Russia and China

Partnership is much better for China than it is for Russia

Just how much better might not become clear for a few years yet



IT IS THE love triangle of global politics. Since the second world war, China, Russia and the United States have repeatedly swapped partners. The collapse of the Sino-Soviet pact after the death of Josef Stalin was followed by Richard Nixon’s visit to China in 1972 and Mikhail Gorbachev’s detente with China 30 years ago. Today’s pairing, between Vladimir Putin and Xi Jinping, was cemented in 2014 after Russia annexed Crimea. In each case the country that was left on its own has always seemed to pay a price, by being stretched militarily and diplomatically.

This time is different. Though America is out in the cold, the price is falling chiefly on Russia. China dominates every aspect of the two countries’ partnership. Its economy is six times larger (at purchasing-power parity) and its power is growing, even as Russia’s fades. What seemed a brilliant way for Mr Putin to turn his back on the West and magnify Russia’s influence is looking like a trap that his country will find hard to escape. Far from being an equal partner, Russia is evolving into a Chinese tributary.

That may seem a harsh judgment. Russia is still a nuclear-weapons state with a permanent seat on the UN Security Council. It has modernised its armed forces and, as in Syria, is not afraid to use them. This week Russian and Chinese warplanes conducted what appeared to be a joint air patrol for the first time, causing alarm when South Korea said a Russian plane had intruded into its airspace.

But the real news is how rapidly Russia is becoming dependent on its giant neighbour (see article). China is a vital market for Russian raw materials: Rosneft, Russia’s national oil company, depends on Chinese financing and is increasingly diverting its oil to China. As Russia seeks to evade the hegemony of the dollar, the yuan is becoming a bigger part of its foreign-currency reserves (the share of dollars fell by half to 23% during 2018, while the yuan’s share grew from 3% to 14%).

China supplies vital components for Russia’s advanced weapons systems. And China is the source of the networking and security gear that Mr Putin needs to control his people. Last month Russia struck a deal with Huawei, a Chinese telecoms firm distrusted by America, to develop 5G equipment—thus rooting Russia firmly in China’s half of the splinternet.

This suits China just fine. It wants a lasting friendship with Russia, if only to secure its northern border, the scene of clashes in 1969, and a source of worry in the 1990s when Russia looked as if it might drift into the West’s orbit. Russia also serves as an enthusiastic vanguard in China’s campaign to puncture Western ideas of universal human rights and democracy, which both countries see as an incitement to “colour revolutions”.

Mr Putin can point to several arguments for his partnership with China, in addition to their joint hostility to the liberal project. One is expediency. Western sanctions, imposed after his annexation of Crimea, the meddling in American elections in 2016 and the lethal use of a nerve agent in Britain two years later, have left Russia without many alternatives.

Mr Xi has also given Russia cover for its military action in Syria and, to some extent, Crimea. And, in contrast to the end of the 17th century, when Peter the Great looked to Europe as the wellspring of progress, Mr Putin can plausibly argue that the future now belongs to China and its system of state capitalism.

However, Mr Putin is mistaken. For a start, the Russian version of state capitalism is a rent-seeking, productivity-sapping licence for the clique that surrounds him to steal freely from the national coffers—which is one reason why Chinese investment in Russia is rather limited.

There is also a contradiction between Mr Putin’s claim to be restoring Russian greatness and the increasingly obvious reality of its subordinate role to China. This creates tension in Central Asia. Because stability in the region is important for China’s domestic security—it wants Central Asia to keep Islamic extremism at bay—the People’s Liberation Army is stationing troops in Tajikistan and staging exercises there, without consulting Russia.

And, at some level, the aims of Russia and China diverge. There is a limit to how much ordinary Russians will forgo Western freedoms. If the regime holds on to power by means of Chinese technology, it will feed popular anger towards China and its Russian clients.

Who can say when the strains will show? Imagine that Mr Putin chooses to step down in 2024, when the constitution says he must, and that his successor tries to mark the change by distancing Russia from China and turning towards Europe. Only then will it become clear how deep China’s influence runs and how much pressure it is prepared to exert to retain its sway. Russia’s next president may find that the country has lost its room for manoeuvre.

Does this mean that the rest of the world—especially the West—should seek to prise Russia from China’s embrace, before it is too late? That idea will tempt those diplomats and analysts who think Russia is too important to alienate. But it seems unlikely. America does not suffer from the Xi-Putin alignment today as it would have done in the cold war. Although Russia and China do indeed undermine the West’s notion of universal values, with President Donald Trump in the White House that doctrine is, alas, hardly being applied universally in any case.

What is more, China’s influence over Russia has compensations. An angry declining power like Russia is dangerous; it may feel tempted to lash out to show it is still a force to be reckoned with, by bullying Belarus, say, or by stoking the old fears of Chinese expansion into Siberia.

But China has no appetite for international crises, unless they are of its own devising. As Russia’s partner, China can serve as a source of reassurance along their joint border, and temper Russia’s excesses around the world.

Sweet patience

Rather than railing against Russia or trying to woo it back, the West should point out its subordination and wait. Sooner or later, a President Alexei Navalny or someone like him will look westwards once again. That is when Russia will most need Western help. And that is when the man or woman in the Oval Office should emulate Nixon—and go to Moscow. ■

Precious Metals Reaching Initial Targets Prior to Aug 19 – Now What’s Next?


