Markets Insight

Cash entices as central banks diverge

Mohamed El-Erian

Fed signals December rate rise while ECB suggests more QE

ECB president Mario Draghi©Reuters
ECB president Mario Draghi

Recent signals from the European Central Bank and the Federal Reserve have reignited talk of divergent monetary policies among the world’s two most influential central banks.
The short-term implications for investors include a stronger dollar, greater equity market volatility and a wider trading range for key interest rate differentials. The longer-term consequences are up for grabs. Both suggest investors should revisit conventional wisdom that dismisses cash as a “wasting asset” in their portfolios.
Following last week’s policy meeting, the Fed signalled that, contrary to consensus market expectations, the December meeting was “live” when it comes to the possibility of the first interest rate rise for almost 10 years. It did so implicitly, by downplaying concerns about international economic and financial instability that — previously — had kept the central bank on the sidelines; and explicitly, by referring to the process of “determining whether it will be appropriate to raise the target range [for the federal funds rate] at its next meeting”.
These signals stand in stark contrast to what came out of the ECB a week earlier. Mario Draghi , ECB president, indicated the central bank’s readiness to increase its large-scale security purchase programme to counter economic weakness and deflationary pressures.
The opposing policy signals bring back to the fore a policy divergence that, in recent months, had been muted by developments in the emerging world. A broad-based weakening in economic growth became evident in emerging markets during the summer, with every systemically important economy slowing (including China) and two of them in recession (Brazil and Russia). The financial market dislocations that followed raised alarm bells on both sides of the Atlantic in view of concerns about unfavourable spillovers. With that, the Fed had no choice but to signal increased dovishness at its September meeting.
Now that emerging markets have calmed down quite a bit — helped in part by additional Chinese monetary stimulus — the Fed feels more comfortable about diverging from other central banks. Such divergence will fuel dollar appreciation, particularly against the euro. But the dollar is unlikely to move far enough to accommodate fully the required relative price changes throughout the economy. As such, the trading range for the differential between US and German government yields will increase.

Together with pockets of concern about the consequences of a less united and less market supportive central banking community, that is likely to trigger more frequent bouts of heightened equity market volatility.

The longer-term implications are harder to pin down. Persistent policy divergence will prove hard to maintain given the extent of interconnectedness, as well as limits to US willingness to allow its currency to carry the burden of the adjustment process. Either the Fed will be forced to reverse course as the US economy is pressured by persistent weakness in Europe and the emerging world; or, a more comprehensive policy response out of Europe reinvigorates growth there, enabling the ECB to start its own policy normalisation process.

In responding to these considerations, investors should revisit the conventional wisdom that cash, deemed a “wasting asset”, does not have a legitimate place in sophisticated asset allocations. Instead, this is a world in which a good cushion of cash and cash equivalents in portfolios makes sense for both strategic and tactical reasons.

In the short term, it places investors in a good position to scale into the inevitable price overshoots that are likely to materialise, together with excessive contagion within asset classes and unusual correlations between them. As we were reminded on several occasions this year, this is a market in which fundamentally solid stocks and bonds can easily get unduly contaminated by weaknesses elsewhere, especially given the high likelihood of patchy liquidity.

Over the longer term, a strategic cash cushion provides investors with an important element of resilience at a time of genuine uncertainty. It remains unclear whether the global economy will transition to broader-based growth, thereby validating elevated market prices, or tip into even lower global growth and financial instability as weaker fundamentals undermine central banks’ effectiveness in suppressing volatility and bolstering asset prices.

Mohamed El-Erian is chief economic adviser to Allianz and chair of President Barack Obama’s Global Development Council

Up and Down Wall Street

China’s New Economics: Two for the Money

With few births and a graying population, China will allow couples to have two children, in the hope that reproduction will foster economic demand.

By Randall W. Forsyth        

Oh, Say, can you see this?

That would be Jean-Baptiste Say, the 18th century French economist famous for his law that production is the source of demand because income from output provides the wherewithal for spending.

China introduced a corollary to Say’s Law last week, which might be summed up as reproduction drives demand. The Communist Party ended its one-child policy and allowed all married couples to have two kids.

The change is supposed to alleviate the demographic squeeze seen in virtually every industrialized nation, that of an aging population with a stagnant or shrinking workforce. That trend will be even more severe in China in coming decades because of its longtime and draconian curbs on having more than one child.

According to Bank Credit Analyst, population growth has been slowing sharply around the globe, the result of an inverse relationship between per capita gross domestic product and fertility; as societies get richer, they have fewer babies. And China has been in the forefront of that trend, with population growth slowing to about 0.5% per annum, less than a third the pace of the late 1980s.

The effects of any uptick in China’s labor workforce, of course, won’t be felt for at least a couple of decades. For now, the only increase in labor will be on the part of new mothers. So, most demographers thought the change in the one-child rule was years overdue.

But there could have been another motivation. Beijing has been trying to engineer a massive reorientation of its economy, away from exports and investments in capital goods and property, and toward consumer spending. As any new parent knows, babies mean buying—lots of stuff.

Call it a different kind of quantitative easing. Even more than the six rounds of interest-rate cuts in the past year, the change allowing couples to have a second baby could spur spending in nine months, if not sooner. The stock market, being forward-looking, bid up shares of diaper makers, baby-bottle manufacturers, and skin-care product makers (although a condom producer saw a decline), say published reports.

From my recollection of when our kids were young, Chinese couples can look forward to their abodes being taken over by all sorts of colored plastic stuff. They then may be spurred to move to bigger living quarters, perhaps in one of those empty apartment towers in the ghost cities that have sprung up around the nation, which were based on the notion of build it and they will come.

But the prospect of shelling out for all that stuff—plus the other expenses that aspirational parents in China (and in lots of other places) can look forward to, such as tuitions, tutoring, sports teams, camps, computers, phones, and the list goes on—may prove a deterrent to bigger families. And that doesn’t speak to the more serious problem of the lack of affordable child care.

The economic implications of graying populations with shrinking workforces and increased ranks of retirees are dire, BCA concludes. Demand will be hurt by a shrinking consumer market, while supply will be curbed by a smaller workforce—unless there’s a surge in productivity, which has been going the other way. Resources needed to support an aging dependent population will be diverted from other uses. And possible tax hikes to fund social spending could further hamper growth.

