get much cheaper.

Central banks are biased towards loose policy

William White, former chief economist at the Bank for International Settlements (BIS), sees the world in a debt trap. He calls for a global monetary system that disciplines national central Banks.

Peter Rohner

(Photo: Iris C. Ritter/FuW)

Mr. White, in response to the economic slowdown, central banks around the world have left the path of monetary policy normalisation. Are you surprised about this U-turn?

No, not really. The reaction was in a certain sense almost inevitable. During the market wobbles at the end of last year, the Fed realized that the effect of higher rates could be slower growth that nobody wanted. And so they backed off. The U-turn is just another manifestation of that worry what would happen next. Plus, in central banking, there is a bias towards loose policy and lower rates.

Why is that?

With public and private debt at record highs, we are in a debt trap. When you are in a debt trap it means: you know that you want to raise rates to bring the expansion of debt to an end, but you can’t because raising rates will cause all sorts of problems, for example hurt growth and increase debt servicing costs. There are also political-economy-constraints. High government debt and deficits mean that higher rates are going to hit the government.

Are there other reasons for the loosening bias?

The exchange rate is another. When you tighten monetary policy, the currency appreciates. But most countries prefer a weaker currency. That means, everybody is caught in that trap. And then there is the question of blame. When rates go up and a recession follows, central banks will be blamed, not the politicians. Put all these things together, it is clear that delay becomes the default option.

How did we end up in the debt trap?

We were encouraged to do this. Just think what we have been doing since 2007. Monetary easing is an invitation to take on more private sector debt. And fiscal expansion is by definition an increase of government debt. Both instruments carry the risk of higher debt levels that eventually will kill you.

But the actions taken by the central banks during the financial crisis 2008/09 probably avoided a worse outcome.

In the early days of the crisis, central banks were right to do what they did. But post-crisis, the reliance on monetary policy to sort out all problems in the economy was too excessive. Debt problems are insolvency problems. Central banks are in the illiquidity business. Their policies made the problems worse because they have been encouraging more debt. And this started long before 2007. Monetary policy has been very asymmetrical over decades. Easing has been more pronounced than tightening. So we ended up with zero interest rates. At the fiscal side, we have had the same asymmetry so that government debt ratios have ratcheted up.

For politicians, loose fiscal policies can be a strategy to please voters. But where does the decade-long bias towards loose monetary policy come from?

The inflation-targeting regime is in part the problem. Price declines were considered to be a danger.

For the last twenty years, monetary policy has leaned towards inflation being too low. In a downturn, rates were lowered because inflation was under control. But in the upturn, they were not raised back to old levels.

But declining prices can be very harmful as the Great Depression learned us.

In history, there have been long periods where prices have gone down and the economy has been growing quiet vigorously because productivity increased. That was more the rule than the exception. The Great Depression, where prices and output were declining, was the exception. However, that exceptional event left a huge imprint on people’s mind and is now thought to be the norm.

You mean central banks should have allowed prices to decline?

At least prior to 2007. After 1990, the combination of China and India coming back to the global trading system and importing western technology and the increase in global manpower has to be treated as a positive supply shock. It pushed down the price level. And that should have been allowed to happen because it did not harm anybody. People were able to buy more stuff, producers made more profit, everybody was gaining.

One way to deal with too much debt is inflating it away. Is that a viable solution?

A little bit of inflation continuing over a long period of time can work wonders on the debt problem by reducing the real rates of return of the ones who own the debt. It is a rather gentle way of getting out of debt problems. We saw a lot of this in the post-war period. It is known as financial repression.

Will it also work in the modern world?

It’s not impossible, but in a world with open financial and capital markets it won’t be as easy as in the post-war era. If one country decides to take the path of financial repression, people will put their money to some other country and another currency. That is the danger of financial repression in the modern world. Either you have very strict capital controls, or you have a system where everybody does financial repression at the same time.

Are you worried when you follow the current debate in the US about Modern Monetary Theory?

I am a little bit. In a nutshell, what these people seem to be saying is that we need more active fiscal policy and that central banks should keep monetary conditions loose. It makes a lot of sense as long as you carry it not too far. The advocates of MMT think that debt levels don’t matter as long as you can print money in your own currency. But that idea is all wrong. History tells us that this can wind up very badly.