October 5 ADL predictive modeling forecast chart

Our incredible October 5 ADL predictive modeling chart, below, highlights just how powerful some of our proprietary price modeling tools really are.  Imagine having the ability to look 10+ months into the future to be able to attempt to understand exactly what price may attempt to do and to be able to plan and prepare for these moves well ahead of the “setup”. 

So far, our analysis of the precious metals has been spot on and we’ll continue to try to update our members and followers as this movement continues.


 

RECENT TRADE WITH 3X Gold ETF:

The ADL system hs played a large roll in our short term trading result for August already having closed 24.16% profit this month – See Here




This original prediction based on our advanced Adaptive Dynamic Learning (ADL) predictive price modeling system suggests price should be near or above $1600 by August/September 2019 (the higher yellow dash lines within the blue rectangle).  If these predictions continue to hold up as valid and true, then we would expect the price of Gold to target these levels as a “leg 1 move” then consolidate a bit before attempting to move higher.

Weekly Gold chart highlights our expectations

This Weekly Gold chart highlights our expectations for the current and future price rotations in Gold. 

As you can see, we are still expecting a $1600 initial upside price target (shown as $1595) and a brief price rotation after that level is reached.  The reality of this move is that Gold could rally well above $1600 before stalling, but we believe the $1595 level is a safe call for this move and we believe the rotation will be fairly short-lived before the price continues to rally further.

One interesting point to make is that the $1595 level is well above the highest (RED) Fibonacci projected price target.  These types of moves by price can happen in extended trending.  It happens that the Fibonacci price modeling system predicted these ranges based on historical price rotations and recent trends. 

Yet when something happens in the markets that result in trends extending beyond the predicted levels, it suggests that a larger, more volatile, the price trend has established which could push price levels to 1.6x or 2x the precious target level ranges.  This would suggest $1700 to $1850 as a new upside target level (eventually).




As Silver starts to move higher, finally breaking above historical resistance and really starting to rally as Gold has taken off, one very interesting price setup happened this week – a VERY LARGE RANGE BAR.  Silver has historically shown a bar range volatility of near or below $0.40.  On August 13, Silver set up a total high-to-low bar range of just over $1.00.  This massive increase in volatility suggests that Silver could be setting up for a very explosive price move in the near future. 

If volatility continues to stay near 1.5x to 2.5x historical levels, Silver could rally $6 to $10 in a very short 14 to 30 days.

What does this mean for our precious metals trade and for our members and followers?  It means that the metals are “loading up on fuel” at the moment and preparing for something BIG.


 

CONCLUDING THOUGHTS:

How is this aligning with our August 19 breakdown prediction and how should traders plan for these moves and protect their assets?  Right now, if you have not already set up and entered your precious metals trades, you should consider scaling into trades soon and/or waiting for this rotation that we are suggesting is only about 5+ days away.  Silver is still an incredible opportunity for traders and Gold should stall near $1595, then likely rotate a bit lower towards $1525 before bottoming.  Therefore, any entry below $1540 in Gold or below $17 in Silver is still a solid entry-level.

Now, before we carry on with our research, we want to highlight the fact that many things are aligning with our August 19 global market breakdown prediction.  We’ll go into more detail about this in Part II of this research article and attempt to detail our expectations, but we want to warn you that we believe extended risks will start to become more evident on or after August 19, 2019.  This is not a warning that should prompt you to immediately start selling off everything you own and setting up for a massive short trade in the markets.  What it means is that August 19 will likely be the start of an extended “rounded top” or other types of extended top formation that will provide a more clear projection of targets and opportunities as it plays out.

You’ll see more in Part II of this research post (delivered to you just in time before the weekend)

MORE UNIQUE ANALYSIS ON THE BEAR MARKET IN STOCKS AND METALS, MINERS, AND S&P 500

I warned that the next financial crisis (bear market) was scary close, possibly just a couple weeks away. The charts I posted will make you really start to worry. See Scary Bear Market Setup Charts.

In early June I posted a detailed video explaining in showing the bottoming formation and gold and where to spot the breakout level, I also talked about crude oil reaching it upside target after a double bottom, and I called short term top in the SP 500 index. This was one of my premarket videos for members it gives you a good taste of what you can expect each and every morning before the Opening Bell. Watch Video Here.

Detailed report talking about where the next bull and bear markets are and how to identify them. This report focused on gold miners and the SP 500 index. My charts compared the 2008 market top and bear market along with the 2019 market prices today. See Comparison Charts Here.

Dispatches From Bond-Land


Jared Dillian


First, please do me a favor—I would love it if you would follow me on Twitter.

By this point, you have probably heard that $15 trillion of bonds are trading with negative yields, which represents 25% of all sovereign bonds outstanding. Lots of people are indignant about this—but it’s no use getting mad at the market.

Lots of people say it doesn’t make sense. It makes sense to me, and to a few other people. If you see something in the market that doesn’t make sense, it’s usually best to stay away, rather than picking a fight with it.

We’re not in uncharted territory here. Let’s do a market psychology exercise.

Back in 2012, ten-year yields were actually lower:


 
And again in 2016:


 
Both of those times (and I remember this quite clearly), people were bullish on bonds and said that yields were going lower. Instead, they rocketed higher. They said that the deflation/disinflation that we were experiencing was unstoppable, and a whole bunch of other stuff, that turned out not to happen.

In 2016 I presented a short bond thesis at a conference and I practically got hounded off the stage. Nobody remembers this, but everyone was really bullish on bonds back then. It was actually kind of a weird situation. The organizers of the conference avoided me after that, like I was radioactive.