BCA’s outlook, contained in a report cheerfully titled “No Way Out,” does have some positives: “The clearest investment conclusion emerging from the analysis is that the secular bull market in health-care stocks is in its infancy, and increased public spending on health care will crowd out investment in other sectors. Public spending on health care has been increasing for a few decades now, but if economic growth is going to be stuck in a slower growth pattern, then it is likely that individuals will concentrate on improving their quality of life, further accentuating this trend.”

Yet health-care companies continue to be hellbent on combining to fend off pricing pressures, competition, and taxes. Pfizer (ticker: PFE) last week reported it was in talks to link up with Allergan (AGN), which would effectively move its domicile to tax-friendly Ireland (see Pfizer feature). That comes on the heels of Pfizer’s acquiring Hospira, and Actavis taking over Allergan this year. (They kept the Allergan name.) Also last week, Walgreens Boots Alliance (WAG) said it is acquiring Rite Aid (RAD). And that’s just last week’s deals.

At least they’re all fighting over a growing pie. JPMorgan economist Daniel Silver points out that health care has been driving consumers’ outlays. Growth in health-care expenditures accelerated to a 4.7% annual rate in the third quarter from 3% in the corresponding 2014 period. Growth in spending on all other goods and services has remained steady, however, which suggests where some of the “windfall” from lower energy costs went. At the same time, “solid job growth in the health-care industry has corresponded with accelerating wage gains,” Silver adds.

Demographics is destiny, it’s often been said. China is trying to alter its demographically dictated future by letting couples have more babies, which could help its economy in the short run and couldn’t hurt in the long run. For the rest of the world, spending and investing will be increasingly about paying for health care for an aging population.

THE STOCK MARKET ENDED OCTOBER, a month best known for infamous crashes, with some nice gains. Wilshire Associates reckons that holders of U.S. stocks wound up the month some $1.8 trillion wealthier, on paper at least, a rise of 7.6%. Among the popular averages, the Dow added 8.47%, the S&P 500 tacked on 8.30%, while the Nasdaq 9.38%, all best showings since October 2011.

While the initial batch of third-quarter earnings released in the month matched the lowered expectations analysts had set, the real credit for October’s advance goes to, well, credit. Credit spreads narrowed after having widened sharply during the stock market’s summer swoon, allowing the capital markets to continue to fund massive deals and share buybacks. As our colleague Amey Stone noted in her Income Investing blog on, companies brought some $19 billion of bonds to market on Thursday alone, including a $13 billion megaoffering by Microsoft (MSFT) to help fund repurchases of its stock already at a 15-year high.

The benign interest-rate environment was abetted by the Federal Reserve’s decision in September to hold off on lifting rates anytime soon, which was joined by strong hints by the European Central Bank that it would probably expand its bond purchases, plus further cuts in interest rates and bank reserve requirements by the People’s Bank of China.

But the Federal Open Market Committee last week made clear that the first rate hike from its near-zero federal-funds rate target, which has prevailed for nearly seven years, will be on the table at its Dec. 15-16 confab. Assuming the Fed’s key economic markers—employment and inflation—make progress in reaching its targets, we should have liftoff.

That’s a big if.

Fed-funds futures contracts are giving about even-money odds on that happening, but Michael Darda, chief economist and market strategist at MKM Partners, remains skeptical about a December hike.

With the Fed’s quantitative easing having ended a year ago, growth in current-dollar gross domestic product has slowed to the low end of its five-year range—something that also happened when the Fed wound up its first two rounds of QE. And that also applies if factors such as trade, inventories, and government spending—things that depressed third-quarter real GDP growth—are stripped away. And inflation (based on the Fed’s favored measure, the core personal consumption deflator) is running materially below the central bank’s 2% target.

“Commencing a tightening process from the [zero lower bound] on short rates with 1) slowing nominal growth, 2) inflation below target, 3) expected inflation below target consistent levels, and 4) lingering credit stress seems like a strategy with considerable downside risk,” Darda writes.

Fed officials emphasize that their decisions depend on the data, which makes the next two employment reports crucial, with October’s numbers on tap this Friday. Forecasts are for nonfarm payrolls to return to trend, with a gain of about 180,000 after September’s punk 142,000 rise. The jobless rate is expected to remain at 5.1%—just above a key dividing line for investors, according to Jim Paulsen, chief investment strategist at Wells Capital Management.
When unemployment dips below 5%, he finds, stock and bond investors don’t do nearly as well as when it’s higher, even as workers fare better.

Looking back to cycles dating to 1948, Jim finds that stock returns were nearly twice as strong and long-term government-bond returns almost four times greater when joblessness was above 5% than when it was lower. Moreover, stock and bond investors tended to suffer monthly declines more frequently when the rate was below that level.

Historically, Jim explains, bond yields have tended to be on the rise once the jobless rate drops under 5%, and the next recession has been less than two years away. In other words, the economic cycle’s end was nigh.

An exception was the late 1990s, during the tech boom. That was accompanied by strong productivity gains, which he notes are conspicuously missing these days.

So, at full employment, risks in stocks or bonds aren’t well rewarded. Far from being a perma-bear, Jim was a steadfast stock bull until about a year ago. Since then, the major averages are little changed, even with October’s gains. That’s worth mulling.

Paul Ryan and the Trumpians

Ryan and the Freedom Caucus do a deal to avoid the political wilderness.

By Daniel Henninger 

In the months preceding the October eruption, the broader American electorate had spent every day coming to grips with the possibility that the GOP’s presidential nominee would be the mercurial ex-host of “Celebrity Apprentice.”

The possibility loomed that the Freedom Caucus, after ending John Boehner’s Speakership and tanking Kevin McCarthy’s chances of succeeding him, would convince American voters that the Republicans were a party that preferred internal party chaos to governing the country.

This Thursday, with a strong majority of the Freedom Caucus in support, Rep. Paul Ryan of Wisconsin becomes House Speaker. Concurrently, Mr. Boehner, like a condemned but honorable Roman consul, released Mr. Ryan from the deadly politics of the debt limit and budget. The departing House leader knows that Mr. Ryan’s denunciation of the deal was strictly business.

A useful cliché holds that every cloud has a silver lining. If so, the resolution of the Speaker standoff in the House (none dare call it “compromise”) offers the chance of a way forward into 2016 for the Republicans’ feuding tribes.

We may assume Paul Ryan did not spend the past week re-reading “Gulliver’s Travels,” Jonathan Swift’s satire of 18th-century British politics, whose myriad disputes look a lot like American politics in our time.

After the McCarthy shipwreck, Paul Ryan, like a Gulliver captured by the Lilliputians, washed up on the floor of the House of Representatives, and immediately found himself tied down by the pesky Freedom Caucus. One might call them the Trumpians.

