Is the Perfect Storm Over for Markets?

Mohamed A. El-Erian

 building clouds

LAGUNA BEACH – Earlier this year, financial markets around the world were forced to navigate a perfect storm – a violent disruption fueled by an unusual amalgamation of smaller disturbances. Financial volatility rose, unsettling investors; stocks went on a rollercoaster ride, ending substantially lower; government bond yields plummeted, and lenders found themselves in the unusual position of having to pay for the privilege of holding an even bigger amount of government debt (almost one-third of the total).
The longer these disturbances persisted, the greater the threat to a global economy already challenged by structural weaknesses, income and wealth inequalities, pockets of excessive indebtedness, deficient aggregate demand, and insufficient policy coordination. And while relative calm has returned to financial markets, the three causes of volatility are yet to dissipate in any meaningful sense.
First, mounting signs of economic weakness in China and a series of uncharacteristic policy stumbles there still raise concerns about the overall health of the global economy. Given that China is the second largest economy in the world, it didn’t take long for European officials to reduce their own growth projections, and for the International Monetary Fund to revise downward its expectations for global growth.
Second, there are still legitimate doubts about the effectiveness of central banks, the one group of policymaking institutions that has been actively engaged in supporting sustainable economic growth. In the United States, doubts focus on the willingness of the Federal Reserve to remain “unconventional”; elsewhere, however, doubts about effectiveness concern central banks’ ability to formulate, communicate, and implement policy decisions. For example, rather than viewing monetary authorities’ activism as an encouraging sign of policy effectiveness, markets have been alarmed by the Bank of Japan’s decision to follow the European Central Bank in taking policy rates even deeper into negative territory.
Third, the system has lost some important safety belts, which have yet to be restored. There are fewer pockets of “patient capital” stepping in to buy when flightier investors are rushing to the exit. In the oil market, the once-powerful OPEC cartel has stepped back from the role of swing producer on the downside – that is, cutting output in order to stop a disorderly price collapse.
Each of these three factors alone would have attracted the attention of traders and investors around the world. Occurring simultaneously, they unsettled markets. Intra-day volatility rose in virtually every segment of global financial markets; adverse price contagion became more common as more vulnerable entities contaminated the stronger ones; and asset-market correlations were rendered less stable.
All this came in the context of a US economy that continues to be a powerful engine of job creation. But markets were not voting on the most recent economic developments in the US. Instead, they were being forced to judge the sustainability of financial asset prices that, boosted by liquidity, had notably decoupled from underlying economic fundamentals.
In the wake of this volatility, markets have recently regained a more stable footing. Yet the fundamental longer-term challenge of allowing markets to re-price assets to fundamentals in a relatively orderly fashion – and, critically, without causing economic damage that would then blow back into even more unsettled finance – remains.
Indeed, the more frequent the bouts of financial volatility in the months to come, the greater the risk that it will lead consumers to become more cautious about spending, and prompt companies to postpone even more of their investment in new plant and equipment. And, if this were to persist and spread, even the US – a relatively healthy economy – could be forced to revise downward its expectations for economic growth and corporate earnings.
Durably stabilizing today’s markets is important, especially for a system that has already assumed too much financial risk. It requires a policy handoff instigated by more responsible behavior on the part of politicians on both sides of the Atlantic – one that undertakes the much-needed transition from over-reliance on central banks to a more comprehensive policy approach that deals with the economy’s trifecta of structural, demand, and debt impediments (and does so in the context of greater global policy coordination).
Should this handoff occur, its beneficial impact in terms of delivering inclusive growth and genuine global stability would be turbocharged by the productive deployment of cash sitting on companies’ balance sheets, and by exciting technological innovations that began as firm/sector specific but are now having economy-wide effects. If the handoff fails, the financial volatility experienced earlier this year will not only return; it could also turn out to have been a prologue for a notable risk of recession, greater inequality, and enduring financial instability.

Yellen Gives Bulls What They Want

(I’m back in the turret briefly, but my hands are failing me limiting my typing, so this report is shortened.)

There’s a lot of spin (um, lying?) going on with the Fed’s announcement Wednesday.
It’s consistent with past comments and runs as follows:

Consumer Confidence has improved—no it hasn’t.
Economic Growth is growing at “moderate” pace—not really unless you consider 1% moderate.
The strong dollar has restricted economic growth—this has been the mantra for past two years, Retail Sales, Industrial Production and so forth remain weak.
Oil prices are rebounding has prices increased—that’s possibly true but the category is still weak.
Employment is expanding as is participation—most new jobs part-time or in the low paying services sectors, this is BS.
Over Seas Economic weakness has little effect on our projections—seriously?
Financial market (stock markets) are doing well fanning the flames to heat up investor confidence—markets are still rallying based on corporate buybacks. One thing to keep in mind is that this creates a lot of debt.
And, so the psychological manipulation goes.