Now practically nobody is bullish! Why is that? I suppose the inflation picture is markedly different—we have tariffs and there are wage pressures and such—but I don’t think that’s what this is about.

My thesis, which I have carried around for 20 years: when everyone believes something, it is usually wrong.

What does everyone believe right now? That negative yields are unsustainable.

Maybe that is true. Maybe not.


Bubbles in Everything

You can have a bubble in any asset class, from little stuffed animals to lines of computer code. Why not bonds?

The bitcoin bubble burst when there were more Coinbase accounts than Schwab accounts, and there was a bitcoin rapper in the New York Times. We don’t have any bond rappers yet, so I’d say the bull market has a ways to go.

George Soros always said that if he saw a bubble forming he would get in there and try to make it bigger—which is pretty much the opposite of what everyone does.

What everyone does, is goes on Twitter to complain about it. It’s not just Twitter—negative yields was probably the biggest concern you guys listed in the bond survey.

Right now, people don’t believe in the trade, or understand it. This is going to continue until they do understand it.

There are also fundamental reasons which are plainly obvious—bad demographics and a savings glut, which creates huge demand for safer assets like bonds, pushing down yields. Both of those things were cited the last two times around (2012 and 2016), but not this time.

My opinion: smart people (including the owner of this website) predicted debt and deflation years ago. You know how it happens. Gradually, then suddenly.

Anyway, I can’t do one scroll through Twitter without someone freaking out about negative interest rates. Turn on the internet and see. But what if negative interest rates… are normal? What if they make sense?

Ask this question around certain people and they completely lose their minds. The last time I saw people get this indignant about a trade, it was… Beyond Meat. See how that turned out. I have experience with this sentiment thing. When something makes people angry, I have confidence that the trend in question will continue for a very long time. I think negative rates are not an aberration and could become a semi-permanent feature of finance.

When people start to believe in negative rates, they will probably come to an end.


Bond House

Lehman Brothers was a “bond house.” They were really good at fixed income—not so good at equities. Though equities did pretty well towards the end.

It was kind of hard not to be exposed to bonds at Lehman, even if you did work in equities. If you recall, the Barclays bond indices that we have today used to be Lehman bond indices. I got a lot of customer flow in the 20+ Year Treasury Bond ETF, TLT, and it was because Lehman had the index.

I also took six weeks of bond math when I joined the firm in the summer of 2001, and most of it stuck with me.

A lot has changed since then. Most of the trading activity in US Treasurys is electronic.
 
Back then, it was all high-touch—carried out by actual humans.

A lot has remained the same. It’s still fundamentally the same market that it was 20 years ago. There’s a lot more debt, but one thing that has remained constant is how difficult it is to trade off of supply—the idea that more bonds makes rates go higher. And, people believe strange things about the bond market these days—they think more supply makes interest rates go down.

If you think things are stupid, they will probably get more stupid. You can put that on my tombstone.

PART 4 – Global Central Banks Move To Keep The Party Rolling

Chris Vermeullen


In this last segment of our multi-part research post regarding the US Fed and the global central banks, it is becoming evident that the fear of a further market contraction is resulting in the decrease in rates and the push for additional QE functions.  Our research has shown that the global economy has partially recovered from the 2008-09 credit market collapse, but the process of the recovery has resulted in a “blowout” type of event where shifting capital intents and the transition from the 19th century economic model towards a new 21st century economic model is setting up the global markets for a massive rotation event over the next 12 to 24 months – possibly longer.

PART 1 OF THIS ARTICLE

PART 2 OF THIS ARTICLE

PART 3 OF THIS ARTICLE


It is our belief that capital is still doing what capital always does, seeking out the best opportunities for safety and returns.  Right now, that location is easily found in only certain segments of the markets; volatility, precious metals, certain energy sectors, US Treasuries and CASH.  The future events, including the massive rotational event that we believe is about to unfold in the global markets, will change the way capital is deployed for many years to come. 

It is very likely that this rotation event will create incredible opportunities for skilled technical traders or subscribers to our trade signal newsletter over the next 12 to 36 months and will likely prompt a further shift towards the new 21st-century economic model that we believe will be the ultimate outcome.

Taking a brief look at our recent history highlights the fact that capital becomes fearful about 12 to 16 months before a major US election event.  Additionally, certain other factors related to the global economy heighten this fear as US/China trade issues, global debt issues and economic output issues continue to plague the markets.  The combination of these types of events set up a “perfect storm” type of economic cycle where skilled technical traders are just waiting for the impact event to hit before the markets begin a bigger rotational event.

These types of events, similar to the 2000 and 2008-09 market crash event, are a process where price rotates out of a normal range and attempts to explore lower price levels that act as price support.  It is not uncommon for these types of events to happen, although the severity of these events is difficult to determine prior to their execution. 

The US Fed and global central Banks set up an easy money process over the past 9+ years that allowed for capital to be deployed as a process that has setup this current massive rotational event. 

At first, the intent was to support collapsing markets and institutions – we understand that. 

But the nature of capital is to always seek out suitable safety and returns, so capital did what is always does hunt out the best opportunities for profits.  First, it rallied into the crashing real estate market and emerging markets – which had been crushed by the 2008-09 credit crisis event. 

Next, it piled into the Asian markets and healthcare/technology markets.  At this time, it also started piling into the startup/VC markets throughout the world as well as certain commodities.  The recovery seemed to have created a booming and cash-flush market for anyone with two dollars to rub together.