In Swift’s original, the Lilliputians are having an intense intraparty dispute over whether soft-boiled eggs should be cracked at the large end or small end. Lilliputians were either Big-Enders or Little-Enders, just as some have separated Republicans into “Conservatives” or “Establishment.” Mr. Ryan spent two weeks untangling the Freedom Caucus’s concerns, such as whether to revive the Hastert Rule and other procedural details.   

Republican National Committee Chairman Reince Priebus, in a recent interview with the Washington Examiner, said, “We’re cooked as a party for quite awhile if we don’t win in 2016.” He said the GOP risks becoming a party that wins midterm elections but isn’t up to winning the presidency so that it can govern.

Paul Ryan and two-thirds of the Freedom Caucus have just shown they wish to govern rather than fight each other. Can the same be said for the party’s base? That’s not clear.

One day after the path cleared to the Ryan Speakership, a sub-faction of conservatives said they were furious at . . . the Freedom Caucus! You’ve heard of road rage? Politics now seems to have its own instant-anger phenomenon—radio rage. That’s fine. The political raging on the radio is entertaining, a testament to the market system. The best reaction to the “sellout” charge came from Rep. Ken Buck of Colorado, a Ryan supporter in the Freedom Caucus, who was asked if he feared the pitchforks back home. No, replied Mr. Buck, “I’m the guy with the pitchfork.”

The Republican electorate is a cauldron of anger, principle, desperation and personal agendas. No one understands exactly what is going on inside the base, and that now includes Donald Trump, the great disrupter, who this week said he was mystified by Ben Carson’s rising appeal.

Remember Charles and David Koch? Until Donald Trump, Ben Carson and Carly Fiorina shot past the Republican field, the enraged left—led by Sen. Elizabeth Warren, Barack Obama and now Hillary Clinton—bellowed that the Koch brothers’ “dark money” and Citizens United were wrecking “our democracy.” So much for that.

Charles Koch opened up to The Wall Street Journal this week about the GOP’s primary fight and gave some good, free advice to the party’s Trumpians, Carsonians and Tea Partiers: “Typically, what happens when voters are frustrated is they give the government even more power.”

What Mr. Koch no doubt sees is that if enough irreconcilably unhappy voters in a divided party don’t vote next November, then Hillary Clinton, a born-again progressive, will win because Democrats will salute her and vote.

A left-dependent Clinton presidency, the third Obama term, guarantees four and maybe eight more years of weak, socially destructive economic growth. That will bring public demands for more government than any conservative has ever dreamed of. You’ll see executive orders on steroids.

The agreement between Paul Ryan and the Freedom Caucus was not a presidential election.

But it was a reality check on the uses, and limits, of political anger. It opens a way forward for Republicans who don’t want to spend a very long time crying and complaining in the wilderness.

Fed's US Debt Bomb

By: Adam Hamilton

With the Federal Reserve's first rate-hike cycle in nearly a decade looming, traders are working overtime trying to divine its timing and impact on the markets. They are closely monitoring the same employment and inflation data the Fed will use to start tightening. But there's another little-discussed concern for the Fed, the solvency of the US government. The Fed's zero-interest-rate policy has spawned a grave US debt bomb.

Back in late 2008, the US stock markets suffered their first true stock panic since 1907. This once-in-a-century fear superstorm proved catastrophic. In a single month leading into October 2008, the flagship S&P 500 stock index plummeted 30.0%. Over 6/7ths of these losses happened in 2 weeks, a massive 25.9% cratering! That exceeded the threshold for a stock panic, which is a 20%+ plunge in a couple weeks.

Such extreme selling catapulted fear so high that the S&P 500 had fallen another 11.4% less than a month later! The American central bankers certainly weren't immune to this epic fear, so they joined the traders in panicking. The Fed feared that the stock panic's wealth effect, the tendency for weaker stocks to retard consumer spending, would cast the entire US economy over a cliff right into a new great depression.

So the central bankers acted quickly to try and restore confidence through shoring up the devastated stock markets. The Fed slashed its key federal-funds rate two separate times in October 2008 for 50 basis points each. This certainly didn't stop the extreme stock selling, so the Fed desperately made an enormous 100bp cut in December! That blasted the federal-funds rate to zero, beginning the ZIRP era.

Running a zero-interest-rate policy is an extreme measure that central banks rarely use. It is reserved for dire economic emergencies, and then promptly reversed soon after. Indeed upon panicking into ZIRP, Fed officials promised that highly-distorting condition would be temporary. Yet here we are, 6.9 years later, and ZIRP is still in place! The Fed has lacked the courage to normalize its extreme stock-panic policies.

ZIRP is super-problematic on all kinds of fronts. It greatly distorts financial markets, unleashing a torrent of easy money that bids up prices. The Fed's ZIRP and quantitative-easing money-printing campaigns fueled recent years' extraordinary stock-market levitation.

American corporations borrowed way over a trillion dollars at the Fed's record-low rates, using cheap money to manipulate their stock prices higher via buybacks.

Companies certainly weren't the only large borrowers taking advantage of the ZIRP extremes.

The stock panic and its aftermath also had an enormous impact on the United States federal government. 2008's critical presidential elections were held in early November just a week after the US stock markets had lost nearly a third of their value in a single month. Scared Americans desperately wanted something to change.

Provocatively, stock-market performance leading into US presidential elections happens to be one of the best predictors of their outcomes. Since 1900, the fate of the US stock markets in the Septembers and Octobers before early-November elections has predicted the winner 26 out of 29 times. This is a 90% success rate! In 10 of the 12 times the stock markets fell in those final 2 months, the incumbent party lost.

And with the S&P 500 plummeting 24.5% in September and October 2008, the incumbent Republicans didn't have a prayer of winning that election. The Democrats' Barack Obama won 52.9% of the popular vote, and then assumed office in January 2009. He represents the American political party that has always been known for its fanatical devotion to excessive government spending. ZIRP greatly facilitated that.

The Fed's extreme artificially-low interest rates were implemented right between Obama's election win and his inauguration. The Democrats also won decisive majorities in the US Senate and House of Representatives in that stock-panic election. So the party that fervently believes bigger government is the solution to all problems controlled all the levers of power, and it rushed to expand government spending.

But not surprisingly the already-heavily-indebted US government wasn't running a surplus, so the only way it could spend more was by first borrowing that money in the markets. Normally interest rates act as a critical constraint on that government borrowing. Excessive bond issuance (demand for money) leads to higher interest rates, which make the debt-servicing costs more expensive to naturally limit debt growth.

