The Global Bubble

Doug Nolan

Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder - can prove particularly hazardous (to finance and the real economy).

Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and financial excess (and shorten the Credit cycle).

A multi-decade experiment in unfettered “money” and Credit has encompassed the world. 

Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global basis. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.

The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.

The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance. Declining bond yields by 1987 had helped spur rapid expansion in corporate bonds, GSE securitizations, commercial paper, securities financing (i.e. “repos,” Fed funds, funding corps) and derivative trading (i.e. “portfolio insurance”). Post-crash accommodation ensured that the Federal Reserve looked the other way as Bubbles proliferated in junk bonds, leveraged buyouts and commercial and residential real estate on both coasts.

It’s instructive to note that period’s momentous financial innovation/expansion In the 10-year period 1986 to 1995, total Debt Securities (from Fed Z.1 report) surged $7.097 TN, or 159%, to $11.574 TN. For comparison, bank Loans increased 73% ($3.309 TN) to $7.839 TN. Leading the charge in marketable debt issuance, GSE Securities (with their implied government backing) surged 283% ($1.777 TN) to $2.406 TN. Corporate Bonds jumped 254% ($2.213 TN) to $3.085 TN. Outstanding Asset-Backed Securities inflated an incredible 1,692% ($626bn) to $663 billion.

The other side of issuance boom was a revolution in the structure of financial asset management. Mutual Fund assets inflated 653% ($1.607 TN) during the ‘86-‘95 period to $1.853 TN. Money Market Fund assets surged 206% ($499bn) to $741 billion. Security Broker/Dealer assets jumped 288% ($860bn) to $1.159 TN. Wall Street Funding Corps rose 195% ($242bn) to $366 billion, and Fed Funds and Security Repurchase Agreements increased 171% ($802bn) to $1.271 TN. Certainly also worth noting, over this period the global derivatives market expanded from almost nonexistence to about $64 TN.

Market-based Credit is highly unstable. Predictably, the evolution to market finance created instability and, over time, acute fragilities. The early-nineties saw the bursting of Bubbles in junk bonds, M&A and commercial real estate. The neglected S&L crisis festered from a few billion-dollar problem to a $300 billion debacle. By 1991, the U.S. banking system was significantly impaired.

There was a school of thought that S&L losses were akin to money flushed down the toilet. It had been destroyed and should simply be replaced with new money. “Helicopter money” was not yet reputable – much less fancied. So the Greenspan Fed instead slashed rates, manipulated the yield curve and accommodated the rapid expansion of market-based finance. If not for the ’87 bailout, the early-nineties stealth bailout and cultivation of non-bank Credit would not have been necessary.

Spurring market-based Credit - and the financial markets more generally - proved the most powerful monetary policy mechanism ever. The collapse in the Soviet Union couple with the proliferation of new technologies provided powerful impetus to New Paradigm and New Era thinking.

The unfolding historic inflation of “money” and Credit by the world’s reserve currency did not come without profound consequences. Massive U.S. Current Account Deficits flooded the world with dollar balances. Meanwhile, the flourishing leveraged speculating community broadened their targets from U.S. debt markets to higher yielding securities around the world.

By 1993, market-based finance and leveraged speculation had taken the “developed” world by storm. Apparently there was no turning back. So it’s been serial booms, busts and progressively more audacious policy accommodation ever since. The GSEs bailed out the bond, MBS and derivative markets in 1994, ensuring much more spectacular Bubbles to come. The 1995 Mexican bailout created a backdrop ensuring that fledgling “Asian Tiger” Bubbles inflated precariously. When those Bubbles chaotically imploded in 1997, the perception took hold that the West would never allow Russia to collapse. Such thinking spurred speculative excess in Russian debt and currency derivatives that imploded in September 1998.

Global Bubble Dynamics had certainly taken root by 1998. U.S.-style financial innovation was taking hold throughout Asia and Europe. Financial flows were booming across the markets, and the world’s big financial conglomerates were aggressively adopting securitization, speculation and globalization. Moreover, a booming leveraged speculating community, with trades propagating across the globe, ensured increasingly tight linkages between international markets. When Long-Term Capital Management (LTCM) – with egregious leverage along with $2.0 TN of notional derivative exposures around the globe – failed in the fall of 1998, it was a case of top U.S. officials as the “committee to save the world.”

The Bubble saved in 1998/99 has inflated uncontrollably and today has the world at the precipice. Historic debt expansion has unfolded virtually everywhere, much of it trading in the marketplace. The global leveraged speculating community has grown from about $400 billion to $3.0 TN. Global derivates have exploded to $700 TN. An ETF complex has risen from nothing to more than $3.0 TN.

The LTCM bailout ensured an almost doubling of Nasdaq in 1999, with that Bubble imploding in 2000. I’m not so sure the euro currency would exist in its current form if not for the efforts of “the committee…”. Leveraged speculation played an instrumental role in the collapse in Italian and Greek bond yields, a miraculous development that proved pivotal for highly indebted Greece and Italy’s inclusion in the euro monetary regime. I also believe that the U.S. Credit Bubble, fueled largely by the GSEs and non-bank Credit creation, played prominently in the huge flows boosting the euro currency. And global demand for euro-based securities created fatefully loose Credit conditions for the likes of Greece, Portugal, Ireland, Italy and Spain.

If not for the “committee to save the world” and the 1998 bailouts, I doubt we would have witnessed to rise of “Helicopter Ben.” The ’87 stock market crash drove fears of another depression. Depression worries returned with the early-nineties banking crisis, and then again in 1998. When U.S. stock and corporate bond Bubbles burst in 2000-2002, Dr. Bernanke, the foremost expert on the Great Depression, was summoned to the Federal Reserve to provide the theoretical framework for a major reflationary effort.

With Wall Street cheering all the way, the Greenspan/Bernanke Fed collapsed rates and targeted (the fledgling Bubble in) mortgage Credit as the primary mechanism for system reflation. Mortgage Credit doubled in almost six years, in the process inflating home prices, corporate profits, securities prices and incomes. Much more so than the “tech” Bubble, the mortgage finance Bubble became deeply systemic. Unprecedented Current Account Deficits, the weak dollar and enormous speculative flows inundated the world with finance. As the U.S. Credit Bubble became increasingly global, policymakers around the world remained too accommodative.

The bursting of the mortgage finance Bubble almost incited global financial collapse. It took concerted central bank intervention, $1 TN of Bernanke QE, unprecedented bailouts, zero rates and massive fiscal stimulus to hold catastrophe at bay. Massive monetary stimulus pushed fledgling Bubbles in EM and China to historic extremes. The Chinese instituted a $600 billion stimulus package then proceeded to completely lose control of their financial and economic Bubbles. QE, zero rates and dollar devaluation incited a spectacular Global Reflation Trade that has collapsed spectacularly. Ultra-loose finance on a global basis ensured epic over- and malinvestment throughout the energy and commodity sectors. Virtually free-“money” incited massive over-investment in manufacturing capacity, especially throughout China and Asia. In the U.S. and globally, zero rates and liquidity excess fueled tech and biotech Bubbles 2.0.

The global government finance Bubble became deeply systemic. Zero rates and QE inflated securities markets and asset prices on an unprecedented scale. Leveraged securities speculation engulfed the entire globe. Derivatives trading became globalized like never before. And each instance of market vulnerability was met with an aggressive concerted central bank response. As the global Bubble succumbed to “blow off” excess, central bankers completely lost control of inflationary processes.

The European Bubble was at the precipice in 2012. If not for Bernanke’s QE gambit, I seriously doubt Draghi and Kuroda would have ever succeeded in pushing through massive “money” printing operations at the ECB and BOJ. With the Fed, ECB, BOJ and others moving forward with “whatever it takes” concerted QE, global securities Bubbles morphed into one big play on the global monetary experiment.