Just remember gold rallied sharply which means a green from the Fed keeping interest rates low.

So, what is the current rally based on? Earnings? No. Better economic data. No. For now it’s zero interest rates forever which allows cheat debt for stock buyback.

That said, you must understand the Yellen doesn’t want to raise rates before the election this fall. This is part of Obama’s legacy after all. If Trump should be elected, she’ll raise interest rates, and if markets decline he’ll get the blame. Petty politics? Sure, that’s the way Washington works.

Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red).

Dependent on the day (green) may mean leveraged inverse or leveraged short (red).

3-16-2016 2-18-02 PM

Volume was modest and breadth per the WSJ was positive.

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3-16-2016 2-29-53 PM

12-17-2015 9-04-44 PM Chart of the Day
3-16-2016 3-15-44 PM gld

Charts of the Day
















    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.


    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.


    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation has changed due to a variety of new factors including HFTs, new VIX linked ETPs and a multitude of new products to leverage trading and change or obscure prior VIX relevance.


My bet would be the current market rally was based on inside information some thought, or were told would happen.

Frankly it would be naïve to think otherwise. In the case, and as I’ve been saying lo these many months, for this trend to be valid, the news must follow the market’s trend.

And so it did this day.

Today’s data, and all the data since January 1st hasn’t been positive. Also earning are estimated to fall sharply. The only mounting evidence of a rally is the ongoing debt fueled corporate buybacks.

This is what the Fed has achieved thus far.

Let’s see what happens. 

France's Economic Deterioration Confirms That The Euro Currency Is A Failing Experiment

by: Zoltan Ban
- France entered the 2008 global crisis as an AAA country. Its current economic indicators, such as the unemployment rate, deficits & debt make it look more like a PIGS member.

- The Euro currency, which is too strong for some, while much weaker than should be for others, which is what led to the PIGS is also main factor affecting France.

- Whether France decides to leave the Euro experiment now, or waits for its demise, the end result will most likely be sovereign debt default.

- Most other European countries will most likely share the same fate, within about a decade at the most. We should start preparing, because it could happen at any moment.