But the idea of more fiscal easing seems very appealing to many.

Yes it is, and I partly agree. I think we should have been using fiscal rather than monetary expansion over the course of the last couples of years. But we should have done it aligned with a mechanism that ensures that the policy tightens as things get better.

Are you advocating a debt break like we have it in Switzerland or in Germany?

I don’t like what you have done in Europe. I just say we should be very clear about the medium time framework and have legislations in place that will ensure that we are going to have much tighter fiscal policy when things get better. That might take the steam out of the upturn but would put us on a more stable fiscal path. But at these debt levels, anticyclical fiscal and monetary policy alone will not solve the problem. You also need to allow writing off the debt and restructure it.

That sounds painful. How could it be achieved?

You must identify which debt is not serviceable and take steps to make sure that it is written off. The supervisors in the banking system have to force the banks to restructure as opposed to provide support to zombie firms. In the next recession, we should have a combination of fiscal stimulus and a credible longer term debt sustainability target and pay much greater attention to debt restructuring. But nobody likes to talk about this.

Critics of fiscal and monetary expansion stress the danger of hyperinflation and refer to countries like Zimbabwe. But is this a fair comparison? The US is much larger and runs the world currency.

I agree, a collapse of the currency and hyperinflation are much less likely in a large economy and even less likely if that large economy provides the world currency. But the underlying processes are the same. The problems of hyperinflation never start with the central bank. They start with the fiscal authority that lets its finances get out of control. At one point creditors get worried and stop funding. Then the government turns to the central bank to get the money. The more it does, the more people are aware of the inflation danger. And they flee the currency.

But the dollar is not in demise. People seem to have confidence in the US and its currency.

Regardless of who you are, if you do not maintain a degree of order over your fiscal and external circumstances, there will be a price to pay. In the case of the US it will take longer, but there is already a murmuring of concerns about the dollar being the world currency because the US has a twin deficit at the top of the business cycle. And the Trump administration is using the dollar as a geopolitical weapon, what the Russians, the Chinese and the Europeans do not like. We are starting to see the beginnings of a backlash.

How could the global monetary system be put on a more stable footing?

The fundamental problem is that we do not have a global monetary system. We have a monetary non-system, in which central banks can do what they want. The manifestation of this is the explosion of their balance sheets.

What do you suggest?

I don t’ want to go back to the gold standard, but at least it was a set of rules that made sure individual countries could not do things that were harmful to themselves and also to others. We need a system that stops countries from letting their central bank’s balance sheet explode. The US has the privilege of running the system, but there is no interest in talking about this.

If not the US, who else could initiate reforms? What about the role of the BIS you used to work for as chief economist?

The BIS has no power, it is just a place where experts get together, talk and agree. Then they use the moral authority of that international agreement, so called «soft law», to convince people at the national levels to pass laws. The only institution to deal with it might be the IMF. There were a number of attempts to get the IMF to try to discipline its members. But that does not work because the creditors who do not need the IMF money are not listening to the fund. And the biggest debtor, the US, is not listening either because it has the dollar.

What does all this mean for smaller countries such as Switzerland or Canada?

We are both totally at the mercy of the monetary non-system. We cannot deviate from the course that the US and the Eurozone go because of the effects on the exchange rate. You in Switzerland ought to tighten monetary policy to prevent a bubble in the property market, but you can’t because of the implication on the franc.

Within the Fed, there are discussions to allow above-target inflation for a period of time. Is this reasonable or a matter of concern?

All of the debate is about finding a new framework that will allow the central bank somehow magically to raise inflation expectations. The idea is that inflation is too low and inflation expectations have to be raised. That comes out of the models they are using. In these models, expectations play a huge role. In my opinion, the approach is doomed to failure. Inflation expectations won’t rise.

What makes you so sure about it?

Why would you expect inflation expectations to rise when the Fed has no credible instruments to make them rise? Rates are already low and QE has already been used and will not have the same effect again. It reminds me of the situation years ago in Jackson Hole when there was a recommendation for the Bank of Japan’s Vice Governor Yutaka Yamaguchi to just raise inflation expectations. His answer was exactly that: How can I raise expectations without having the instruments? Again, I think none of this stuff will work and it is totally misguided. It is driven by the analytical framework the central banks are using. But I think their framework is not working in the real world.