But first with ZIRP and later with quantitative easing, the Federal Reserve systematically removed all the free-market restraints on government spending. ZIRP forced short-term interest rates down near zero, and the federal government eagerly rushed to borrow for next to nothing. Then later the Fed started to actively conjure up new money out of thin air to buy US government bonds, classic debt monetization.

This gross Fed manipulation naturally led to extreme record government spending and deficits, both absolutely and as a percentage of the US economy. This first chart looks at the latter over the past 65 years or so. Note that the US government runs fiscal years that end on September 30th, so 2015 is already in the books. The damage the Fed and Democrats wreaked on US finances is just staggering.

US Finances GDP Percent 1950-2015

For a half-century ending in 2007 before that extreme stock-panic year in 2008, US federal government spending averaged 20.3% of US gross domestic product. The Obama years saw this soar to a record 25.2% in 2010, and an average of 23.6%. This is about 1/6th higher than the long-term norm, trillions of dollars of new government spending beyond precedent. The Democrats didn't scrimp on government largesse!

They financed their record spending with record borrowing, as evidenced by the massive red federal-deficit bars. For 50 years prior to that once-in-a-century stock panic, federal deficits averaged 2.0% of GDP. And in all fairness to the Democrats, the big-spending Ronald Reagan years in the 1980s saw some of the worst deficits before the panic. But Obama and his Democratic Congress shattered those records.

Deficits under Obama skyrocketed to a crazy record 9.8% of GDP in 2009 per the latest data from the US Treasury and Federal Reserve! Their average level during the Obama years was 6.1% of GDP, which is more than triple the half-century precedent! The government spending since the stock panic under the Democrats has been vast beyond belief. This couldn't have happened without the Fed's zero-rate manipulation.

Thankfully those extreme deficits have normalized in recent years, which Obama loves to point out in his political speeches. The record government spending retreated to merely super-high levels, and taxes as a percentage of GDP surged with the Fed-levitated US stock markets. But higher federal receipts are fleeting, as stock bear markets hammer them as was evident in the early-2000s and late-2000s cyclical bears.

But a far-larger problem than unsustainable levels of federal-government tax receipts are those record deficits' contribution to the federal government's debt. While deficits are how much spending exceeds income in any year, debt is the cumulative total of all years' excessive spending. Just slowing the rate of overspending doesn't even start to address the debt already accumulated. And that is the Fed's debt bomb.

Imagine if you had a $100k income but also $100k in credit-card debt after many years of spending more than you earned. Even when you stop living beyond your means and borrowing, that massive debt load remains. And if the interest rates charged on those credit cards rise high enough, merely servicing that existing debt could easily threaten to bankrupt you. The US government now faces this dire situation.

This next chart looks at the total federal debt over the past 35 years or so. Superimposed on top of that are some average annual interest rates. They include yields on 1-year and 10-year US Treasuries that represent short and long rates. And the blue line is the effective US interest rate, the actual money the US government pays in interest each year divided by the federal debt.

This keeps Fed officials awake at night.

US Debt and Interest Rates 1980-2015

Between 1983 and 2007, the quarter-century span before the stock panic, the US federal debt grew at an average of 8.7% annually. Washington was spending almost 9% more than it took in through taxes. And the Obama years since 2009 surprisingly didn't greatly exceed this precedent, with average debt growth of 9.5% per year. That's only about 1/11th higher. But the raw-dollar size of that borrowing was incredible.

In the Obama years, the federal debt skyrocketed $8.7t or 87% higher! That was as much absolute debt growth in 7 years as had previously taken 25 years. The acceleration of raw debt since the stock panic is readily evident in this chart. It mirrors a parabolic ascent, which is very dangerous when we're talking about federal-debt levels now exceeding the size of the entire US economy! The Fed's ZIRP enabled all this.

For the quarter-century prior to the stock panic, 1-year US Treasuries and 10-year US Treasuries had average yields of 5.6% and 6.9%. These fair-market interest rates were what it cost the US government to borrow money in the bond markets. They worked to constrain debt growth, because it was expensive to pay the interest on existing debt. Those 25 years saw an average effective US government interest rate of 6.4%.

But the Fed's gross manipulations following the stock panic radically changed prevailing interest rates on both ends of the yield curve. The Fed's supposedly-temporary zero-interest-rate-policy crisis measure aggressively dragged down all short-term rates. And the US government rushed to take advantage of this cheap money by rolling over maturing Treasuries into new Treasuries with shorter average maturities.

And soon after ZIRP, the Fed formally launched quantitative easing in early 2009. QE is just a fancy euphemism for monetizing debt, creating new money out of thin air to buy bonds. QE1 was expanded to include direct Fed buying of US Treasuries, which QE2 and QE3 continued at ever-higher levels.

The Fed was very transparent in brazenly admitting it was buying Treasuries to manipulate long interest rates lower.

When the Fed creates money to buy bonds, this additional demand bids up bond prices. And the higher the price of any bond, the lower its yield. QE enabled the Obama Administration to borrow vastly more money at far lower rates than it ever could've hoped to in normal market conditions. But the interest the US government was paying to service this debt was artificially low, like a temporary teaser rate on credit cards.

As the national debt was skyrocketing higher since the stock panic thanks to the Democrats' extreme overspending facilitated by the Fed, the interest paid on each dollar borrowed was plunging. The preliminary data for fiscal 2015 just ended suggests an effective interest rate of less than 2.2% on the US government's incredible $18.7t in debt! That is a ticking time bomb for the Fed, a critical rate-hike consideration.

As the Fed hikes rates, the entire interest-rate complex including the yields on US Treasuries will rise to reflect this. And that's a colossal problem for a US government up to its eyeballs in debt. In fiscal 2015 the US government had to pay $402b in interest expenses on its enormous debt, less than 2.2%. That's only about a third of the quarter-century average effective interest rate before the Fed's ZIRP and QE arrived.

If the Fed fully normalizes interest rates, which the global bond markets will probably eventually force whether the Fed wants to or not, the very solvency of the US government comes into question.

At the pre-ZIRP average effective interest rate of 6.4%, the interest expenses on $18.7t in government debt would rocket to $1200b per year! That would likely prove to be an insurmountable hurdle for the US government.