It’s now been more than three years of absolute monetary disorder. The commodities Bubble went bust, which, in the age of over-liquefied and speculative global markets, worked to spur only greater “blow off” excess throughout global securities markets. The EM Bubble burst, which provoked only greater stimulus measures in China. Chinese reflationary policies incited precarious “blow off” stock and bond market excesses. The timid Fed’s failure to begin rate normalization spurred speculative Bubble excess throughout equities, fixed-income and derivative markets.

On an unprecedented global basis, extreme monetary measures fueled financial excess at the expense of real economies. Monetary disorder and Bubble Dynamics ensured highly destabilizing wealth redistribution – within and between nations. Extreme central bank policies spurred leveraged speculation around the globe. Extraordinary devaluation measures from the ECB and BOJ ensured the euro and yen were used aggressively for leveraged “carry trade” speculations. “Carry trade” and currency derivative-related leverage became powerful sources of liquidity driving securities market “blow off” excess – again on a globalized basis. With the global Bubble now faltering, risk is too high to maintain highly leveraged bets.

In the face of faltering energy and commodities, weakening CPI trends, a highly vulnerable global economic backdrop and mounting social and geopolitical tension, highly unstable global securities markets lurched higher. It all became one gargantuan bet on the global central bank experiment with boundless monetary stimulus. Global securities markets diverged from fundamental economic prospects like never before.

In the end, the runaway global Bubble was built chiefly upon confidence in central banking and policymaking more generally. Markets rather abruptly lost confidence in the ability of Chinese officials to manage their faltering Bubbles. With the historic Chinese Credit and economic Bubbles at risk of imploding – and energy and commodities prices collapsing - faith in the capacity of global central bankers to keep the game going began to wane. The sophisticated leveraged players commenced risk reduction - and suddenly there were few buyers. Instead of more QE, central bankers have responded to “risk off” with negative interest rates. Negative rates don’t alleviate market illiquidity and they won’t bolster faltering global Bubbles. They do intensify the unfolding crisis of confidence.

Between the faltering Chinese Bubble and the unwind of securities market speculative leverage globally, global Credit and economic backdrops have turned ominous. The downside of a historic global Credit cycle has commenced. De-risking/de-leveraging ensure a process of much tighter Credit conditions. This is problematic for leveraged speculators, companies, countries and regions – certainly including banks and securities firms around the world.

Negative rates, collapsing energy companies and weak global prospects hurt bank sentiment. 
But bank stocks are collapsing globally because of the faltering global Credit Bubble. Between waning confidence in central banking and the global banking system, one is left to question the functioning of global derivatives markets. And if counter-party risk becomes an issue in the global risk “insurance” marketplace, global securities markets quickly face a potentially catastrophic backdrop.

A tremendous number of bets were placed based on a world of ongoing liquidity abundance, risk embracement and growth. In a “risk on” world of cheap finance, the latest Greek bailout strategy appeared manageable. In today’s “risk off” faltering global Bubble reality, Greece is a disaster. Greek sovereign yields are up 370 bps in six weeks. A bursting global Bubble will shake confidence in the European periphery – and likely European integration more generally. 
Periphery spreads widened meaningfully again this week.

Here at home, contagion effects have made it to the investment-grade corporate debt market. 
In “risk on,” loose “money” as far as the eye can see, writing insurance on corporate Credit (CDS) became a quite popular endeavor. But with the market now questioning the global economy, central bank efficacy, and the soundness of the banking system and Wall Street firms, it makes more sense to unwind previous speculations and buy insurance. This equates to a major unwind of leverage throughout the corporate debt marketplace, in addition to huge amounts of additional selling to hedge new CDS trades. Suddenly, liquidity abundance is transformed into problematic marketplace illiquidity. Again, a major tightening in Credit conditions bodes ill for leveraged entities. It also bodes ill for the general economy.

Booming international corporate debt markets have been instrumental in fueling the global securities market boom – and the Global Credit Bubble more generally. And I would add that perceived low-risk corporate Credit has been at the (Crowded) epicenter of the central bank-induced “Moneyness of Risk Assets” phenomenon. If I’m right on the unfolding global backdrop, prospects for corporate Credit as a liquid store of value are dismal. A Crisis of Confidence in Corporate Credit would severely impact an already fragile global financial and economic backdrop. 

The Hate Preachers

Inside Germany's Dangerous New Populist Party

Photo Gallery: A Look at Germany's Populist Right

The Alternative for Germany was born as an anti-euro movement. But it has since positioned itself far to the populist right. Despite its efforts at maintaining respectability, the party's extremist flank is wide open.

The settling of accounts with Frauke Petry, head of Germany's right-wing populist Alternative for Germany (AfD) party, was done by telephone early in the morning. The party's national leadership came together for a long-planned conference call at 7:30 a.m. last Tuesday, but before they began working through their agenda, talk turned to Petry's leadership.

"Everything you are doing at the moment is complete shit," hissed one board member. "How am I supposed to interpret that?" a dumbfounded Petry replied. "What about the word 'shit' is difficult to understand?" came the answer.

The tribunal lasted for half an hour and virtually every board member had something negative to say about the AfD leader. They complained of her frequent unwillingness to consult with other party leaders and of her chronic distrust. More than anything, though, they criticized "this incredible stupidity:" namely, Petry's comment in an interview with the newspaper Mannheimer Morgen that police should "use their firearms if necessary" to stop refugees at Germany's borders.

What, though, were they angry about? Was their concern analogous to media commentators across the political spectrum, for whom Petry's words were reminiscent of the mass shootings of World War II and of those who lost their lives trying to cross the East German wall? Were Petry's colleagues as upset as the so-called establishment parties, who doubted that the AfD, to quote Social Democratic Party (SPD) head Sigmar Gabriel, "remained committed to the country's free-democratic foundations?"

No, they weren't. Most of the board members were more concerned about Petry's tactical error: Both her disclosure of the AfD's true attitudes and the timing of that disclosure. Petry, after all, had violated the right-wing populist formula for success.

Stoking fears, particularly against foreigners and newcomers is part of that formula.

Insinuations that the West, or German-ness, is facing collapse are likewise perfectly acceptable.

But one shouldn't be overly precise about how to confront the threat: The idea of shots fired at the border is not likely to find acceptance beyond a very narrow, extremist slice of the electorate. And there are just a few weeks to go before a trio of important state elections.

At the very least, Petry's comments were awkward. And negligent.

Yet after the wave of indignation rolled through Germany -- and after Petry's fellow AfD board member Beatrix von Storch added that, if necessary, even women and children should be fired at -- it quickly became clear that in these rancorous, abrasive times, the rules that once governed political dialogue in Germany no longer apply.

The AfD, it seems, may even have benefited from Petry's comments: The ARD-Deutschlandtrend survey recently found that support for the right-wing populists has risen to 12 percent, making in the third strongest party in the county.

A Dangerous Party

Volker Kauder, parliamentary floor leader for Chancellor Angela Merkel's conservative Christian Democratic Union (CDU), commented that Petry's utterances exposed "the true face of the AfD leadership." But there are apparently many in Germany who find that true face appealing -- whether openly or not -- and are prepared to vote for people like Petry.

There are many conservative, upper middle-class voters -- most of them older, white males -- who had hoped that the AfD would provide them with a new political home reminiscent of the Helmut Kohl-era Christian Democrats. For these voters, Angela Merkel's CDU has become too liberal, too unprincipled, too un-Catholic and too multicultural. It is a natural pool of voters for a party to the right of the CDU.