It may not fit in as neatly as PIIGS, when it comes to acronyms, but I do believe that this increasingly fits the reality of the economic situation in Europe. Ireland is set to resume its strong economic performance, helping it dig itself out from the aftermath of its banking crisis, which caused its debt/GDP ratio to almost triple, from 44% in 2008, to 120% by 2011. Thanks to disciplined fiscal budgets, as well as robust economic growth, it managed to cut its debt/GDP ratio to below 100% as of the end of 2015.
The rest of the PIIGS, which in fact should read PIGS right now, have not fared very well since the crisis. In fact, it seems that without the ECB and the IMF, most of these countries would be in deep trouble. At the root of the problem in my view is the euro currency, which is way too strong for the needs of these countries. It is the economic performance, especially when it comes to net exports of countries like Germany, which is making the euro currency too strong. They fall further as a result, pushing the euro further below the level it would have to be if it were to reflect only the German economy. That in turn further stimulates Germany's export capacity.
It is a vicious cycle, which will never loosen its grip on the poor euro countries caught in it.
It may be argued that Ireland escaped therefore it is possible to exit the vicious cycle, but fact is that Ireland was never really caught in it. Its economy always had the capacity to resume the strong growth trajectory it saw before the 2008 crisis. The weak euro, mainly stemming from the Greek crisis, as well as worries about Italy, Spain and Portugal have in fact benefited Ireland, which just like Germany is rather competitive, aside from its banking sector which managed to get itself into trouble.
France sinking slowly but surely.
Entering the 2008 crisis, France was one of the AAA rated countries, considered to be one of the euro-area pillars of stability, alongside Germany. Since 2008 however, France's vulnerability has been exposed and frankly it is currently grossly under-estimated in my view.
While Germany continued to maintain its solid fiscal situation and managed to solidify its trade balance situation, France is failing on all fronts.
Data source: Trading Economics.
As we can see, France is unable to get its government debt situation under control. In fact, it has been getting waivers from being subjected to sanctions due to its deficits surpassing the 3% threshold, under the Excessive Deficit Procedure rules for years now.
Unemployment is another problem area for France. Unemployment was a problem before, with the period before 2000 seeing it go over 10%. Between 2000-2008 things were on an improving path, with unemployment dropping below 7.5% by the beginning of 2008. Since then, it kept increasing.
By 2012, it went above 10% and has been there ever since. Presently, it is 10.2% as of January, according to Eurostat. A most worrying aspect of the January numbers is the progression of the youth unemployment rate. It went from 24.8% in January, 2015, to 25.9% in January, 2016. In this regard, it is firmly in the PIGS camp in the Eurozone. It is not yet as high as it is in those countries, but aside from Portugal, Italy, Spain and Greece, France does have the highest youth unemployment rate in the euro zone, aside from tiny Cyprus.
Data source: Eurostat.
It is very important to highlight youth unemployment when it comes to talking about a country's economic future. The young are always the future. As their lives will go in the longer run, so will the future of the society they belong to. As we can see, the young citizens and residents of France are not off to a very bright start.
More immediate results of failing to provide the environment for young people to launch themselves career-wise is a loss of the investment society makes in education, as their abilities gained through education tend to be lost and in many cases forever under-utilized. As a consequence, many people in this generation also lose the ability to become good consumers.
Construction, which tends to be a great boost to labor demand, ends up suffering as an increasingly large number of young people fail to form a family and buy a house. No house means no need for furniture either, and therefore no need for factories and stores selling the furniture. The trend works through the economy, leading to even fewer opportunities for young people.
A low income level and a lack of income stability also dampens demand for other goods such as cars or entertainment services such as restaurants. It feeds through the economy, with every year that passes, as a shrinking number of young people join the workforce due to demographic trends. Even among this shrinking demographic, far fewer of them become relatively successful in establishing a middle class lifestyle proportionally speaking, compared with previous post-WW2 generations.
It is very important to understand that the youth unemployment rate we are seeing is a symptom of a sustained deterioration of the French economy, but at the same time it is becoming a causing factor in cementing the trend of deterioration. It is an irreversible trend as long as major changes fail to materialize. There are those who think that it is only a matter of changing government policy on labor protection, taxation and other such adjustments. But in reality, there is only one way out, and that way is a return to its own national currency. It is clear at this point in time that France needs a currency which will weaken much more than the euro has in the past few years. The euro without the German effect would be much weaker today than it is, and it is in fact what most euro zone economies need, including France.
Short-term effects.
It is not as if France is the only country facing economic difficulties in the EU. Countries in the euro zone such as Cyprus, Belgium, Finland, Slovenia have all struggled to find traction through this so-called recovery period, which officially started in Europe in 2013. The reason why we need to keep an eye on France is because it is the second-largest Eurozone economy, meaning that the EU itself cannot gain much traction, especially given that Italy and Spain, which are the euro zone's third and fourth largest economies respectively, are also struggling. If the EU fails to gain traction and put in a few years of robust growth, then it is harder for France to exit its own slump as well.
Unlike smaller countries such as Slovenia, or Cyprus, which could go through an economic slump without having much effect on the overall EU economy, and tag along if the EU economy booms again, with France reality is that the EU cannot really enter a boom period without the full economic participation of France. At the same time, France cannot recover without an EU boom. This is especially the case given that many of the products made in France, such as cars, do not have the same access to the global market as German brands do. Renault, Peugeot and Citroen, which are France's car makers are all missing from the North American market, while German car producers are all present and selling in significant volumes.
The resulting effect of the current situation is well-illustrated in the EC winter 2016 forecast for this year and next.
As we can see, this year and in 2017, France's economy will continue to grow considerably slower than the EU average. It is also one of only a few countries unable to bring its deficits below 3% as demanded by EU treaties. By 2017, it will be one of only two countries with a deficit above 3%, alongside Portugal in the 19 member euro zone. Even Spain, Italy and Greece are forecast to achieve deficits considerably below 3%. The unemployment rate is also set to continue to stay above the 10% threshold. We should keep in mind that this forecast does not include a possible global recessionary event, which would drastically change the outlook for the EU and France. At this point, if a global downturn were to strike this year or next, we could potentially see a situation where France will have to run deficits deemed much higher than considered to be sustainable, leading to a French sovereign debt crisis as bond investors rush for the exit door. Alternatively, we could see France attempting to reign in its deficit through a global downturn, which would in effect cause a similar economic contraction to what we have seen in Greece as it attempted to catch up to its fiscal imbalances, with counter-productive results, which resulted in a huge plunge in economic output year after year. Either way, whenever the next recession comes, given the poor state of France's economy when entering it, its chances of coming out of it as anything else but an addition to the PIGS club are slim, even if the acronym might not work as well in forming a neat word to remember it by.
Longer-term consequences.
As we saw with the Greek crisis, the end-result can only be one, and that is default. Greece did not officially go through a default yet, but it will, despite more than half a decade of suffering inflicted on its population in a futile attempt to prevent it. Similarly, whether France decides to dump the euro now, or a decade from now, after continued deterioration of its economy, the end-result can only be one and that is sovereign debt default. As I pointed out, France cannot hope to reform itself into competitiveness within the euro currency context. It could leave the euro now, but that will also come with its own pain and suffering. The increased costs of dealing with its main trade partners due to currency issues would initially offset the gain from having its own adjustable currency. Switching back to the French franc would also mean that markets would demand a much higher interest on France's bond issues, leading to a significant increase in interest expenses, putting further pressure on its government finances. This would lead to a spike in its debt/GDP ratio, leading to an eventual default within a few years.
As bad as that sounds, it would in fact be better for France to go down that road than continue on with this failed experiment. Sticking with the euro will only lead to a continued deterioration of its economy. It will continue to deteriorate until France will either decide to exit, be pushed out, or until the whole experiment comes to an end, which I would not dismiss at this point, given what is going on in Europe at the moment.
Implications for the global economy and investors.
The continued deterioration of France's economy, which was considered an AAA country by the ratings agencies going into the 2008 crisis, is perhaps the most credible confirmation that the euro currency is a failed experiment. It is now only a matter of time before it unravels at some point, in some fashion, leading to European economic disaster and a severe global crisis. The countries comprising the euro area, collectively make up the second largest economy on the planet after all, therefore the fallout will be very significant when it will happen.