Then came the 2015-16 market contraction and the end of the US Fed QE processes.  At this time, China realized the need to control capital outflows and the US/Global markets slowed to a crawl as the US Presidential election cycle ramped-up.  It was just 12 months prior to this 2015-16 event that oil crashed from $114 to $46.  Within 2015-16, Oil continued to crash to levels below $30.  This was the equivalent of the blowout cycle for the global economy.  Headed into the 2016 US elections, the global economy was running on only 5 of 8 cylinders and was limping along hoping to find some way out of this mess.

The November 2016 US elections were just what the global economy needed and everyone’s perceptions about the future changed almost overnight.  I remember watching the price of Gold on election night; +$75 early in the evening as Clinton was expected to win, then it continued to fall back to +$0 fairly late in the evening, then it fell to -$75 as the news of a Trump win was solidified.  This rotation equated to a nearly 10% rotation in less than 24 hours based on FEAR.  Once fear was abated, global investors and capital went to work seeking out the safest environments and best returns – like normal.

This resurgence of capital into the markets set up of a new SOP (standard operating procedure) where capital began to be deployed in more risky environments and into broader and bigger investment structures.  This is the SETUP I’m trying to highlight that was created by the US Fed and central banks.  I don’t believe anyone thought, at that time in early 2017, that the current set of events would have transpired and I believe global governments, central banks, and global financial institutions thought, “Party on, dude!  We’re back to 2010 all over again”.  Boy, were they wrong.

This time, the global central banks, governments and state-run enterprises engaged in bigger and more complex credit/debt structures while attempting to run the same game they were running back in 2010 and 2011.  The difference this time is that the US Fed started raising Fed Fund Rates and destroyed the US Dollar carry trade while putting increasing pressure on the global market, global debt and global trade.  The continued rally of the US Dollar after the 2018 lows helped to solidify the advantages and risks in the markets.  This upside rally in the US Dollar, after the 2014 to 2016 rally, really upset the balance of the global markets and setup an increasing pressure point for foreign markets.

It soon became very evident that risks in the foreign markets could be partially mitigated by investing in the US stock market and by moving capital away from risky currencies and into US Dollar based assets.  Capital is always doing what it always does – seeking out the best environment for returns and protection from risk.  Thus, we have the setup right now – only 15 months before the 2020 US Presidential elections.  What happens now?

This setup is likely to prompt a rotation in the global markets as well as within the US stock market. 

It is very likely that a continued contraction in consumer and banking activity (think business, real estate, trade, commodities, and others) will prompt a contraction in global economics very similar to what happened in 2014~2016.  This process will likely put extreme risk factors at play in some of the most fragile economies and state-run enterprises on the planet.  Once the flooring begins to crack in some of these markets, we’ll see how this event will play out.  Right now, our eye is watching Europe and Asia for early warning signs.

The US Fed will continue to manipulate the FFR levels in an attempt to help mitigate the risks associated with this contraction event.  It is likely that the US Fed already sees what we see and it attempting to position themselves into a more responsive stance given the potential outcomes. 

Inadvertently, the US Fed and global central banks presented an offer that was too good for anyone to ignore – easy cash.  What they didn’t expect is that the 2014 to 2019 rally in the US Dollar and US stock market would transition capital deployment within the global market in such a way that it has – setting up the current event cycle.

We believe a downside pricing event is very likely over the next 10 to 25+ days where the US stock market may fall 12 to 25%, targeting levels shown on this chart (or slightly lower) as this rotational event takes place.  Ultimately, the US markets will recover much quicker than many foreign/global markets.  Our estimates are that the recovery in the US markets will likely begin to take place near March or April 2020 and continue higher beyond this date.




This Custom Smart Cash Index chart highlights the type of capital shift activity we’ve been describing to our readers and followers.  It is easy to see that capital moved out of risky investments within the downturns on this chart and into the most opportunistic equity markets within the uptrends on this chart.  Remember, most opportunistic markets are sometimes outside of the scope of this Smart Cash index.  For example, this chart does not relate strength in the Precious Metals markets or other commodities/currencies.  All this chart is trying to highlight for followers is how capital is being deployed in viable global equity markets and when capital is exiting or entering these markets.

Given the current setup, we would expect a breakdown in this Smart Cash Index over the next 4+ months to set up a new lower price level establishing a base/bottom before attempting to move higher.  We believe the 100 level, shown as historical support, is a proper target price level for this move initially.




Lastly, we believe capital is moving aggressively into the precious metals markets and we urge all skilled technical traders to pay attention to this chart of the Gold/Silver ratio.  If our analysis is correct and a larger rotation price cycle is about to unfold in the global markets, which may last well into 2020 (or beyond) for certain global markets, then you really need to pay attention to the upside potential for this Gold/Silver ratio.

As we’ve drawn on this chart, if this ratio recovers to 50% of the 2011 peak levels as this rotation unloads on the global market, this would push Gold and Silver prices to levels potentially 60% to 140%+ higher than current levels.  I understand how hard it is to understand these types of incredible price increases and how they could possibly be relative to current prices, but trust us in our research. 

Gold and Silver prices have been measurably depressed over the past 3 to 4 years.  Unleashing the real valuation levels of these precious metals at a time when risk factors are excessive suggests that Gold could easily be trading above $3200 and Silver above $60 to $65 within 6 to 12 months.