But the AfD is more than that. It is a dangerous party. The party leadership may have sought to distance itself from Petry's comments, but it was a half-hearted attempt, based more on tactical concerns than genuine condemnation. Indeed, along with dissatisfied conservatives, the AfD has also become a catchment basin for right-wing extremists and anti-refugee, Islamophobic rabble-rousers. Increasingly, the party's existence, and growing popularity, is raising questions as to whether Germany has truly learned the lessons of World War II and the Nazi dictatorship. Lessons such as: xenophobia has no place in democracies; European values and laws are binding; the right to asylum is non-negotiable; and even people who cross borders illegally should not be shot at. The AfD is slowly becoming Germany's answer to the Front National in France: a xenophobic, chauvinistic, anti-European party.

Should the party's hardliners prevail, Germany's political landscape will change significantly, as will political debate in the country. Currently, Chancellor Angela Merkel is governing in a coalition together with the Social Democrats, Germany's large, center-left party. That means that those who disapprove of Chancellor Angela Merkel's handling of the refugee crisis don't have many choices when it comes to casting a protest vote, particularly given that the Greens are reliably pro-refugee. The AfD seems poised to be the beneficiary, despite Petry's apparent willingness to use deadly force against migrants.

Meanwhile, Germany's established parties are facing a dilemma. Years ago, the Left Party emerged on the far-left wing, but it has long been viewed with suspicion and never been seen as a viable option when assembling a governing coalition at the federal level. Now, the AfD threatens to play a similar role on the right wing. That would mean that so-called "grand coalitions," pairing the conservatives with the SPD, will become the rule rather than the exception.

Repudiation of Merkel

The AfD is far from being a single-dimensional party. A young party that does not yet have a clearly established identity, it is home to many different currents and voices.

Not every sentence is openly xenophobic and its missteps are sometimes the product of inexperience rather than iniquity. Since its split last year, the party hasn't had a true platform or an established set of values that would clearly keep the extremists at bay. The AfD leadership is a collection of radical-Christian ideologues, arch-conservative military veterans, buttoned-up business professors and disillusioned business owners. It is an odd collection -- and one that has proven vulnerable to radical temptations, as demonstrated by Petry and Storch.

What unites this camp is the rejection of all competing political movements and, in particular, the repudiation of Merkel's refugee policies, which AfD deputy head Alexander Gauland described last year as a "gift" to his party. But there are two approaches to politics: The one involves finding alternative answers to political questions that are still consistent with human dignity and the constitution. The other is that of calling the state as such into question and threatening its structures. Right now, it doesn't look as though AfD leadership is poised to make the correct choice. In recent months, it has become all too clear that the AfD leadership prefers to surf the wave of anger among its followers. And the party doesn't always have control over that wave.

That was all too apparent two Thursdays ago in Mannheim. Frauke Petry had yet to make her controversial comment about the use of firearms against incoming refugees when she stepped up to the podium at a restaurant in the city. Some 400 AfD followers had come to see her speak while outside, police were trying to keep a left-wing, anti-AfD demonstration under control. For a solid hour, Petry decried all that was going wrong in Germany: the refugee crisis, problems with the education system, the "premature sexualization of children." The audience listened intently and applauded occasionally. Then, during the question-and-answer session, tempers flared. A man asked how the AfD planned to prevent German schoolchildren from "being beaten and extorted by the foreigners."

Petry was clearly surprised by the question. She said that in such instances the parents' association must get involved, as should teachers and school directors. "Democracy is slow," she said. "Those who make such claims have to prove they are real." The hall erupted, with furious shouts piercing the air. The man who asked the question yelled: "Our country is facing an emergency! Millions are coming to us! It's crazy what is happening!"

Amid the applause, Petry tried to regain the crowd's attention. "Let me just ..." But she was ignored. "You can't just beat around the bush and sugarcoat the problem," the man called out. "We want concrete proposals. How can we get black Africans to stay in their home countries?"

A Wave of the Hand

Slowly, Petry regained control of the situation. She said she understood the anger and dissatisfaction. But even the AfD, she added, couldn't "solve the problem of illegal immigration with a wave of the hand."

It was a rare moment of honesty. For months, right-wing populists from the AfD have been suggesting that there were simple solutions to the refugee crisis: the introduction of upper limits; closing national borders; suspending the Schengen border-free travel regime; suspending the right to asylum. Petry's suggestion a few days after the Mannheim incident that firearms be used to defend the German border was of the same ilk. But what they don't like to talk about is the fact that hundreds of thousands of Syrians and Iraqis who have a right to asylum are already in Germany and must be integrated, even if the country were to seal off its borders tomorrow. But the party has no answers for how to do that.

It is a problem that has dogged the party from the very beginning. The AfD was originally founded in opposition to the euro and, particularly, to Angela Merkel's handling of the euro crisis. But even then, under the leadership of economist Bernd Lucke, the AfD was unable to convincingly explain how its approach would be an improvement on Merkel's. The party initially urged Germany to withdraw from the euro zone before shifting to demands that Greece be thrown out. Then it began promoting a smaller, northern European euro zone. More than anything, though, the party's message was a populist one: We'll end the bailout insanity.

That kind of simplistic approach quickly became the party's calling card -- and the strategy worked, even if Lucke is no longer among the party's leaders. The problem, however, is that the questions the party is addressing have become more sensitive and social harmony is at stake. Asylum hostels are being set on fire, refugees and journalists are being attacked, the xenophobic PEGIDA movement is marching through eastern German cities and Facebook has become a platform of hate.

Nevertheless, the AfD leadership continues to hint to their followers that simple solutions are available -- that one could simply stop the "asylum chaos" or back out of NATO. One leader of a state AfD chapter in eastern Germany has taken to chanting: "Those who don't love Germany, should leave Germany," and "Hop, hop, hop, asylum stop!" And just like during the euro crisis," few AfD supporters are asking for policy details.

For the AfD of today and its supporters, the party's split amid the 2015 departure of Bernd Lucke -- and his accusation that the party has become a "right-wing swamp" -- is ancient history. Voters tend to know little about the AfD candidates on state party lists. But they don't really care either. Mostly, they want to register their protest against the establishment parties. According to the recent ARD-Deutschlandtend survey, 81 percent of respondents believe that Merkel's government doesn't have the refugee crisis under control. Fewer than half are satisfied with the job the chancellor is doing.

Disappointed by Life in the West

Indeed, the weakness of Merkel's CDU and her coalition partners from the SPD is AfD's primary strength, with the refugee crisis having given the party a boost. But instead of looking for a conservative political solution to the problem, the AfD has succumbed to the temptation of shrill populism. Most recently, that has been particularly evident in the pro-firearm comments emanating from Frauke Petry and Beatrix von Storch.

Petry spent her early childhood in communist East Germany and only moved to the West at the age of 14 once the Berlin Wall fell. There, she joined her father, who had earlier fled East Germany. Petry once told the German weekly Stern that she had been disappointed by life in the West. East Germany, she said, felt too constrained, but the West felt too arbitrary. In the interview, she sounded like a lost soul, like a woman without roots.

Petry has undergone many political shifts. As a young businesswoman, she was in favor of gender quotas, but is now opposed to the idea. A chemist by training, she was able to start her own business with the help of state subsidies, although she now says that the state should keep out of the business sector. The mother of four children, Petry initially sought to make family policy a foundation of her political career and insisted that German mothers should have many children. But since she made public the fact that she left her husband for fellow party member Marcus Pretzell, family policy has become something of a taboo subject for her.

Although she may be flexible when it comes to policy, her leadership style is anything but. For the last several months, the Saxony state parliament has been pursuing an inquiry into why the AfD in Saxony, where Petry is chapter leader, suddenly removed a candidate from its list shortly before elections there. The man in question says he was punished because he refused to make a campaign loan to the party. Petry has angrily dismissed the accusation.