Whether the euro will collapse this year as a result of the endless crises facing the EU, ranging from the continued economic stagnation, the threat of a British vote to exit the EU this summer, the continued antagonism between the EU and Russia, or the migrant crisis which is causing an unprecedented level of friction and animosity between EU countries, as well as between the people and their elites, whom they increasingly do not trust, makes it increasingly likely that the euro experiment will end rather soon. Even if that is not the case and all these problems will either go away or Europeans will manage to cope with the challenges and the consequences, the continued destruction of many euro zone economies means that the euro currency is unlikely to survive the shock of the next global economic downturn. There is simply nothing left to prop it up with.
Governments already have too much debt to try fiscal stimulus and the ECB is already being as accommodating as it can get when it comes to interest rates and QE. What this means to all of us is that we need to start preparing ourselves for a collapse of the euro within a decade at the latest. Odds of it happening are in my opinion higher than the odds of it not happening, so we all need to have a strategy meant to cope with the fallout.
My strategy is to keep some gold exposure, in case that it all unravels very suddenly. Others may try to bet on the US dollar and assets denominated in the US currency. Some more adventurous individuals may venture to prepare to short relevant assets, such as European ETF's or individual European companies. Some of these strategies may work better than others. One thing that is guaranteed to not work in my opinion is to ignore the facts and continue to just assume that this will work itself out. As the case of France shows us, there is no way out of this grand failing experiment, except for economic catastrophe.

The New Interventionists

Mark Leonard

Russian planes

MUNICH – The consequences of Russia’s intervention in Syria stretch far beyond the Middle East. The Kremlin’s military campaign has tilted the stalemate in favor of the government and derailed efforts to craft a political compromise to end the war. It also heralds the beginning of a new era in geopolitics, in which large-scale military interventions are not carried out by Western coalitions, but by countries acting in their own narrow self-interest, often in contravention of international law.

Since the end of the Cold War, the debate over international military action has pitted powerful, interventionist Western powers against weaker countries, like Russia and China, whose leaders argued that national sovereignty is sacrosanct and inviolable. The unfolding developments in Syria are further evidence that the tables are turning. While the West is losing its appetite for intervention – particularly involving ground troops – countries like Russia, China, Iran, and Saudi Arabia are increasingly intervening in their neighbors’ affairs.

In the 1990s, after genocides in Rwanda and the Balkans, Western countries developed a doctrine of so-called humanitarian intervention. “The Responsibility to Protect” (colloquially known as “R2P”) held countries accountable for their people’s welfare and compelled the international community to intervene when governments failed to protect civilians from mass atrocities – or were themselves threatening civilians. The doctrine upended the traditional concept of national sovereignty, and in countries like Russia and China, it quickly came to be viewed as little more than a fig leaf for Western-sponsored regime change.

So it is ironic, to say the least, that Russia is using a concept similar to R2P to justify its intervention, only in this case it is defending the government from its citizens, rather than the other way around. Russia’s efforts are, in effect, an argument for a return to the era of absolute sovereignty, in which governments are uniquely responsible for what happens within their country’s borders.

Russia’s stance also reflects its preference for stability over justice and its acceptance of the legitimacy of authoritarian rule. With the proliferation of “color revolutions” in places like Georgia, Ukraine, and Kyrgyzstan, Russia and China have become increasingly wary of popular uprisings. The threat of Western intervention, in their view, only compounds the potential for instability. Indeed, the Chinese have coined their own stiff foreign-policy jargon for this sentiment: fanxifang xin ganshe zhuyi (loosely translated, “countering Western neo-interventionism”).