CONCLUDING THOUGHTS:

In closing, we want to urge all skilled technical traders to keep a very open perspective to the “Party on, Dude” mode of the global central banks and be aware that a very fragile floor is the only thing holding up the markets in another massive US presidential election cycle event.  In our opinion, the writing is already on the wall and we are preparing for this rotational event and alerting our members on what to do to profit from these moves.

The Federal Reserve and global central banks will attempt to keep the party rolling for as long as possible because they know the downside event could be something they don’t want to have to deal with.  So watch how these global central banks attempt to nudge public perception away from risks and towards the “party on” mode.  Stay alert.  Stay aware.  When this breaks, it will break quickly and aggressively.

Using technical analysis and proven strategies we can follow the market trends and profit from them no matter which the market moves. We bet with the market (the house) and provide entry, target, and stops for all trades we initiate.

Google parent Alphabet overtakes Apple to become new king of cash

Leadership switch follows concerted effort by iPhone maker to reduce its liquid reserves

Richard Waters in San Francisco


The financial reserves of Google’s parent company Alphabet have risen to $117bn while Apple’s cash pile has fallen to $102bn © Bloomberg


The corporate world has a new king of cash. The title for the company with the biggest financial reserves, held by Apple for a decade, has passed to Google’s parent, Alphabet, according to figures released in recent days.

The switch in leadership follows a concerted effort by the iPhone maker to reduce its liquid reserves, six years after it first came under pressure from activist investor Carl Icahn to pay out more of its cash hoard. Apple’s holdings of cash and marketable securities, net of debt, has fallen to $102bn, down from a peak of $163bn at the end of 2017.

Alphabet’s financial reserves have been moving in the opposite direction. At $117bn, its cash pile has risen by almost $20bn over the same period.

The rise of Google’s parent to the top of the corporate liquidity rankings puts its corporate wealth and power on conspicuous display at a politically sensitive moment. After being hit with €8.2bn in antitrust fines to the EU in the past two years, it now faces intense scrutiny in Washington.

The company’s preference for hoarding its money and spending it on trying to break into new markets, rather than using it to reward shareholders with buybacks or dividends, as Apple has done, also antagonises some investors.

“In general, their attempts to reinvent themselves with their new initiatives aren’t working out,” said Walter Price, a portfolio manager at Allianz Global Investors. “I wish they’d return more cash to shareholders and waste less.”

Too much liquidity?

The cash build-up has come despite a surge in capital spending. At $25bn last year — up 50 per cent from 2017 — much of the money has been pouring into real estate, as Google has added to its office holdings in cities such as New York and built data centres to support its growing cloud computing business.

Ruth Porat, chief financial officer, has been at pains to downplay the real estate investments, stressing that they are a one-off and that, in a normal quarter, 70 per cent of capital spending goes into servers and other new equipment.

The infrastructure to support artificial intelligence that Google had been building “requires a tonne of compute power”, said Youssef Squali, an analyst at SunTrust Robinson Humphrey. But he added that, like some other big tech companies, it had seen higher spending on machine learning feed through directly into higher revenue. That had left Wall Street generally comfortable with the spending surge.

It is in areas beyond Google’s core business that the complaints persist. Alphabet’s cash is produced almost entirely by its search advertising business, which has been supplemented by strong growth from online video service YouTube.

By contrast, Google’s other businesses — such as cloud computing, smartphones and home automation — are believed to have been consuming cash. Alphabet has also lost $15bn in the six years since disclosures began in businesses beside Google — something it describes as its “Other Bets”, ranging from the Waymo driverless car unit to the Verily healthcare division.

Google had done enough to “make the cut” in cloud computing, where it is chasing market leaders Amazon Web Services and Microsoft, said Mr Price. But he added that it had had little impact in breaking into other markets.

Heightened buybacks

Until last week, Alphabet has also stood out among big tech companies for not taking a more aggressive stance on returning cash to shareholders following the passage of US tax reform at the end of 2017. The new law applied an immediate — though reduced — tax rate to US companies’ overseas cash reserves, in the process removing the incentive to sit on the money rather than start paying it out.

Apple has responded to the change by spending $122bn on buying back stock and paying dividends in the past 18 months. Other companies to dig deep include Cisco Systems, which has cut its cash holdings from $35bn at the time of the new tax law to only $11bn.

Alphabet’s stock buybacks, by contrast, have been paltry. In the nearly four years since it began repurchasing its own stock, it has spent an average of only $1.7bn a quarter.

In that time, it has handed out more new shares in the form of employee stock benefits than it has bought back through its repurchase programme. As a result, the payments have done nothing to lift its earnings per share — the reason investors generally welcome buybacks.

Things could be about to change. Last week, Alphabet said its board had added $25bn to its stock buyback programme, taking total new repurchase authorisations to $37.5bn since the start of this year.

Ms Porat said the increase did not reflect any change in Alphabet’s financial priorities, and that its two top goals were unchanged: to invest in the long-term growth of its existing businesses, and to support acquisitions. However, the move contributed to a strong stock price rebound on the same day that the company also reported a rebound in revenue growth, dispelling worries about a sharp secular slowdown in its advertising business.

The cash mountain

Even the heightened rate of buybacks may not cap the growth in Alphabet’s cash mountain. Its free cash flow this year was forecast to top $30bn, rising to almost $40bn next year, said George Salmon, an analyst at Hargreaves Lansdown. The new buyback intentions “don’t represent a step change” big enough to actually reduce the company’s total reserves, he said.

Many investors are now counting on a steady increase in Alphabet’s stock repurchases as its search advertising business continues to mature — much as Apple responded to an end of growth in iPhone volumes with a more concerted effort to distribute its cash.