There are two kinds of spending the US government does, mandatory and discretionary. The former accounts for over 60% of all spending and happens automatically. It includes giant welfare programs on autopilot like Medicare and Social Security. These transfer payments can't be lowered without a huge backlash from the voters who rely on them, and the Democrats wouldn't cut government payments for anything.

The minority remainder of overall spending is discretionary, and includes everything else done by the federal government including the military. In 2015, this discretionary spending totaled about $1.1t out of $3.4t or so. If Fed rate hikes return interest rates to normal levels, it would cost the US government another $800b just to service its existing debt. That would devour nearly 3/4ths of all discretionary government spending!

This is a nightmare scenario for the US government, which includes the Federal Reserve. Such a giant jump in interest expenses would force catastrophic cuts in government services including the military (54% of discretionary). The only other alternative would be to "finance" these soaring interest payments by issuing more debt. But that's like borrowing on a credit card to pay interest, it accelerates the debt spiral.

Even if the Fed's coming rate-hike cycle is exceedingly gradual and prolonged, if the global markets refrain from forcing the Fed's hand, the consequences for the US government are still dire. If the new effective interest rate the US is forced to pay is merely halfway between current extreme levels and the quarter-century pre-ZIRP average, or 4.3%, it would still double the government's annual interest payments!

A $400b jump in debt-servicing costs would be almost as catastrophic against a $1100b discretionary budget as an $800b jump. There would either have to be draconian cuts in government spending on salaries and services or else a massive jump in deficits. And running bigger deficits is super-risky since that greatly increases the odds the world markets will force interest rates higher far faster than the Fed wants.

Today's Fed-conjured fantasyland of record-low interest rates combined with record-high federal debt levels is exceedingly dangerous. It is literally a ticking time bomb that truly threatens to bankrupt the US government! I strongly suspect this dire situation is far more pressing on the minds of Fed officials when it comes to rate-hike decisions than the usual considerations of employment, inflation, and market impact.

Thanks to the astoundingly-reckless excessive government spending under Obama enabled by the Fed's ZIRP and QE, there's a good chance the Fed can't even attempt another meaningful rate-hike cycle. It may try to manipulate rates lower forever or risk its very existence. And politics will really come into play leading into next year's critical presidential election as well. 

Remember Janet Yellen is a hardcore Democrat.

Fed rate-hike cycles are very damaging to stock markets. The end of easy money hammers stocks from multiple fronts. Higher rates slow overall national spending which weighs on corporate sales and profits, leading to higher valuations. Interest expenses rise too, further eroding earnings. On top of all that, rising bond yields make stocks relatively less attractive. So stock markets don't fare well in rate-hike cycles.

And with the fate of the stock markets late next year having a 90% chance of predicting the outcome of the next presidential election, it's hard to imagine Yellen taking the risk of all but guaranteeing a loss for her party. And since rate hikes will initially lead to rapid federal-deficit growth since spending cuts will be aggressively resisted, the Yellen Fed will be unlikely to hike rates materially in a presidential-election year.

So with the grave implications for the Fed's government master if interest rates even start to normalize, it is hard to imagine a big new rate-hike cycle. The Democratic-run hyper-dovish Fed is exceedingly unlikely to risk tanking the Democratic-run epically-profligate US government. Through its wildly-irresponsible ZIRP and QE policies, the Fed has created a US debt bomb that appears impossibly intractable to defuse.

And if the Fed can't materially hike rates any more due to the catastrophic impact that will have on the US government, the primary beneficiary will be gold. Along with the Fed's ZIRP-and-QE-spawned stock-market levitation, the main reason gold has been so weak in recent years is futures speculators' fear that Fed rate hikes will crush this zero-yielding asset. That's ironic because history proves just the opposite!

But if traders come to realize the Fed has painted itself so deep into a corner that any meaningful normalization of rates is impossible without bankrupting the US government, investors are going to flock back to gold. It thrives in low-real-rate environments, the natural consequence of central-bank interest-rate manipulation. And as gold enjoys an investment renaissance, the dirt-cheap gold stocks are going to soar.

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The bottom line is the Fed's radically-unprecedented easy-money policies since the stock panic have created a dangerous US government debt bomb. ZIRP and QE artificially forced interest rates down to record lows, enabling epic overspending by the Democratic government under Obama. The resulting debt load has grown so massive that merely normal interest rates will literally bankrupt the US government.

This Democratic-led Fed isn't going to embark on a meaningful rate-hike cycle if it forces its government master into serious jeopardy. The dire realty of this situation likely means lower rates for longer. While the Fed may make isolated token rate hikes here and there, a full normalization isn't going to happen with the US government in mortal peril. The asset most likely to thrive in a lower-rates-forever scenario is gold.

War of The Worlds

By: The Burning Platform

"We know now that in the early years of the twentieth century this world was being watched closely by intelligences greater than man's and yet as mortal as his own. We know now that as human beings busied themselves about their various concerns they were scrutinized and studied, perhaps almost as narrowly as a man with a microscope might scrutinize the transient creatures that swarm and multiply in a drop of water. With infinite complacence men went to and fro over the earth about their little affairs ... In the thirty-ninth year of the twentieth century came the great disillusionment. It was near the end of October. Business was better. The war scare was over. More men were back at work. Sales were picking up."  
- Opening monologue of War of the Worlds broadcast - October 30,1938
Orson Welles War of the Worlds Broadcast

It was 77 years ago this week that Orson Welles struck terror into the hearts of Americans with his live radio broadcast of the HG Wells classic War of the Worlds. The broadcast began at 8:00 pm on Mischief Night 1938. As I was searching for anything of interest to watch the other night on the 600 cable stations available 24/7, I stumbled across a PBS program about Welles' famous broadcast. As I watched the program, I was struck by how this episode during the last Fourth Turning and how people react to events is so similar to how people are reacting during the current Fourth Turning. History may not repeat exactly, but it certainly rhymes.

It was the ninth year of the Fourth Turning. The Great Depression was still in progress. After a few years of a faux recovery (stock market up 400% from the 1932 low to its 1937 high) for the few, with the majority still suffering, another violent leg down struck in 1938. GDP collapsed, unemployment spiked back towards 20%, and the stock market crashed by 50%. The hodgepodge of New Deal make work programs and Federal Reserve machinations failed miserably to lift the country out of its doldrums. Sound familiar? The average American household had not seen their lives improve and now the foreboding threat of war hung over their heads.