But Russia’s respect for sovereignty has notable limits. In Crimea in 2014, the Kremlin embraced a very different doctrine of intervention, justifying its actions in Ukraine on the grounds that it was defending the rights of ethnic Russians. This marks a return to a pre-Westphalian world of linguistic, religious, and sectarian solidarity, of the sort Czarist Russia practiced when it regarded itself as the protector all Slavs.

Not surprisingly, this justification for intervention is rapidly finding adherents in other parts of the world. In the Middle East, Saudi Arabia has adopted a parallel argument for its support of Sunni forces in Yemen and Syria, as has Iran in backing its Shia allies in both countries. Even China is increasingly being pushed to take responsibility for its citizens and companies overseas. At the beginning of the Libyan civil war, China airlifted tens of thousands of its citizens out of the country.

All of this has come at a time when the West is losing its military preeminence. Improvements in the Russian and Chinese militaries and the increasingly common use of asymmetric strategies by state and non-state actors are leveling the battlefield. Indeed, the proliferation of state-sponsored non-state actors in places like Libya, Syria, Crimea, and Donbas is blurring the distinction between state and non-state violence.

After the Cold War, the West imposed an international order that defined geopolitics worldwide. When that order was threatened, Western leaders felt authorized to intervene in the affairs of whatever “rogue state” was causing the problem. But now that order is being challenged on several fronts simultaneously – globally by Russia and China, and at the regional level by increasingly assertive players in the Middle East, Latin America, and even Europe.

As a new order takes shape, the roles countries have played for the last 25 years are likely to be reversed. In the West, the concept of sovereignty and the limited use of power is likely to make a comeback, while national leaders who have traditionally called for restraint will become increasingly bold in unleashing their troops.


Software Is Disrupting Venture-Capital Sector

CircleUp’s Classifier shows algorithms now play bigger role in prescreening investments

By Christopher Mims

Illustration: Richard Borge

Ten years ago, bored by the repetitive nature of his work as a private-equity analyst, Ryan Caldbeck began to think that the job could be done as well by software. Today, he’s the co-founder and chief executive of CircleUp, an online crowdfunding platform specializing in consumer-goods companies—think food, cosmetics and chain restaurants. Mr. Caldbeck’s firm has built software that he says does more or less what he once found so stultifying.

Internally, this software is called the “Classifier.” It applies so-called machine learning to a pool of big data: more than 10,000 evaluations over four years by CircleUp’s human analysts.

The software has been prescreening investments for analysts since March 2014. The result is much higher deal flow. Fewer than 10 analysts collectively evaluate 500 potential deals a month, says a CircleUp spokeswoman. By comparison, a typical private-equity firm evaluates fewer than 500 deals in a year.

During the prescreen, the Classifier crunches a candidate company’s financial data: revenue, growth, margins, distribution channels and the like. Other sources are also thrown into the mix, including data from market-research firm Nielsen and quantitative measures of reach and activity on social media, for a total of 92,000 data points per company, says Mr. Caldbeck. Then the machine decides whether the company merits further evaluation by human beings.

The Classifier is nowhere close to fully automating the process of investing in private companies.

And compared with the tools available for public markets—software-driven hedge funds like Renaissance Technologies, or robo advisers for individual investors like Wealthfront and Betterment—CircleUp’s software is primitive.

But CircleUp’s effort exemplifies a larger trend in finance, where algorithms play a growing role in markets for areas as diverse as startups and real estate. Software is eating the world, again, only this time it threatens the jobs of precisely the financiers accustomed to disrupting everyone else.

One reason CircleUp could build its Classifier is that the companies in which it organizes investments tend to have very similar business models. The food companies, for example, generally sell similar types of products into grocery stores with nearly identical requirements.

The company’s software wouldn’t work in tech, says Rory Eakin, CircleUp’s other co-founder and chief operating officer. The business models of tech startups vary widely, and those companies can tap a robust network of incubators and venture capitalists. “I don’t think there’s a problem to be solved in tech investing, but if you have an organic-kale-chip company and you’re reinventing the salty-snack category, there’s no ecosystem to fund that,” says Mr. Eakin.

One such kale-chip maker is Rhythm Superfoods. It was first evaluated by the Classifier, accepted into CircleUp, and is now in 5,000 U.S. stores. On the strength of that growth, the company netted a financing round of $3 million, led by General Mills GIS 0.69 % .

A challenge to further automating the assessment of private companies is a lack of publicly available data. In general, only potential investors get to see a private company’s financials.