One potential avenue for using the money — making acquisitions — looks less likely given the regulatory backdrop, according to some investors. “The US government is going to take care of the M&A question by making it more difficult to do deals,” said Jim Tierney, a chief investment officer at AllianceBernstein. Along with growing maturing in the core business, that was likely to make the $25bn repurchase authorisation announced last week “the tip of the iceberg”, he said.

Facebook, with less than half the cash reserves, has also turned its thoughts to distributing more of its excess cash, heavily outspending Google last year on stock repurchases.

“These are going to become free cash flow machines with nowhere to spend their money except on buybacks,” said Mr Tierney.

In greenbacks we trust: global crises propel demand for $100 bills

Widely viewed as a safe asset, nearly 80% of the US notes are now held overseas

Federica Cocco





“A curious thing has happened,” the IMF observed in a blog post last week, noting that the $100 bill had overtaken the $1 bill in circulation for the first time.

The number of $100 bills has doubled since the global financial crisis. This climb has surprised some because of the march towards a cashless society, in which nearly a third of Americans use no cash at all on a weekly basis, Pew Research Center data show. Nearly 80 per cent of these bills are held overseas, according to the Federal Reserve Bank of Chicago.

Ruth Judson, an economist at the Fed board of governors, said the trend can be attributed, at least in part, to geopolitical instability. “Overseas demand for US dollars is likely driven by its status as a safe asset,” she said. “Cash demand, especially from other countries, increases in times of political and financial crisis.”

The IMF said it was “impossible to know for sure” where the greenbacks are held but cited turmoil-hit Venezuela as a prime example of a nation where holding US dollars was highly valued.

Other observers have mooted a rise in global corruption and criminal activity. Former Treasury secretary Lawrence Summers has called for the $100 note to be scrapped to frustrate illicit activities, a move reminiscent of the European Central Bank’s decision in 2016 to stop producing €500 notes with the same aim. But the cost of replacing the $100 note with more $50s and the cut in seigniorage, the profits a government makes from issuing currency, have hindered efforts.

Hong Kong’s Present Is Taiwan’s Future

China’s complacency is a sign of confidence, not weakness.

By Jacob L. Shapiro



After three months, the Hong Kong extradition protests of 2019 have  become quotidian. The Monday morning question for China-watchers has not been whether a protest took place but how many people showed up or how violently clashed with the police or with one another. Was this going to be the Monday that the Chinese government might finally decide that enough was enough, and that the rule of law must be reinstated by force in the Special Administrative Region?

 
The Plateau
One June 9, more than 1 million people flooded the streets of Hong Kong to protest a controversial extradition bill that would have made it legal for convicted criminals in Hong Kong to be extradited to mainland China. The force of that protest came from its spontaneity; spontaneity means unpredictability, and unpredictability puts real pressure on political decision-makers to placate the masses before things get out of hand. The June 9 protests forced authorities to halt the bill – first temporarily, then indefinitely. But the protests of recent weekends haven’t forced government authorities to do much of anything.
That’s not a coincidence. It is immensely difficult for protest movements to sustain the intensity and magnitude necessary to drive real political change. When protests become a regular weekend activity, it usually means they have lost the momentum necessary to create political change. Consider the yellow vest protests in France that began late last year. The size and vitriol of the protests prompted French President Emmanuel Macron to ditch his planned fuel tax hike and call for a national dialogue to address the protesters’ demands. For weeks after Macron’s capitulation, the yellow vests continued to ransack Parisian businesses and burn cars in the streets – but they never again forced Macron's hand. Though some yellow vest protesters still turn out each weekend, their numbers have dwindled so much that Macron’s government is making another pass at the economic reforms that brought protesters to the streets in the first place.

Like the French protests, the unrest in Hong Kong has reached a plateau of ineffectuality. Yes, last weekend thousands of protesters took to the streets and clashed with police in Hong Kong again, despite the fact that Hong Kong authorities forbade any marches in the city and despite rumors that China was considering dispatching the People’s Liberation Army to the restive Special Administrative Region to quell the unrest. But these protests are orders of magnitude smaller than the June 9 demonstrations. As for the PLA, the source of those “rumors” is a Chinese Defense Ministry spokesperson who told a media briefing last Wednesday that the PLA would only intervene at the Hong Kong regional government’s request. 
Mainland China’s government does not seem to feel compelled to intervene Tiananmen-style in Hong Kong. Spokespersons for China’s Hong Kong and Macau Affairs Office gave a fairly bland press conference on Monday, repeating some platitudes about how bad the demonstrations are for Hong Kong and scolding foreign countries that have criticized China over the protests. That is remarkable on the face of it. One of the primary roles of the Chinese state is to maintain social harmony. A Chinese state that is unwilling or unable to ensure social harmony will not remain in power for very long. But this Chinese state is neither of those. This is a Chinese government that has elevated Xi Jinping to the de facto position of emperor-in-chief and is busily attempting to remake Uighurs in the image of the Han via “reeducation camps.” China is not intervening in Hong Kong because it chooses not to. 
Three Rivers, Two Systems, One China
To understand why – and to understand Hong Kong in the first place – we need to examine a bit of Chinese history and geography.
 