The national hysteria over a play about the ridiculously impossible plot of Martians attacking Grover's Mill, New Jersey seems crazy without the benefit of context. The nation was already on edge. They had just suffered another economic blow to their solar plexus, and now the drumbeats of war in Europe were growing louder. Welles' biographer Frank Brady described the mindset of the nation:
"For the entire month prior to 'The War of the Worlds', radio had kept the American public alert to the ominous happenings throughout the world. The Munich crisis was at its height. ... For the first time in history, the public could tune into their radios every night and hear, boot by boot, accusation by accusation, threat by threat, the rumblings that seemed inevitably leading to a world war."
Studies discovered that fewer than one-third of frightened listeners understood the invaders to be aliens; most thought they were listening to reports of a German invasion or a natural catastrophe. The public allowed their emotions to overcome their rational mind. Playing upon people's fears becomes easier when they are emotionally susceptible and beaten down from years of bad news. Even though it was specifically stated the show was a work of fiction, the mental state of the country was so panicked, people believed something bad was on the verge of happening and allowed themselves to believe.

Nation Is Swept In Fear By Martian Invasion

Much of the credit for the realism of the broadcast goes to Welles, a brilliant showman, who went on to create one of the greatest movies ever made just three years later - Citizen Kane.

Welles thought the script was dull, just a day or two before the broadcast. He stressed the importance of inserting news flashes and eyewitness accounts into the script to create a sense of urgency and excitement. The nation had gotten used to breaking news bulletins during the Munich Crisis.

Another important issue was the fact the Mercury Theater on the Air was a radio show without commercial interruptions, adding to the program's realism. The entire episode lasted 90 minutes and at the end of the play Welles assumed his role as host and told listeners the broadcast was a Halloween concoction: the equivalent, he said, "of dressing up in a sheet, jumping out of a bush and saying, 'Boo!'" Despite the announcements before and after the show, the outrage and calls for Orson Welles' head were deafening.

What struck me while watching the PBS retrospective were the similarities between then and now. The gullibility of the masses, the power of fear, the overreaction by the media, busy bodies calling for the government to do something, and the effectiveness of propaganda are all commonalities between that Fourth Turning and today's Fourth Turning.

Evidently some listeners heard only a portion of the broadcast because they had been tuned into the Edgar Bergen Show and switched to CBS radio after the play had begun. Some of these people were overcome with fear as the tension and anxiety prior to World War II led them to mistake it for a genuine news broadcast. Thousands of those people rushed to share the false reports with others, or called CBS, newspapers, or the police to ask if the broadcast was real.

The telephone switchboards were overcome with volume and policeman overstepped their authority and entered the CBS studios to try and stop the show mid-broadcast. Evidently, the authorities weren't big fans of the First Amendment or Fourth Amendment in 1938 either.

Retrospective analysis has found the hysteria was not as widespread as purported by the mainstream media. The fact the play was performed in NYC, the media capital of the world, and the fictional attack was occurring in New Jersey provided much more publicity to the event. In reality, most of the dupes who were gullible enough to believe that Martians were actually attacking were old people and women. The timeline of the show should have revealed its falsehood to any critical thinking person, as the military somehow was mobilized and defeated within a 30 minute window.

It seems our society will always have a large swath of people who will believe anything they are told by the media or the government. Our government run public education system now matriculates millions of functionally illiterate zombie like creatures into society, who can be easily manipulated and controlled through the use of mass media and false propaganda. Those who constitute the invisible government behind the Deep State duly noted the psychological power of fear during this episode in history.

The master of propaganda during that age even noted the impact on the American public.

Adolf Hitler referenced the broadcast in a speech in Munich on November 8, 1938. Welles later remarked that Hitler cited the effect of the broadcast on the American public as evidence of "the corrupt condition and decadent state of affairs in democracy". It likely confirmed his belief the democratic countries of the world would not have the guts to stand up to a man willing to wage all out war. He invaded Poland less than one year later, initiating the bloodiest war in history.

Fear is a potent emotion to manipulate by the ruling class among a populace incapable or unwilling to think for themselves. The men behind the curtain, after decades of perfecting the psychological methods of molding the opinions, tastes, and ideas of the masses, believe they can control society through the use of fear. In 1938 Americans feared Germans, economic hardship, war, and evidently Martian invasions. Today they are taught to fear phantom Muslim terrorists, Russians, Chinese, Iranians, gun owners, anyone who questions government overreach, and anyone who disagrees with the social justice warrior agenda. The father of Edward Bernays, portrayed it succinctly in 1928:
"In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons...who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind."
As I watched the despicable display of yellow journalism by the pathetic excuses for journalists during the CNBC presidential debate the other night, I was reminded of the PBS show and how the press completely blew the War of the Worlds broadcast out of proportion to its actual impact. Within three weeks, newspapers had published at least 12,500 articles about the broadcast and its impact, although the story dropped off the front pages after a few days. It was essentially a tempest in a teapot that has lived on for decades because the press created the outrage and fear.

This is no different than what happens on a daily and weekly basis today. The mainstream media attempts to work the masses into a frenzy over a meaningless debt ceiling "showdown", the latest hurricane or snowstorm, the latest fake terrorist warning, the collapse of Greece, the imminent acquisition of a nuclear bomb by Iran, the invasion of the Ukraine by Russia, or whatever sensationalist storyline that will get them ratings and strike the necessary fear into the hearts of the masses.

Every looming threat is relegated to the back pages of the legacy media rags a few days later.

The degraded faux journalists prefer to distract the willfully ignorant masses with the latest Kardashian/Lamar Odom/Caitlyn Jenner reality TV episode, Oscar fashion shows, professional sports, how to get rich in the stock market infomercials, and how you can have the perfect body segments on one of the dozens of faux news shows.

What I found fascinating in the PBS episode is the never ending calls from busy bodies, control freaks, and lovers of government coercion to do something about everything they don't like. In the days following the broadcast, there was widespread outrage in the media. The program's news-bulletin format was described as deceptive by some newspapers and public figures, leading to an outcry against the perpetrators of the broadcast and calls for regulation by the Federal Communications Commission. How dare Orson Welles broadcast a play, described beforehand as a work of fiction, in a creative, exciting, and realistic manner. Do you see any similarities to calls for the FCC to control the internet, where anti-establishment websites dare to speak the truth?

There will always be a sociopathic segment of the population who want control over everything and everyone. They want bigger government, more laws, more regulations, more restrictions, more taxes and more control over your life. The 1930's marked a huge turning point for this country, with the majority supporting the New Deal and government intervening deeply into our everyday lives.