Once such data is collected, however, there might be other uses. Alexander Mittal, CEO of FundersClub, one of the first online investment marketplaces where accredited investors could pool their money in private deals, says his team is analyzing its four years of data to assess which investors on FundersClub are best at judging companies, as evidenced by how their investments perform.

Using software to pick the humans who are best at picking startups certainly seems like a baby step toward automating the investment process. By analogy, think about how Google’s algorithm started out using signals from humans—how often Web pages linked to one another—to pick the most relevant pages and has since become more automated.

There’s an irony here: CircleUp, which is to some extent trying to disrupt traditional venture capital, is itself funded by venture funds including Union Square Ventures, Canaan Partners and Google Ventures. That isn’t lost on CircleUp investor Andy Weissman of Union Square Ventures, who jokes that “our hope is that CircleUp will put us out of business.”

The complexities of identifying successful tech companies will probably keep Mr. Weissman safe for the foreseeable future. Still, the truth is that CircleUp and companies like it could eventually take a chunk out of the profits earned by private investors.

It is possible, in other words, that the Warren Buffett of the 21st century will be an artificially intelligent software program.

There are also many categories of private investments that might yield to this same approach, especially in debt financing for segments like agriculture or industrial machinery. This is, after all, what Lending Club LC -6.07 % is trying to do for consumer debt.

Meanwhile, CircleUp’s Classifier is simply making the human analysts the company employs more effective. Even in the relatively straightforward world of investing in consumer goods, people aren’t out of the loop—yet.

Cash, Guns And Safes: Stress Is Spreading

By: John Rubino

The Bank For International Settlements just released a report stating that the spread of negative interest rates hasn't caused the world to end. From this morning's Bloomberg:

Negative Interest Rates Are Working Just Fine So Far: BIS 
Negative interest-rate policies currently in use by central banks around the world have worked through their respective systems in much the same way as positive rates, though it's not known how far below zero that would continue to be the case, the Bank for International Settlements said. 
In its quarterly report published Sunday, the Basel-based "central bank for central banks" said that "so far, zero has not proved to be a technically binding lower limit for central bank policy rates." 
The BIS's verdict on negative rates gives backing to the European Central Bank, the Bank of Japan and others at a time when such unconventional methods are facing increasing criticism for their potential impact on the financial industry and currency markets. A sell-off in European bank stocks this year was partly driven by fears that further rate cuts by the ECB would damage profitability in a sector still recovering from the debt crisis. 
"The experience so far suggests that modestly negative policy rates are transmitted to money-market rates in very much the same way as positive rates are," report authors Morten Bech and Aytek Malkhozov said. "Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties."
The report also presented calculations of the average effective rate that banks pay on cash above the minimum requirements or exemptions at the ECB, the Swiss National Bank, the Riksbank and the Danish central bank, showing that a lower negative policy rate doesn't necessarily translate into a more expensive proposition for lenders.

The BIS report does include some caveats along the lines of "it's early in the process and there's no way to know if more deeply negative rates will cause trouble." Still, the idea that the system isn't being stressed by today's negative rates is belied by some trends that have gotten a fair bit of press lately. Consider:
The New Cash Hoarders 
(Wall Street Journal) - Negative interest rates have the law-abiding scrambling for bills. 
Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens responding rationally to monetary policy. 
The Swiss National Bank introduced negative interest rates in December 2014. The aim was to drive money out of banks and into the economy, but that only works to the extent that savers find attractive places to spend or invest their money. 
With economic growth an anemic 1%, many Swiss withdrew cash fromthe bank and stashed it at home or in safe-deposit boxes. High-denomination notes are naturally preferred for this purpose, so circulation of 1,000-franc notes (worth about $1,010) rose 17% last year. They now account for 60% of all bills in circulation and are worth almost as much as Serbia's GDP. 
Japan, where banks pay infinitesimally low interest on deposits, is a similar story. Demand for the highest-denomination 10,000-yen notes rose 6.2% last year, the largest jump since 2002. But 10,000-yen notes are worth only about $88, so hiding places fill up fast. That explains why Japanese went on a safe-buying spree last month after the Bank of Japan announced negative interest rates on some reserves.  
Stores reported that sales of safes rose as much as 250%, and shares of safe-maker Secom spiked 5.3% in one week.

That academics and bureaucrats have responded by calling for the partial elimination of cash isn't helping calm the masses. From the above Wall Street Journal article:
"In certain circles the 500 euro note is known as the 'Bin Laden,'" former U.S. Treasury SecretaryLarry Summers wrote last month in calling for a global ban on notes worth more than $50 or $100. He noted interest from European Central Bank President Mario Draghi and said that "if Europe moved, pressure could likely be brought on others, notably Switzerland." 
Fellow Harvard economist Kenneth Rogoff wants to retire cash altogether, primarily because "a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity." But he doesn't hide the additional monetary-policy motive: "Getting rid of physical currency and replacing it with electronic money," he wrote in 2014, would allow central bankers to set negative interest rates without people "bailing out into cash."