  
China’s three most important rivers – the Yellow, the Yangtze and the Pearl – each represent a phase of Chinese territorial expansion. The Yellow River is the cradle of Chinese civilization. The earliest ancestors of today’s Chinese people emerged from the Yellow River Basin, expanding primarily southward where they fought and eventually conquered rival tribes and ethnic groups that lived along the Yangtze River. From there, Chinese civilization spread even farther south, all the way to the Pearl River. The conjoining of the regions around these three rivers was achieved by the Qin and the Han dynasties, which ruled China successively from 221 B.C.–220 A.D. Since the Han Dynasty, the fundamental goal of every Chinese dynasty or ruler has been to maintain Chinese control over these three regions, often by conquering neighboring regions as buffers or tributaries.
What is today southern China (the area around the Pearl River system) has been an integral part of China for over two millennia. For most of that time period, Hong Kong was irrelevant. To successive Chinese dynasties, “Hong Kong” simply referred to the small, sparsely populated and strategically unimportant island of Hong Kong that lay at the edge of the Pearl River Delta. Today, “Hong Kong” refers to the former British colony that combines three distinct geographic units. Hong Kong Island, which as recently as 1841 was described by then British Foreign Secretary Lord Palmerston as “a barren island with hardly a house upon it,” was ceded to the British Empire “in perpetuity” in the 1842 Treaty of Nanjing. The Kowloon Peninsula, another hilly and mostly unpopulated region, was ceded to the British in 1860 in the Peking Convention. The “New Territories” were leased to the British in 1898 for a period of 99 years. Of the three, only Hong Kong Island is separated from the Chinese mainland.

If it had been up to the British, Hong Kong would never have been returned to China. In fact, the British approached the Chinese government in the 1980s hoping to renew their 99-year lease on the New Territories. Not only did Chinese leader Deng Xiaoping reject the British request, but he also informed the British that when the terms of the lease expired, China planned to recover its sovereignty over all of Hong Kong, not just the parts that were leased. By 1979, when Britain first approached China about renewing the lease, Britain was hardly an empire any longer and certainly did not possess the capability to defend Hong Kong from China. Britain had no choice but to acquiesce to China’s demands. It did so in the 1984 Sino-British Joint Declaration, which said Hong Kong would be returned to China in 1997 – but also guaranteed that Hong Kong’s unique political and economic system would remain unchanged for a period of 50 years: the so-called “one country, two systems” framework.
 
In the Mainland’s Image
The “one country, two systems” framework did not reflect any sort of British-Chinese compromise. From the Chinese government’s perspective, “one country, two systems” was a pragmatic policy designed to slowly assimilate Hong Kong back into mainland China – and the Chinese government would benefit from Hong Kong’s status as a global financial capital along the way. But it was never going to be easy. After all, the British essentially built and then ruled Hong Kong for 156 years. The British bequeathed to Hong Kong an entirely different set of values and structures from those cultivated on the mainland under Qing and then Communist rule. Many in the West let themselves believe that post-Mao China would be recreated in the image of the West, that Hong Kong could function as a sort of Trojan horse for the remaking of China as a liberal democratic pillar of the international political system. They failed to realize that China’s intention all along was to remake Hong Kong in its image. The era of Chinese humiliation at the hands of foreign powers was over for good.

The Chinese government always knew that integrating Hong Kong would be long and arduous. Beijing probably assumed there would be moments like the anti-extradition protests or the 2014 Umbrella protests. Hong Kong was a British colony for too long for there not to be deep-seated political and cultural experiences that needed to be overcome. Luckily, we don’t have to guess how long China planned for this process to take; we can simply take China at its word. China agreed to a “one country, two systems” state of affairs for a period of 50 years. Much as China refused to renew the British lease on the New Territories in 1984, it will refuse to renew the “one country, two systems” framework in 2047. In 1997, China was not yet strong enough to assimilate Hong Kong into the mainland, but Beijing is betting by 2047 it will be. And by then, China will be looking to use the lessons it has learned in integrating Hong Kong to bring Taiwan into the fold. China’s goal in the coming decades will be to make it politically and economically impossible for Taiwan to resist rejoining the mainland, even if that means implementing another “one country, two systems” framework to ease the shock of a union, just as it did with Hong Kong.
It's difficult to predict what kinds of hot-button issues and developments impel people to leave the comfort and safety of their homes to protest against their government. That many in Hong Kong would have opposed the extradition bill is not a surprise, but why the extradition bill in particular caused such a stir – after all the other steps China has taken to reassert control over Hong Kong – is a mystery. Take China’s kidnapping and extradition of five Hong Kong residents in the 2016 Causeway Bay Books controversy, for example. Those disappearances were arguably more shocking than anything put forward in the extradition bill, which was simply a formalization of a power that China has exercised in the past and will exercise whenever it deems it necessary. But for whatever reason, the bill touched a nerve inside Hong Kong, and the government in Beijing will now watch carefully to see what it can learn from how the situation develops from here. Intervening too heavy-handedly would be counterproductive. China’s goal is not to force Hong Kong to be like the rest of China, but to slowly assimilate and acculturate Hong Kong to its new political reality – and China isn’t in a rush.

If this level of unrest was simmering in Beijing, or Shanghai, or any other Chinese city, the Chinese government would have already suppressed it. In that sense, “one country, two systems” is very much alive and well. The same rules don’t apply in Hong Kong. China knows that Hong Kong is different and removed enough from the rest of China that it does not need to fear that what is happening there will spill over into other Chinese cities. “One country, two systems” cuts both ways. China also knows that forcing Hong Kong to become like the rest of China overnight will inevitably fail.
 