But in testimony before parliament, she and a fellow party member repeatedly contradicted each other -- and both were under oath. "We strongly believe that state prosecutors will file charges," Petry's general secretary wrote in an email to grassroots supporters. He added, however, that he is convinced that "the charges will not be substantiated." Still: "a bit" will "stick to us." Should Petry be found guilty of perjury, she faces a minimum penalty of one year in prison.

Petry has not shied away from identifying AfD with other right-wing populist parties in Europe and is planning a joint appearance with Heinz-Christian Strache of the Austrian Freedom Party on Friday in Düsseldorf. Indeed, observers in Berlin and in the rest of Germany are growing increasingly concerned about the party's path, and not just because of Petry and the AfD's climbing survey results. In contrast to earlier right-wing populist parties from Germany, the rise of the AfD is firmly rooted in a broad European trend whereby right-wing political groups and movements are gaining support. In France, Front National even came out on top in the first round of December regional elections.

Angry White Men

It is a pattern seen across all Western democracies: anger, frustration and resentments are increasingly finding expression on the political extremes. And it tends to be the same demographic that joins such rage-driven movements: middle-aged, white men.

The pattern is the product of changing demographic and political realities. It used to be that all influential positions in politics and industry were occupied by a man in a suit. And even in the case of political or professional clashes and disagreements, one's adversary was also a white man in a suit. No matter how bitter the debate, a chat about football over a drink was often enough to smooth even the most ruffled of feathers.

But such elemental certainty doesn't exist anymore. The most powerful man in the world has dark skin and it seems eminently possible that he will be succeeded by a woman. Our most important strategic partners and competitors are men and women from China, Indonesia and Brazil, people with different beliefs, cultures and values.

People who are much more difficult to assess and understand. And then comes a woman, the German chancellor, who asks even more from this already stressed group by allowing a huge number of young men from foreign cultures into the country.

Those who feel threatened often feel that violence, or at least outbursts of rage, are justifiable. Self-defense! It is this approach that is the bread-and-butter of right-wing populist movements -- and Frauke Petry knows, or senses, as much.

In truth, it seems likely that most people realize that recent trends in our globalized world cannot be reversed. But it is not a realization that makes the situation any simpler. We are, after all, also experiencing a crisis of faith in present-day political and social institutions -- one that has been fueled by a series of recent crises. The century began with the terror attacks on Sept. 11, 2001 in the United States. The West responded with Iraq and Guantanamo, crimes that seriously damaged its claim of moral superiority. Furthermore, surveillance programs undermined our fundamental rights. Thus far, not a single Western policymaker has been held accountable for these missteps.

In a constitutional democracy, that is a problem -- and that too is a feeling that right-wing populists have been able to exploit. The feeling that something isn't quite right, that there is no fairness anymore. And that it is up to us -- it is our right -- to reestablish fairness. Populists are adept at painting a picture of a world that is out of control.

Then came the global economic crisis, triggered by the finance industry. The crisis was managed in a manner that many people found to be profoundly unfair: Debts were nationalized and the finance industry was allowed to continue with business as usual. The consequences remain with us today: slow growth, high unemployment, particularly in southern European countries, and faith in the state, in the judiciary and in politics has vanished -- in Germany too. The state, which was granted the monopoly on the use of force at the outset of modernity, has proven itself to be too weak to confront such crises in a manner that is consistent with Western values.

An Eloquent Right-Wing Ideologue

Those who perceive this dual crisis do not automatically drift to the right. But they certainly don't develop a passion for the status quo. Who, after all, takes to the streets to demonstrate in favor of the chancellor? That's why the streets and digital forums belong to those who espouse hatred at the moment.

It is hardly to be expected that Beatrix von Storch will be the one to stop AfD's drift toward the extremist fringe. An eloquent right-wing ideologue from an old noble family, she could ultimately become even more powerful than Petry. Born Duchess Beatrix Amelie Ehrengard Eilika of Oldenburg, she has engaged in several conservative battles in her past. In law school, she fought for the return of eastern estates lost in the wake of World War II. She also joined marches in opposition to abortion and collected plaintiffs for legal challenges to the European Central Bank.

As a member of the European Parliament with the AfD, she has joined the fight against gender mainstreaming.

Via her husband Sven von Storch, she also maintains a far-flung network that extends as far as the German exile community in southern Chile. Germans there dream of the good old days under the last German Kaiser, pay homage to the German fatherland and pursue a Christian-fundamentalist lifestyle. When Beatrix von Storch spoke on a primetime talk show of rumors that Angela Merkel could soon seek exile in Chile because of the refugee crisis, she didn't necessarily mean it as an insult. For Storch, Chile is a dream destination.

In contrast to Frauke Petry, Storch is an excellent networker. Together with her husband, she established the Zivile Koalition, or Civil Coalition, a digital campaign collective of right-wing conservative blogs and email distribution lists that the couple uses to spread its ideology and to ask for donations. The Storchs are less communicative about how, exactly, they spend those donations.

One of their strengths is also that of performing a timely and orderly retreat should the situation call for it. Whereas Petry continued the next day to defend her comments about using firearms to fend off refugees from Germany's borders, Storch unequivocally admitted to having "screwed up," say fellow party members. Still, it was Storch's Facebook comment indicating that women and children could also be shot at which triggered the most intense outrage. She said that she had "only wanted to help" Petry, and that she was terribly sorry. She said that the Facebook post was a "technical error" and that she had "slipped" with her mouse.

Currently, even as it continues drifting to the right, the AfD is suffering from a power vacuum at the top. Nevertheless, when voters go to the polls on March 13 in Baden-Württemberg, Rhineland-Palatinate and Saxony-Anhalt, the party will in all likelihood end up with representatives in all three state parliaments.

Soldiers of Fortune

Essentially, though, the AfD is suffering from the same malady that has affected all of its right-wing populist predecessors in Germany. Similar to the (now banned) Republikaner, or the Hamburg-based Schill Partei, the AfD has become entangled in internal intrigues and infighting. Furthermore, it has attracted the same collection of careerists, soldiers of fortune and failures that has doomed many previous political movements in Germany.

People like André Poggenburg, for example. Poggenburg is leader of the Saxony-Anhalt chapter of AfD and the party's leading candidate ahead of elections there next month. He is fond of speaking about credibility and the importance of maintaining close contact with voters -- and of accusing politicians from establishment parties that they would be welfare recipients were they to lose their seats in state parliament.

But the problem of the self-proclaimed "successful businessman" is that he himself is in desperate need of a financial bailout in the form of a parliamentarian salary. The owner of a company that sells automobile cooling systems in Saxony-Anhalt, there is an almost 95 percent chance that he won't be able to pay off the debt he currently holds, warns the credit agency Creditreform. The agency "advises against" entering into business relations with him.

AfD supporters seem unconcerned. They even cheered him on during a recent appearance in the state capital of Magdeburg as he spoke about the ups and downs of his business life and admitted "certain lapses in the proper keeping of the books."

Were he a bank, Poggenburg complained, the state would likely have handed over "a half million."

The grassroots clapped, but others in the party are critical of Poggenburg. People such as Jörg Meuthen, AfD lead candidate in Baden-Württemberg and Petry's co-leader at the top of the party. An economics professor, Meuthen was once a faithful follower of party founder Bernd Lucke and is now one of those who would like to see the party focus on national issues without becoming nationalist. He is in favor of conservatism, but rejects right-wing extremism.

Last Wednesday, he spoke at a party event in Kirchberg an der Murr, a small town just northeast of Stuttgart. The parking lot was full of expensive cars and, with the venue having quickly filled up, many visitors were turned away at the door. The crowd outside bulged into the street.