On a different but related note, gun sales are up along with cash and safes. See Gun Sales Soar After Obama Calls for New Restrictions, which includes this fairly striking chart of Americans' shift from rifles to handguns. The red line is handgun sales as a percentage of total sales. We're clearly envisioning more up close and personal uses for our guns these days:

Handgun and Rifles sales 2000-2016

Similar trends are taking hold in Europe, where gun culture is not traditonally part of the mainstream.
German Gun Sales and Permit Applications Soar After Cologne Sex Attacks 
(Breitbart) - Gun sales and gun permit applications have soared in Germany in the wake of the sex attacks in Cologne on New Years Eve. Cologne, Düsseldorf and Frankfurt are all reporting an influx of requests for permits with Cologne police estimating at least 304 applications since the attacks. In 2015 the entire year saw only 408 applications total in the city. 
Spokesman Andre Hartwich of the Düsseldorf police estimates at least eight to ten application requests per day, which if continued throughout the year would dwarf the previous year's requests total of 1,500. 
Ralph Pipe of the Frankfurt Police procedural office has said, "We have been beginning every day with at least 13 applications," in comparison to last year in which there were only one or two applications per day. 
Cologne police also mentioned that pepper spray is not covered under the Arms Act and does not require a permit or license. Sales of pepper spray in Germany have likewise increased and, as Breitbart London has reported, many vendors are even sold out.

This is all part of the same process, in which fiat currency printing presses lead to excessive debt and unwise foreign adventures, which lead to slowing growth, greater wealth inequality and geopolitical blowback, culminating in the kind of generalized mess that we see today.

People react to these uncertainties by trying to protect themselves with cash and guns, and governments respond by trying to limit citizens' ability to do so.

If this play has a third act, it will involve the abolition of cash in some major countries, the rise of various kinds of black markets (silver coins, private-label cash, cryptocurrencies like bitcoin) that bypass traditional banking systems, and a surge in civil unrest, as all those guns are put to use.

The speed with which cash, safes and guns are being accumulated -- and the simultaneous intensification of the war on cash -- imply that the stress is building rapidly, and that the third act may be coming soon.

Calculus Is So Last Century

Training in statistics, linear algebra and algorithmic thinking is more relevant for today’s educated workforce.

By Tianhui Michael Li and Allison Bishop


Photo: Getty Images

Can you remember the last time you did calculus? Unless you are a researcher or engineer, chances are good it was in a high-school or college class you’d rather forget. For most Americans, solving a calculus problem is not a skill they need to perform well at work.

This is not to say that America’s workforce doesn’t need advanced mathematics—quite the opposite. An extensive 2011 McKinsey Global Institute study found that by 2018 the U.S will face a 1.5 million worker shortfall in analysts and managers who have the mathematical training necessary to deal with analysis of “large data sets,” the bread and butter of the big-data revolution.

The question is not whether advanced mathematics is needed but rather what kind of advanced mathematics. Calculus is the handmaiden of physics; it was invented by Newton to explain planetary and projectile motion. While its place at the core of math education may have made sense for Cold War adversaries engaged in a missile and space race, Minute-Man and Apollo no longer occupy the same prominent role in national security and continued prosperity that they once did.

The future of 21st-century America lies in fields like biotechnology and information technology, and these fields require very different math—the kinds designed to handle the vast amounts of data we generate each day. Each individual’s genome contains more than three billion base pairs and a quarter of a million genomes are sequenced every year. In Silicon Valley, computers store over 100 GBs of data—more information than contained in the ancient library at Alexandria—for every man, woman and child on the planet.

Accompanying the proliferation of new data is noise, and a major job for data analysts and scientists is to tease out true signal from coincidence and noise. Knowing when a result is due to chance versus when it is statistically significant requires a firm grasp of probability and statistics and an advanced understanding of mathematics.

We no longer think of outcomes as being triggered by a single factor but multiple ones—possibly thousands. To understand these large and complex data sets, we need an educated workforce that is also equipped with a firm understanding of multivariate mathematics and linear algebra.

Computers and computation are ubiquitous and everyone—not just software engineers—needs to learn how to think algorithmically. Yet the typical calculus curriculum’s emphasis on differentiation and integration rules leaves U.S. students ill-equipped at posing the questions that lead to innovations in computation. Instead, it leaves them well-equipped at performing rote computations that can be easily done by a computer.