Today, the government, in the control of bankers, crony corporate interests, billionaires, and captured political hacks, has smothered our freedoms, liberties, entrepreneurial spirit, intellectual debate, and ability to change the system from within.

Shortly after the Welles broadcast, the nation came together and endured seven years of shared sacrifice, with the young men of the country fighting and dying on continents and islands far from our shores in a struggle against aggression. Today, I feel the aggression is coming from within. It's our own government and the men who control it who are the real enemy. The coming struggle during this Fourth Turning is more likely to be American versus American. A prominent figure from the last Fourth Turning saw into the future decades ago, and he was right.

"I am concerned for the security of our great Nation; not so much because of any treat from without, but because of the insidious forces working from within."  
- Douglas MacArthur

News Analysis

The Mystery of the Vanishing Pay Raise


AMID the global economic turmoil and seesawing markets, millions of Americans have one overriding question: When will my pay increase arrive? The nation’s unemployment rate has fallen substantially since the end of the Great Recession, sliding to 5.1 percent from 10 percent in 2009, but wages haven’t accelerated upward, as many had expected.

In fact, the labor market is a lot softer than a 5.1 percent jobless rate would indicate. For one thing, the percentage of Americans who are working has fallen considerably since the recession began. This disappearance of several million workers — as labor force dropouts they are not factored into the jobless rate — has meant continued labor market weakness, which goes far to explain why wage increases remain so elusive. End of story, many economists say.

But work force experts assert that economists ignore many other factors that help explain America’s stubborn wage stagnation. Outsourcing, offshoring and imports exert a steady downward tug on wages. Labor unions have lost considerable muscle. Many employers have embraced pay-for-performance policies that often mean nice bonuses for the few instead of across-the-board raises for the many.

Peter Cappelli, a professor at the Wharton School of Business, noted, for instance, that many retailers give managers bonuses based on whether they keep their labor budgets below a designated ceiling. “They’re punished to the extent they go over those budgets,” Professor Cappelli said. “If you’re a local manager and you’re thinking, ‘Should we bump up wages,’ it could really hit your bonus.
Companies have done this in order to increase the incentive to hang tough on budgets, and it works.”
In recent years, wage increases, before factoring in inflation, have averaged about 2 percent annually.
But real, after-inflation wages have remained dismayingly flat since 2009, according to the Bureau of Labor Statistics, even though real wages did bump up last fall when the drop in oil prices pulled down inflation. (In a minority view, the Heritage Foundation and some other conservative groups say the bureau has underestimated wage increases.)

Even as business executives urge the Federal Reserve to raise interest rates to prevent inflation, a move that might increase unemployment, Janet L. Yellen, the Fed’s chairwoman, says she might want to let the jobless rate fall below 5 percent. The reason: Only then might hundreds of thousands of discouraged workers or the long-term unemployed finally find jobs.
Lawrence Mishel, president of the Economic Policy Institute, a progressive research group, voiced frustration that while wages regularly rose faster than inflation in the 1950s and ’60s, that’s no longer the case. “Why is there this assumption that wages are only going to rise faster than inflation at very low unemployment?” he asked. “Where does that come from?”
Ever since the Great Recession battered corporate revenues and profits, many companies have been far tougher in containing fixed costs, including labor expenses. “With the stock market’s wild behavior and what we’ve seen in China, companies continue to hold on to huge amounts of cash and are reluctant to increase their costs in the form of increasing wages,” said Kerry Chou, a senior practice specialist at WorldatWork, a nonprofit human resources association.
Jared Bernstein, a former chief economist for Vice President Joseph R. Biden Jr., put it another way: “There’s this pervasive norm” among employers “that labor costs must be held down at all costs because maximizing profits is the be-all and end-all.”
He added that the “atomization” of the American workplace — with the use of more temps, subcontractors, part-timers and on-call workers — had reduced companies’ costs and workers’ bargaining power.
As a result of all these trends, the share of corporate income going to workers has sunk to its lowest level since 1951. The Economic Policy Institute found that the decline in labor’s share of corporate income since 2000 costs workers $535 billion annually, or $3,770 per worker.
“The labor share has declined more than you would think in light of the tightening of the labor market,” said Lawrence Katz, a Harvard labor economist. “It suggests we’re seeing a decline in worker bargaining power.”
Another important trend depressing pay is that more than ever, companies are paying top dollar to star performers — whether marketing wizards or software programmers — while skimping on paying the many workers without special skills.

“Right now the labor market is good if you’re a new graduate of Harvard or Stanford in computer science or a new economics Ph.D. or if you’re coming out with a specialized skill in some health occupation,” Professor Katz said. “The upper 10 percent are probably doing O.K. in the labor market, but typical workers are still facing a lot of difficulties.”
As part of this embrace of pay for performance, many companies are giving raises or one-time bonuses only to their best performers, thus helping retain and attract top talent while subtly showing the door to less stellar workers.
“The higher performers are attracted to and will stay with organizations that differentiate higher performers,” said Ken Abosch, North American compensation practice leader for Aon Hewitt, a consulting firm. “Low performers are uncomfortable working in environments that emphasize higher performance so they will sort themselves out.”
In a study of 1,200 American companies, Aon Hewitt found that 25 percent overwhelmingly emphasize rewards to high performers and give far less or nothing in raises or bonuses to average or poor performers. “Those 25 percent say, ‘We’re going to give 6 percent to the top performers, 1.5 percent to average performers and we’re not going to give anything to below average,’ ” Mr. Abosch said.
Just 10 percent of companies give equal raises spread across the board, Mr. Abosch said. And the remaining companies do something in between — giving somewhat higher raises to top performers and somewhat less to everybody else.
Notwithstanding the overall decline in worker leverage, labor efforts like the Fight for 15 and Our Walmart have succeeded in pushing employers to lift some wages. McDonald’s has raised wages at its company-owned restaurants, and Walmart and Target will increase minimum pay to $10 an hour in February. Seattle, San Francisco and Los Angeles have adopted a $15 minimum wage, while Gov. Andrew M. Cuomo has ordered a $15 minimum wage for New York’s fast-food workers.
Such efforts offer hope to those who are eager to lift wages for everyone. “If you increase the bargaining power of workers, they might say, ‘No, we don’t want you just to give more pay just to the top layer,’ ” said Linda Barrington, executive director of the Institute for Compensation Studies at Cornell University. “We want you to share the rewards more evenly.” 