In the wake of the controversial statements from Petry and Storch, Meuthen used the opportunity to present himself as a member of the party's reasonable wing. He admitted to having "Muslims in my circle of friends" with whom he "gets along excellently." The AfD, he said, is "not a xenophobic party," rather it demands a "clever approach to migration." But it also became clear that he was disinclined to clearly distance himself from Petry's comments.

'Attack on the German People'

That is typical of Meuthen. He is fond of presenting himself as an adversary of right-wingers like Storch and Gauland, but when he is confronted with radical comments from within his own state chapter, he plays the indulgent party leader. Meuthen, for example, declined to say anything critical about Freiburg-based attorney and AfD politician Dubravko Mandic, who recently posted a video on Facebook showing soldiers shooting at civilians behind a fence. The title: "Border Protection in Practice."

Meuthen also had nothing to say about Stuttgart AfD politician Heinrich Fiechtner who, in reference to the refugee crisis, spoke of an "attack on the German people."

Nor did he say anything about fellow AfD member Markus Frohnmeier, head of the party's youth wing Young Alternative. Frohnmeier was quoted on a television report about the New Year's Eve sexual assaults in Cologne as saying: "In my opinion, people like (senior Green Party member) Claudia Roth indirectly participated in the rapes." After the events, Roth had warned against taking advantage of the situation in order to stir up public sentiment against refugees.

Amid such surroundings, Petry is likely facing tough times. Ever since she drew attention to the party's rightward drift with her blather about defending the border with gunfire, her authority is being called into question. Indeed, many of those who helped her last summer during her putsch against Lucke are now beginning to doubt her leadership.

It is unlikely that Petry will be ousted before federal elections in 2017. "More likely is that her freedom will be limited by way of party resolutions," says one member of the party's national board. That could include rules forbidding her from traveling or giving interviews without first consulting party leadership, in addition to limits on her political solo acts together with her partner Pretzell, whose reliability many AfD leaders already question. Meuthen, meanwhile, as head of the Baden-Württemberg chapter of the AfD, will likely gain influence, particularly after what promises to be a successful election result in March.

"What we have to return to in the party," Petry said during her appearance in Mannheim, "is the willingness to acknowledge mistakes." Meuthen said recently that the AfD is not made up of "political professionals who are polished to the point of flatness. Sometimes, a sentence or two slips out of people who have never before worked in politics."

If only that were sufficient explanation. In actuality, though, AfD leaders -- who one might assume have a fair amount of control over their words -- are among those who incite. Uwe Junge, head of the Rhineland-Palatinate chapter of AfD, is a lieutenant colonel in the Bundeswehr, Germany's military. In the "Center of Operative Communication" in the small town of Mayen, he trains political agitation experts who focus their efforts on target groups via radio shows or the Internet. Junge presents himself as a middle-class conservative. In his application for a position in the AfD state leadership committee, he wrote that he left the Christian Democratic Union in 2009 "in disappointment" after more than 30 years of membership. What he didn't write, however, is that he initially joined the Islamophobic party Die Freiheit after leaving the CDU. Die Freiheit is under observation by the Bavarian state intelligence agency.

Rightward Drift

The calm tone Junge uses in his speeches stands in marked contrast to the at-times brutal message they convey. At a party event in Bad Kreuznach in mid-January, he accused his commander-in-chief, Chancellor Merkel, of "treason" committed against the "fatherland." He blasted state interior ministers and governors as a "dishonorable gang of cowards." He also said that all those in power "should be held accountable" because of their asylum policies. As his audience applauded, Junge hastily added that such accountability should come in the form of elections.

The AfD's rightward drift can be seen across Germany, but nowhere is it as clear as in the country's eastern states. Supporters of eastern German AfD chapters are not looking for a conservative alternative on the political spectrum. They are interested in opposing and resisting the established political system.

In the wake of AfD's success in state elections in Saxony, Thuringia and Brandenburg one-and-a-half years ago, pollsters from Forschungsgruppe Wahlen wanted to know what AfD voters expected from their party. "A solution to concrete political problems" was not among the reasons given, the pollsters found.

So what is it? Protest! Like at the PEGIDA demonstrations held every Monday in Dresden, where everybody gathers in opposition to everyone and everything. Forschungsgruppe Wahlen found that in eastern Germany, AfD has become the political home of the politically and economically disillusioned. It has become a "platform of dissatisfaction." The empirical social research department of the Konrad Adenauer Stiftung, a foundation that is closely linked to the CDU, wrote of a "fluid matrix of protest."

In eastern Germany, this protest role was long occupied by the far-left Left Party, which grew out of the East German communist party. Those who felt uncomfortable with the western German party system, were unemployed or yearned for former East German Communist leader Erich Honecker's return voted for the Left Party. Such protest votes hardly counted, as everyone knew, but at least they annoyed everyone else.

Those days are now over. Twenty-six years after the fall of the Berlin Wall, the Left Party is now seen as being part of the political establishment and the disillusioned have moved on. Most of the votes received by the AfD in the three 2014 state elections in eastern Germany came from former Left Party supporters, often because they were perceived as being the only ones "who talked about the problems," as the pollsters discovered. In Saxony, 15,000 voters switched allegiances, in Thuringia it was 16,000 and in Brandenburg, 20,000 defected. In the latter state, AfD party head Alexander Gauland even approached Left Party supporters with targeted mailings.

Mainstreaming Extremism

Dresden-based political scientist Werner Patzelt sees the shift as a systematic protest of the kind experienced in Germany in the mid-2000s after tough welfare reform laws were passed by then Chancellor Gerhard Schröder. The opposition is no longer a political opposition but a systemic opposition. Back then it was fed by the Left Party, today it is agitators like Björn Höcke, head of the AfD state chapter in Thuringia. Höcke has developed a dubious reputation for having waded particularly deep into the nationalist swamp. In western Germany, even the most ardent AfD supporters shake their heads when Höcke, in his speeches, adopts the demagogic tone often used in in the latter years of the Weimar Republic. But in eastern Germany, they celebrate even his most racist utterances because no one else is willing to break with Western political conventions to such a degree.

Indeed, that is perhaps the most dangerous aspect of the AfD's rise. It makes extremism acceptable and polarizes societal debate. It promotes xenophobia and feeds a societal climate wherein it becomes acceptable to offer resistance to presumed legal breaches committed by the country's political leaders.

The result is a radicalization of thought -- and, with some, of action -- which could ultimately follow patterns seen previously by left-wing extremist movements: The more radical the arguments of the movement's intellectual leaders, the more radical the street protests, and vice versa.

It still hasn't become clear how far to the right the AfD as a whole will ultimately drift. It isn't even clear whether the party will, in contrast to its many predecessors, manage to become a lasting fixture within the country's political spectrum. Part of the answer to that question will ultimately be provided by the party's political adversaries -- establishment parties from the CDU to the Greens -- and how they choose to deal with the AfD. Conservative floor leader Volker Kauder has suggested simply ignoring the party. Baden-Württemberg Governor Winfried Kretschmann of the Green Party, for his part, has sought to avoid televised political debates with AfD leaders. And Social Democratic head Sigmar Gabriel has called for the party to be placed under surveillance by German domestic intelligence officials.

Pulling the Rug Out

Not even security officials, though, believe that Gabriel's proposal is expedient, or even legal. And Kretschmann's attempt to keep AfD candidates out of the television debates was likewise conter-productive. Matthias Jung from the pollster group Forschungsgruppe Wahlen said it looked as though establishment politicians were trying to use formalities in order to avoid substantial political debate.

Decades of experience with other right-wing populist parties in Germany suggest a different approach: One must confront the AfD with rational argument and policy.

Establishment parties have to put forth solutions to the large problems that are driving support for the AfD.