China’s complacency should therefore not be read as a sign of weakness but as a sign of confidence. The question the rest of the world should be asking itself is not “what will happen in Hong Kong?” That is a fait accompli. The real question is, “what will happen to Taiwan?” My best guess: In the long-term, China will have more of an interest in assimilating Taiwan than anyone else will have in defending it – that Hong Kong’s present is Taiwan’s future.

Central Banks Are the Fall Guys

For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.

Raghuram G. Rajan

rajan57_DrewAngererGettyImages_jeremypowelltrump


CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been berating the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.

In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election.

When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.

This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.

Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.

But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.

Second, since the crisis, central banks have repeatedly fallen short of their inflation targets.

While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools.

Any hint of further easing seems to encourage financial risk-taking more than real investment.

Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.

Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark.

That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they failed to prevent the financial crisis and paid no price; they are failing now to meet their mandate; and they seem to know no more than the rest of us about the economy.

It is no surprise that populist leaders would be among the most incensed at central banks.

Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.

Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.

A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower.

In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.

Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future.

Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.

What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy.

Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.


Raghuram G. Rajan, Governor of the Reserve Bank of India from 2013 to 2016, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.


Profoundly low interest rates are here to stay

Investors and policymakers must recalibrate their assumptions on capital and investment

Robin Harding




This will be a discomforting, defining week for the global economy. That is not because the US Federal Reserve is set to cut interest rates. Rather it is because of the strikingly low level of rates from which the Fed will start: a range of just 2.25 to 2.5 per cent.

After more than a decade of economic expansion, and despite everything from tariffs to tax cuts, it seems this is as high as US interest rates go. Meanwhile, the European Central Bank is debating whether to reduce its negative rate still further. Until this month, it was possible to imagine that pre-financial crisis levels of 4 to 5 per cent might eventually return. No longer.

According to their own projections, Fed officials believe rates will settle at 2.5 per cent in the long run. Subtract their 2 per cent inflation target and the real reward for capital is going to be a miserable 0.5 per cent. The equivalent rate in Europe and Japan will almost certainly be much lower. Such low levels of interest rates are a profound change from the past. (The federal funds rate was 6.5 per cent, and the real rate was about 4 per cent as recently as 2000.)

Although interest rates touch almost every aspect of economic life, the developed world remains deep in denial about the consequences. Here are eight themes for investors and policymakers to ponder.

First, there is an intimate link between long-run interest rates and long-run economic growth. Perhaps capital is less relevant to the digital economy, but for interest rates to max out at such low levels sends an alarming signal about the prospects for future expansion.

Second, monetary policy is broken. In 2008-09, the Fed cut rates by 5 percentage points and it was not enough. Today it has far less room to respond to a recession. The Bank of Japan, which made no move on Tuesday, has all but given up trying to hit its 2 per cent inflation target. The ECB is in danger of going the same way. The world is dismally unprepared for a downturn: two of the world’s most influential central banks may start the next recession with their policy rate already below zero.

Third, if monetary policy is broken, fiscal policy must step in. That means either governments must approve higher spending and tax cuts in response to a recession or else give the central bank a fiscal tool in the form of “helicopter money”, essentially printing money to spend or distribute to the public. Alternatively, governments could set higher inflation targets and use fiscal policy to reach them now. That would give their central banks more room to cut when they need it.

Fourth, lower interest rates make debt more sustainable. This is particularly true for public debt, because countries actually borrow at these low risk-free rates, and somewhat true for private debt. For many countries, it makes sense to borrow more in order to invest. Predictions of financial crisis based on past levels of debt-to-gross domestic product are likely to be misleading.

Fifth, capital stock should rise relative to output. Investments that were once unprofitable now make sense: road upgrades to save a few minutes of time; expensive, niche drugs to help a few hundred people; or extra years of study to earn a graduate degree. Such projects may feel irrational. They are not.

Sixth, any asset in fixed supply is now more valuable, because its future cash flows can be discounted at a lower rate. A monopoly supplier of water or electricity, land in a city centre or the back catalogue of Disney: the capital value of these assets must rise, so their yield matches the lower interest rates. This trend is related to recent movements in wealth inequality. It also puts investors at risk of identifying financial bubbles that do not actually exist. One vital policy response would be to slash the return on capital allowed to utilities.

Seventh, demand for housing will rise. It is, after all, the main capital asset that most people use. There are two potential outcomes. Where it is possible to build, permanently lower interest rates will trigger an increase in the housing stock. If it is not possible to build, then houses will behave like assets in fixed supply, and soar in price. Thus falling interest rates make planning and zoning rules a crucial economic issue.

Eighth, low interest rates make it harder to save. In particular, they make it harder to save for a pension, and harder to live off whatever capital accumulates. This fact has been obscured by the one-off rise in price for scarce assets, many of which are owned by pension funds. But future returns are likely to fall. The result will force workers to accept some combination of later retirement, higher taxes, bigger pension contributions or lower incomes in old age.

It is possible that this bout of low interest rates will end. Perhaps the Fed is mistaken and it will have to raise rates sharply in the future. Perhaps a burst of technological progress will raise growth and boost demand for capital.

But no one can choose to make that happen: this is not some perverse plot by Fed chair Jay Powell and ECB president Mario Draghi to make life miserable for the world’s savers. The long-run real interest rate balances the desire to save and demand to invest. Central banks are its servants not its masters.

The trend towards lower real interest rates has lasted for decades and is as likely to continue as to reverse. With central banks moving to ease, it is time to stop waiting for rates to recover and face the world as we find it.