Brexit is a life or death matter for Britain's farmers

A new report warns that UK agriculture would collapse outside the EU, but it assumes that any post-Brexit government would let it happen

By Ambrose Evans-Pritchard

Shepherding in Snowdonia

Welsh Hill farms would be devastated unless the UK government made up CAP payments Photo: National Trust Images/Joe Cornish
Land prices will crash. British agriculture will face a traumatic shock, and 90pc of the country’s farmers will be ruined.
There will be a wave of debt foreclosures by banks, akin to the America Dustbowl and the Grapes of Wrath. A fresh seed of discord will be sown between England, Scotland, and Wales, imperilling the United Kingdom.
This is what is likely to happen if Britain votes to leave the EU next year, according to a confidential 70-page report issued to clients by the specialist consultants Agra Europe.
It is not a propaganda document. It is a detailed text, carefully researched, written for industry insiders. It is not to be dismissed lightly.
British farmers currently receive 60pc of their income from EU subsidies and environmental subsidies. They would lose most of this at a stroke unless the British government guaranteed compensating support of one kind or another, and so far it has clarified nothing.
Yet like all Brexit and counter-Brexit assertions, the Devil is in the assumption. Agra Europe takes it as a given that David Cameron or any other British prime minister will do little to prevent such a bloodbath running its course if the British people vote to withdraw from Europe, and say goodbye to the Common Agricultural Policy (CAP).

“What is certain is that no UK government would subsidise agriculture on the scale operated under the CAP,” it states.

This is conjecture. Few Brexit advocates – including ardent free-traders – suggest that subsidies should be slashed. They accept that agriculture is strategic, even iconic, and that society has a special duty of care to farmers. Let us call it ‘une certaine idée de l’Anglettere’, to borrow from Charles de Gaulle.

“Our view is that no farmer in the UK should left out of pocket as a result of Brexit. Preserving our farms and countryside is a very high priority,” says Ian Milne from Global Britain.

“Farmers and fishermen should receive exactly what they received before, for at least five years. We should recruit the excellent agricultural colleges of Cirencester, Reading, and Manchester, and those in Scotland, to invent a new model of subsidies. We paid £12.3bn into the EU budget in 2014, which we would no longer have to pay, so there would be more than enough money.”

Agra Europe’s report is worth reading. It is part of the “political discovery” that forces us to confront the hard realities the Brexit. We are all weary of rhetoric at this point.

Direct CAP payments to Britain will average £2.88bn a year from 2014-2020. This is a trivial sum for those who live and breath the world of global finance, almost a rounding error for Apple, Exxon, or JP Morgan.

In 2013, these subsidies were worth €200 a hectare (£58 an acre) and made up 35-50pc of total gross income. “Only the super-efficient, top 10pc could survive without them,” it said.

Most farmers have thin margins, if they have any at all. DEFRA figures for 2013-2014 show that a fifth of cereal and grazing livestock farms failed to make a profit, and this was before the latest leg down in global commodity prices. Average cereal farms earn around £100,000, and £55,000 of this comes from the EU single farm payment.

The European Commission estimates that land prices would fall 30pc across the EU if CAP subsidies were abolished. “For farmers who have taken out debt against the value of their land, a loss of value could be fatal. 18pc of farms have current liabilities that exceed current assets,” says the Agra Europe report.

For clues on Britain’s post-Brexit strategy, Agra Europe relies on the Fresh Start Policy document published by the Coalition in 2013. This Tory-drafted text is infused with the anti-subsidy doctrines of Adam Smith and David Ricardo, and seems to suggest – implausibly - that Britain could mimic the success of New Zealand and Australia in establishing agrarian free markets.

The Government would cut green payments to the rich agro-industrial farms of the lowlands and concentrate subsides on Welsh hill farms, the Highlands, or areas of special fauna and natural beauty. Tariffs would be slashed, throwing open UK markets to cheap food imports from the Antipodes, North America, Brazil, and Argentina.

“The consequences would likely be that land prices would fall, banks would foreclose on loans based on high land prices, and bankruptcies would be widespread. The numbers of small and medium-sized family farms would further decline and agriculture would become even more industrialised. Only large units with low marginal costs would be able to survive on a fluctuating and uncertain world market. UK food self-sufficiency would fall,” it says.
The damage would not be spread evenly. Per capita reliance on EU farm subsidies is three times higher in Scotland and Wales, and four times higher in Northern Ireland.

Just 12pc of English land qualifies for the EU’s Less Favoured Area subsidies, compared 78pc in Wales and 84pc in Scotland. Brexit is plainly an agrarian minefield.

Less known to the layman is that Britain’s food-processing industry is surprisingly big, and 60pc of its exports go to the EU. These could face a tariff of 48pc on average processed dairy products (assuming UK falls back on Most Favoured Nation status), 22pc for animal and livestock, 21.6pc for sugars and confectionary, 18pc for cereals, 14pc for beverages, and 11pc for tea, coffee, and cocoa.
The UK hosts the headquarters of 17 of the world’s 100 biggest food and beverage conglomerates, more than Germany, France, Switzerland and the Netherlands put together. Some would be tempted to leave, chiefly for dual taxation reasons.

Needless to say, we are talking about tail risks, not forecastable facts. Nobody knows what trade deals would be agreed once the dust settled and whether there would in fact be any such tariffs given the reliance of EU exporters on Britain’s market.

Nor do we know whether an already crippled EU could survive the further trauma of British withdrawal, given the damage already done to the European Project by the failed experiment of monetary union.

Richard North, author of the Death of British Agriculture, said it is an “absurd assumption” that a post-Brexit government would slash farm subsidies, given the reliance of the UK food industry on agricultural feedstock as a raw material.

He notes that Owen Patterson, the former Secretary of State for Environment, Food and Rural Affairs, depends on dairy farmers for miles around to feed his enormous yogurt plant in Shropshire.

His operations would be paralysed under any scenario described by Agra Europe, yet Mr Patterson is a leading champion of Brexit.

Mr North said the more likely outcome is that Britain would go in the opposite direction, increasing rural subsidies along the lines of Norway, Switzerland and Iceland.

This means moving away from production payments to a multi-pronged strategy that combines farming with rural tourism and conservation, intended to safeguard village life and stop the relentless depopulation of the land. “It costs more, but you get more bang for the buck,” he said.

The National Union of Farmers have so far refused to take sides on Brexit, deeming it impossible to make any useful judgment until the Prime Minister has revealed his EU negotiating demands and clarified what future policy will be.

If the 55,000 members of the NFU cannot yet reach an informed conclusion on what is in their own vital self-interest, the rest of us can scarcely do so.