If the government succeeds in reducing the number of refugees coming to Germany and comes up with a convincing plan for the integration of those migrants who are already here, it could manage to pull the rug out from beneath the AfD.

Refugees will continue coming, cultures and religions will continue to mix, German families will look different than they did 40 or 50 years ago, love is many-sided and stubborn -- the German reality will become more complicated, and why not? Most people have no problem with that. Our lives today are freer, safer, healthier and, in most western and eastern German cities, better than they were 30 years ago.

But those who reject all that, fight with the courage of desperation. And it wouldn't be the first time in Europe that the advance of freedom was forced by a radical minority to take an extended, years-long detour.

By Melanie Amann, Matthias Bartsch, Jan Friedmann, Nils Minkmar, Michael Sauga and Steffen Winter

Putin is No Ally Against ISIS

George Soros

Vladimir Putin

MUNICH – The leaders of the United States and the European Union are making a grievous error in thinking that President Vladimir Putin’s Russia is a potential ally in the fight against the Islamic State. The evidence contradicts them. Putin’s current aim is to foster the EU’s disintegration, and the best way to do so is to flood the EU with Syrian refugees.
Russian planes have been bombing the civilian population in southern Syria forcing them to flee to Jordan and Lebanon. There are now 20,000 Syrian refugees camped out in the desert awaiting admission to Jordan. A smaller number are waiting to enter Lebanon. Both groups are growing.
Russia has also launched a large-scale air attack against civilians in northern Syria. This was followed by a ground assault by Syrian President Bashar al-Assad’s army against Aleppo, a city that used to have 2 million inhabitants. The barrel bombs caused 70,000 civilians to flee to Turkey; the ground offensive could uproot many more.
The families on the move may not stop in Turkey. German Chancellor Angela Merkel flew to Ankara on February 9 to make last-minute arrangements with the Turkish government to induce the refugees already in Turkey to prolong their stay there. She offered to airlift 200,000-300,000 Syrian refugees annually directly to Europe on the condition that Turkey prevent them from going to Greece and will accept them back if they do so.
Putin is a gifted tactician, but not a strategic thinker. There is no reason to believe that he intervened in Syria in order to aggravate the European refugee crisis. Indeed, his intervention was a strategic blunder, because it embroiled him in a conflict with Turkish President Recep Tayyip Erdoğan that has hurt the interests of both.
But once Putin saw the opportunity to hasten the EU’s disintegration, he seized it. He has obfuscated his actions by talking of cooperating against a common enemy, ISIS. He has followed a similar approach in Ukraine, signing the Minsk Agreement but failing to carry out its provisions.
It is hard to understand why the leaders of both the US and the EU take Putin at his word rather than judging him by his behavior. The only explanation I can find is that democratic politicians seek to reassure their publics by painting a more favorable picture than reality justifies. The fact is that Putin’s Russia and the EU are engaged in a race against time: The question is which one will collapse first.
The Putin regime faces bankruptcy in 2017, when a large part of its foreign debt matures, and political turmoil may erupt sooner than that. Putin’s popularity, which remains high, rests on a social compact requiring the government to deliver financial stability and a slowly but steadily rising standard of living. Western sanctions, coupled with the sharp decline in the price of oil, will force the regime to fail on both counts.
Russia’s budget deficit is running at 7% of GDP, and the government will have to cut it to 3% in order to prevent inflation from spiraling out of control. Russia’s social security fund is running out of money and has to be merged with the government’s infrastructure fund in order to be replenished.
These and other developments will have a negative effect on living standards and opinions of the electorate before the parliamentary election in the fall.
The most effective way that Putin’s regime can avoid collapse is by causing the EU to collapse sooner. An EU that is coming apart at the seams will not be able to maintain the sanctions it imposed on Russia following its incursion into Ukraine. On the contrary, Putin will be able to gain considerable economic benefits from dividing Europe and exploiting the connections with commercial interests and anti-European parties that he has carefully cultivated.
As matters stand, the EU is set to disintegrate. Ever since the financial crisis of 2008 and the subsequent rescue packages for Greece, the EU has learned how to muddle through one crisis after another. But today it is confronted by five or six crises at the same time, which may prove to be too much. As Merkel correctly foresaw, the migration crisis has the potential to destroy the EU.
When a state or association of states is in mortal danger, it is better for its leaders to confront harsh reality than to ignore it. The race for survival pits the EU against Putin’s Russia. ISIS poses a threat to both, but it should not be over-estimated. Attacks mounted by jihadi terrorists, however terrifying, do not compare with the threat emanating from Russia.
ISIS (and Al Qaeda before it) has recognized the Achilles’ heel of Western civilization – the fear of death – and learned how to exploit it. By arousing latent Islamophobia in the West and inducing both publics and governments to treat Muslims with suspicion, they hope to convince young Muslims that there is no alternative to terrorism. Once this strategy is understood, there is a simple antidote: Refuse to behave the way your enemies want you to.
The threat emanating from Putin’s Russia will be difficult to counter. Failure to recognize it will make the task even more difficult.

German 'bail-in' plan for government bonds risks blowing up the euro

'If I were a politician in Italy, I'd want my own currency as fast as possible: that is the only way to avoid going bankrupt,' said German 'Wise Man'

By Ambrose Evans-Pritchard

The London Debt Conference in 1953, when much of Germany's debt was written off. European sovereign debt was sacrosanct after that until the euro led to serial crises 

A new German plan to impose "haircuts" on holders of eurozone sovereign debt risks igniting an unstoppable European bond crisis and could force Italy and Spain to restore their own currencies, a top adviser to the German government has warned.

“It is the fastest way to break up the eurozone,” said Professor Peter Bofinger, one of the five "Wise Men" on the German Council of Economic Advisers.
"A speculative attack could come very fast. If I were a politician in Italy and I was confronted by this sort of insolvency risk I would want to go back to my own currency as fast as possible, because that is the only way to avoid going bankrupt,” he told The Telegraph.
The German Council has called for a “sovereign insolvency mechanism” even though this overturns the financial principles of the post-war order in Europe, deeming such a move necessary to restore the credibility of the "no-bailout" clause in the Maastricht Treaty. Prof Bofinger issued a vehement dissent.
The plan has the backing of the Bundesbank and most recently the German finance minister, Wolfgang Schauble, who usually succeeds in imposing his will in the eurozone. Sensitive talks are under way in key European capitals, causing shudders in Rome, Madrid and Lisbon.

The Five Sages of Germany. Peter Bofinger is on the left

Under the scheme, bondholders would suffer losses in any future sovereign debt crisis before there can be any rescue by the eurozone bail-out fund (ESM). “It is asking for trouble,” said Lorenzo Codogno, former chief economist for the Italian Treasury and now at LC Macro Advisors.

This sovereign "bail-in" matches the contentious "bail-in" rule for bank bondholders, which came into force in January and has contributed to the drastic sell-off in eurozone bank assets this year.

Prof Bofinger wrote a separate opinion warning that the plan could become self-fulfilling all too quickly, setting off a “bond run” as investors dump their holdings to avoid a haircut.

Italy, Portugal and Spain would be powerless to defend themselves since they no longer have their own monetary instruments. “These countries risk being hit by a dangerous confidence crisis,” he said.

The German Council says the first step would be a higher "risk-weighting" for sovereign debt held by banks, and a limit on how much they can buy, with the explicit aim of forcing banks to divest €604bn. They would have to raise €35bn in fresh capital, deemed “manageable”.

Sovereign exposures of banks in selected euro area member states

It is a neuralgic issue in Italy, where the banks own €400bn of government debt and have effectively used cheap finds from the European Central Bank to prop up the Italian treasury.

Mario Draghi, the ECB’s president, deflected a question on the issue from an Italian euro-MP on Monday. “It is an issue that we do have to deal with. But we have to take a very considered and phased-in approach,” he said.

The move is courting fate at a time when Portugal is already in the eye of the storm, facing a slowing economy and a clash with Brussels over austerity.
The risk spread on Portugal’s 10-year debt surged to 410 basis points over German Bunds last week, pushing borrowing costs back to unsustainable levels in real terms. Portugal’s public debt is 132pc of GDP. Total debt is 341pc, the highest in Europe. The country is in a debt-deflation trap and requires years of high growth to escape.

“Portugal is close to losing market access,” said Mark Dowding, from bond manager Blue Bay.

“We saw very ugly conditions last week, and large US managers invested in Portugal have been looking to exit those positions. With fund redemptions going on, it is a perfect storm.”
Mr Dowding said the saving grace for Portugal is that it has "pre-funded" most of its needs for 2016 and can weather the tempest for a while. If the crisis endures, worries about a fresh Troika rescue for Portugal - and what the terms for debt-holders might be - could take hold quickly. There was no haircut on sovereign bonds when Portugal was bailed out in 2010.

The German Council says the “regulatory privileges” of sovereign debt held on bank books should be phased out. It should no longer be treated as “entirely safe and liquid” under the banks’ liquidity coverage ratios, or be exempt from capital requirements. “The greatest risks are for banks in Greece, Portugal, Spain, Ireland and Italy,” it said.

In theory, the aim is to “reduce the sovereign-bank nexus” by partially separating the two, preventing government debt crises spreading and taking down national banking systems.

Prof Bofinger said the real problem is that Germany and the EMU creditor states still refuse to accept the implications of monetary union: that some level of debt-pooling and fiscal union is imperative to hold the experiment together.

He described the whole notion of a sovereign insolvency mechanism as misconceived, perpetuating the canard that fiscal abuse by governments is the root of the crisis. In reality, (with the exception of Greece) public debt exploded after 2008 because crisis states had to take emergency action to prevent their economies from collapsing.

Moreover, the new plan empowers private investors to act as judge and jury on the solvency of states. "We can't allow a regime where markets are masters of governments,” he said.

The German Council is defiant. It swats aside any talk of an EU treasury or shared fiscal authority. The only way to uphold monetary union is to impose strict control - it said - and “reinforce existing rules”.



China Favors Flexibility in Managing Yuan

Returning to a quasi-dollar peg has helped Beijing as the dollar weakened against the yen and the euro

By Lingling Wei in Beijing and Carolyn Cui in New York

The central bank is keeping its options open, swinging between its pledge to attach the yuan’s value to the currencies of its major trading partners and, when that works against it, repegging it to the dollar.

Since mid-January, the People’s Bank of China has quietly rehitched the yuan’s value to a weakening dollar, despite vowing just a month earlier to use multiple currencies as the yuan’s reference points.

For investors, China’s opportunistic approach sows confusion, which has led to volatile trading.

On Monday, the central bank suddenly guided the yuan sharply higher.
Chinese officials and advisers close to the central bank said the move was aimed at shoring up dwindling confidence in the Chinese currency, also known as the renminbi, that has led businesses and individuals to rush to move capital out of the country. Analysts estimate China’s capital outflows ranged between $500 billion and $1 trillion last year.

“The central bank wants to be flexible,” one of the officials said. “The goal is to reference the renminbi, instead of strictly pegging it, to the basket.”

In published remarks over the weekend, China’s central-bank governor, Zhou Xiaochuan, gave a hint of Beijing’s desire to be opportunistic in remaking its exchange-rate regime. Speaking to Caixin, a prominent Chinese magazine, Mr. Zhou said China would proceed with the reform of referencing the yuan to the currency basket when there is “a window” of opportunity and will be “pragmatic and patient” when there is not.

“The direction is clear, but the path to reform won’t be a straight line,” Mr. Zhou said.

Returning to what some analysts call a quasi-dollar peg has helped Beijing at a time when the dollar has weakened sharply against the yen and the euro as expectations for interest-rate increases in the U.S. fade.

That has allowed the yuan to ride down with the dollar and discreetly depreciate against the currencies of China’s trading partners.

“Things right now are working in the central bank’s favor,” said David Loevinger, a managing director and emerging-market sovereign analyst at TCW Group, with $180.7 billion of assets under management. “For the moment, that’s taken a lot of the pressure from the Chinese yuan.

There’s less need for them to have the yuan depreciate against the dollar.”

But it isn’t clear how long the favorable winds will blow for China. Monday’s currency movements gave an indication of the complexity of China’s gambit.

The yuan strengthened by as much as 1.35% against the dollar in mainland trading on Monday as the central bank guided the currency sharply stronger on the first day of trading following a weeklong Lunar New Year holiday.

Prior to Monday’s surge, which brought the yuan to 6.4938 per dollar in late mainland trading, the yuan had been hovering around 6.57 per dollar.

The central bank engineered the jump to maintain the yuan’s relative stability against other currencies after some of them strengthened against the dollar last week. “It’s a catch-up with movements in the dollar after the holiday,” said Jerry Peng, an analyst at Macquarie Securities.

“But in the near term, the [yuan-dollar] pegging pattern will still hold because stemming outflows remains the central bank’s top priority.”

Monday’s jump erased most of the losses the yuan had sustained in early January, when the central bank unexpectedly weakened the currency amid an economic slowdown. The yuan is down a slight 0.3% against the dollar since the end of last year. By comparison, the yuan has weakened 1.7% against a basket of 13 currencies, the composition of which the central bank disclosed in December, including the dollar, the yen, the euro and the Australian dollar.

Should the dollar resume its surge, Beijing would need to adjust its strategy again because a yuan more closely pegged to a rising dollar would hurt the Chinese central bank’s ability to ease credit, a crucial tool in rekindling economic growth. That is because the central bank, to maintain the peg, would have to intervene more heavily in currency markets, which would have the effect of draining yuan funds out of China’s financial system.

“They have enough firepower to play this game for a long time, but not forever,” Mr. Loevinger said.

The central-bank officials and advisers stress that referencing the yuan against a basket of currencies remains the central bank’s long-term goal. The central bank is expected to revert to the basket approach, they say, as the amount of money leaving the country eases and in the event of renewed strength of the dollar, which has weakened against some major currencies in recent weeks.

In the long run, the officials and advisers say, the Chinese central bank wants to build something thought of as the Singapore model. Under the “basket, band and crawl” system, the Monetary Authority of Singapore manages the Singaporean dollar’s value against a trade-weighted currency basket, allows it to trade within a band and lets the band crawl upward or downward as the central bank sees fit.

With that kind of model in place, the people say, China’s central bank would give a general guidance of future movement of the country’s currency and reduce its intervention in the market.

The state of the Chinese economy—which decelerated to a growth rate of 6.9% last year, the slowest pace in a quarter century—and whether the yuan will sharply depreciate have become a worry for global investors, who have counted on China as a source of growth for more than a decade.

That anxiety has been noticed by Beijing. Senior Chinese officials have pledged to better communicate with the market, though officials at the central bank have also signaled that, when it comes to fighting off speculators, it sometimes helps to be unpredictable.

China’s central bank has been criticized for how it has managed and communicated its exchange-rate policies over the past eight months in a series of surprises and reversals. As it devalued the yuan in August, the central bank tried a new way to fix the yuan’s value each day, only to all but drop it when confused investors sold off the currency.

For global investors, a big depreciation of China’s yuan remains one of the biggest risks this year, as cheaper Chinese exports could drag down asset prices in the rest of the world.

“Coming off a peg is always an extremely delicate thing,” said James Barrineau, co-head of emerging-market debt at Schroders Investment Management, SDR 1.68 % which has $446.5 billion of assets under management. “They really need to communicate [their] broad strategy to have that accepted by the markets.”

Speculative Gold Shorts Abandon Their Positions - Is It Time For Gold To Take A Breather?

by: Hebba Investments

For six straight weeks gold longs have increased their positions while gold shorts have decreased their positions.

The current report only includes data up until last Tuesday and doesn't include Thursday's meteoric rise in the gold price.

Based on historical data, we have never seen seven straight weeks of declining shorts and that's what we expect next week's report to show.

It may be time for short-term traders to take profits in gold, though we still strongly believe that gold has much further to rise in the long-term.
In the latest Commitment of Traders report (NYSE:COT), we saw for the sixth consecutive week gold long build up their positions while short speculators ran for the exits. Speculative long traders are now at their highest levels since last October, while the ratio between longs and shorts dropped to around 30% - the lowest levels since early November. All of this was based on Tuesday's report, which didn't include gold's meteoric rise on Thursday - when we see next week's report it should show that these positions are probably even more tilted towards the longs.
We will get a little more into this but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
About the COT Report

The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investor a way to see what larger traders are doing and to possibly position himself accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the exports on it. What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
This Week's Gold COT Report
This week's report shows speculative traders once again cutting their short positions for a sixth straight week, while speculative longs jump into the gold trade.
After six straight weeks of increasing long positions and decreasing short positions, the speculative portion of the gold market is at a much more balanced position than late last year.
Additionally, since this report is dated to 2/9/16 and doesn't include Thursday's $50 jump in the gold price, the current positions probably have many more longs and much fewer shorts - we're probably going to see our seventh straight week of increasing longs and declining shorts when next week's report comes out.
Going back to the historical data, our records show that we have never seen seven straight weeks of declining shorts (six weeks has been seen a few times). On the long side, we saw eight straight weeks of rising long positions in 2012 as the gold price rose from $1597 to around $1775, which is a bit greater than a 10% gain. The other time that we have seen such a number of increasing speculative longs, was back in September of 2010 as we saw seven straight weeks of gains that took the gold price from $1168 to around $1265. So while the long side of the gains isn't unprecedented, the size of the gains that we have just seen in gold during this streak (from around $1070 to the current $1238 - slightly under 20%) is a bit unprecedented - at least since COT records began in 2006.

What Does This Mean For Investors?
While we are still long-term believers in gold and see no reason to sell physical or core positions, we do feel in the short-term positions are a bit too bullish. We think next week's report will show seven straight weeks of long increases and short decreases as the price of gold is significantly higher than this report's closing data - which has never happened since our data series began.
Thus for investors who do manage their positions using short-term indicators, now may be a good time to take some profits and wait for another lower entry point. Thus lightening up on the gold ETFs (SPDR Gold Shares (NYSEARCA:GLD), PHYS, CEF) and the gold miners may be a prudent move. We stress that this call is only for those who trade gold in the short term - we are still long-term bullish on gold as even at $1240 it is still undervalued as both a hedge against financial system risk and simply on mine supply fundamentals.
What could go wrong with our short-term call? If something in the system breaks or we see a gold supply shortage issue (COMEX default?) then the speculative positioning on the COT report really will mean nothing as the price should rocket. That's why we stress investors should maintain their core and physical gold positions despite the short-term overbought nature of gold. But in the short-term assuming none of these events occur, we see gold pulling back a bit as traders lock in gains and shorts re-enter the market.

America’s Soft Revolution

Plus the myths of the Black Lives Matter movement and good news from Washington.

By James Freeman

“We’re in the midst of a rebellion,” writes Peggy Noonan, “a kind of soft French Revolution going on in America, with the angry and blocked beginning to push hard against an oblivious elite.” Gloria Steinem “thought she owned feminism, thought she was feminism. She doesn’t and isn’t. The Clintons thought they owned the party—they don’t. Hedge-funders thought they owned the GOP. Too bad they forgot to buy the base!”

Ms. Noonan adds that this rebellion accounts for the rise of Bernie Sanders and also Donald Trump, “a clever man with his finger on the pulse, but his political future depends on two big questions. The first is: Is he at all a good man? Underneath the foul mouthed flamboyance is he in it for America? The second: Is he fully stable? He acts like a nut, calling people bimbos, flying off the handle with grievances. Is he mature, reliable? Is he at all a steady hand? Political professionals think these are side questions. ‘Let’s accuse him of not being conservative!’ But they are the issue. Because America doesn’t deliberately elect people it thinks base, not to mention crazy.”

Mr. Sanders and Hillary Clinton have adopted the message of the Black Lives Matter movement. Today in our pages Heather Mac Donald punctures the myths of that movement.

Ms. Mac Donald writes that “fatal police shootings make up a much larger proportion of white and Hispanic homicide deaths than black homicide deaths.” Also, police officers “are killed by blacks at a rate 2.5 times higher than the rate at which blacks are killed by police.” Ms. Mac Donald adds that the Black Lives Matter movement “claims that white officers are especially prone to shooting innocent blacks due to racial bias, but this too is a myth. A March 2015 Justice Department report on the Philadelphia Police Department found that black and Hispanic officers were much more likely than white officers to shoot blacks based on ‘threat misperception’—that is, the mistaken belief that a civilian is armed.”

Speaking of Mrs. Clinton, our columnist Kimberley Strassel writes that “New Hampshire proved that concerns about Mrs. Clinton’s ethics aren’t merely a right-wing talking point.

They’ve permeated the electorate. Some stunning numbers: Among the one-third of Democratic primary voters who said ‘honesty’ was the top quality they wanted in a nominee, Mr. Sanders won 91%. Among the quarter who said they focused on a candidate who ‘cares about people like me,’ Mr. Sanders won 82%.”

A Journal editorial reports “good news from Washington. On Thursday the Senate finally passed—and the White House said the President intends to sign—a permanent extension of the Internet Tax Freedom Act.” The law will “protect against state and local governments imposing taxes on Internet access services or email.”

Amid downbeat economic news, Federal Reserve Chair Janet Yellen “is being blamed for having raised interest rates a minuscule 0.25%, as if that’s enough to topple a $17 trillion economy,” notes the editorial board. “Our own view is that the Fed should have raised rates long ago when the economy was stronger, and it would have more room to maneuver now that growth is flagging.”

Former U.K. Treasury official Ed Balls says that leaving the European Union “would both weaken Britain’s voice on the big global issues and damage the nation’s economy. With half of U.K. trade tied up in Europe, and many U.S. and Asian multinationals currently basing their European headquarters in London, walking away now would cost us investment, jobs and income, as well as influence.”

Greek Orthodox Bishop Demetrios of Mokissos describes the “anti-Christian genocide” being perpetrated by ISIS and marks the anniversary of last year’s execution in Libya of 21 itinerant tradesman working on a construction job. “All were native Egyptians but one, a young African man whose identity is uncertain.” Though he was not a Christian when captured, “when challenged by the terrorists to declare his faith, he reportedly replied: ‘Their God is my God.

In that moment, before his death, he became a Christian. The ISIS murderers seek to demoralize Christians with acts like the slaughter on a Libyan beach. Instead they stir our wonder at the courage and devotion inspired by God’s love,” writes the bishop.

“ChemChina’s $43 billion offer for Swiss-based chemical and biotech company Syngenta SYT 0.41 % still faces several obstacles,” notes the editorial board. “But if it goes through, the deal could bring a huge global benefit: breaking down China’s resistance to genetically modified crops and building its protections for intellectual property.”

“Every year, Americans spend nearly $19 billion on retail goods celebrating Valentine’s Day, and about $1.5 billion of that is on candy. One reason that heart-shaped box is so expensive—about $24 a pound for a brand-name basic assortment”—is the federal government’s price-control program, write Rep. Joe Pitts and David McIntosh