We’re not saying calculus shouldn’t be taught. Calculus, like any rigorous technical discipline, is great mental training. We would love for everyone to take it. But the singular drive toward calculus in high school and college displaces other topics more important for today’s economy and society.

Statistics, linear algebra and algorithmic thinking are not just useful for data scientists in Silicon Valley or researchers for the Human Genome Project. They are becoming vital to the way we think about manufacturing, finance, public health, politics and even journalism.

It is time to ask ourselves: Is calculus really the best choice to serve as the culminating mathematical experience for a vast majority of students or are they, and society, better served by other mathematical subjects?

Mr. Li is the founder and CEO of the Data Incubator, a firm that provides data-science training.

Ms. Bishop is a professor of computer science at Columbia University.

A Year of Ocean Regeneration

Isabella Lövin, Ratu Inoke Kubuabola, Trevor Manuel

Ocean wave

OXFORD – The importance of the world’s ocean cannot be overstated. They supply 50% of the oxygen we breathe, feed billions of people, and provide livelihoods for millions more. They are the great biological pump of global atmospheric and thermal regulation, and the driver of the water and nutrient cycles. And they are among the most powerful tools for mitigating the effects of climate change. In short, the ocean is a critical ally, and we must do everything in our power to safeguard them.
This is all the more important, given the unprecedented and unpredictable threats that we currently face. Though the ocean has been integral to slowing climate change, absorbing over 30% of the greenhouse-gas emissions and 90% of the excess heat generated since the Industrial Revolution, the cost has been huge. Ocean acidification and warming has been occurring at alarming rates, and are already having a serious impact on some of our most precious marine ecosystems – an impact that will only intensify.
Today, vast swaths of the world are experiencing what is likely to be the strongest El Niño on record. The adverse weather resulting from the phenomenon – which originates in the Pacific, but affects the ocean worldwide – is expected to affect adversely over 60 million people this year, compounding the misery wrought last year. It is a sobering reminder of our vulnerability to both natural and human-induced shocks to the earth’s systems.
Despite all of this, we continue to degrade our oceans through the relentless destruction of habitats and biodiversity, including through overfishing and pollution. Disturbingly, recent reports indicate that the ocean may contain one kilogram of plastics for every three kilograms of fish by 2025. These actions are facilitated by chronic failures of global governance; for example, one-fifth of all fish taken from the ocean is caught illegally.
Urgent action must be taken not just to address climate change broadly by reducing greenhouse-gas emissions, but also to enhance the health and resilience of our oceans.
Fortunately, in 2015 – a watershed year for global commitments – world leaders established conservation and restoration of the world’s oceans as a key component of the new United Nations development agenda, underpinned by 17 so-called Sustainable Development Goals.
Specifically, SDG 14 commits world leaders to end overfishing, eliminate illegal fishing, establish more marine protected areas, reduce plastic litter and other sources of marine pollution, and increase ocean resilience to acidification. The Global Ocean Commission celebrated this strong endorsement of urgent action to protect the ocean, which closely reflects the set of proposals contained in the Global Ocean Commission’s 2014 report From Decline to Recovery: A Rescue Package for the Global Ocean.
So the world now has an agreed roadmap for ocean recovery. But how far and how fast we travel is yet to be determined. And the task ahead – translating admirable and ambitious commitments into effective collaborative action at the local, national, and international levels – is immense.
The challenge is compounded by the weak and fragmented state of global ocean governance. Unlike other SDGs – such as those related to health, education, or hunger – there is no single international body charged with driving forward the implementation of the ocean SDG. As a result, it is not clear who will be responsible for monitoring and measuring progress and ensuring accountability.
To ensure that SDG 14 does not fall by the wayside, the governments of Fiji and Sweden proposed convening a high-level UN conference on ocean and seas in Fiji, with Swedish support, in June 2017.
Their proposal was subsequently co-sponsored by 95 countries and adopted unanimously in a UN General Assembly resolution.
By drawing attention to the progress being made toward meeting SDG 14 targets and shining a spotlight on where results are lagging, the conference will provide a much-needed “accountability moment.” At the same time, by bringing together relevant stakeholders, it will help to catalyze deeper cooperation among governments, civil society, and the private sector.
This is a promising step forward, reflecting the tremendous momentum that efforts to protect the ocean have gained in recent years. As the Global Ocean Commission’s work comes to a natural conclusion, its many partners and supporters will be working hard to sustain this momentum, ensuring that building healthy and resilient oceans remains a global priority until it is a global reality.
The key to success, according to the Global Ocean Commission’s final report, will be the creation of an independent, transparent mechanism for monitoring, measuring, and reporting on the essential actions needed to achieve the SDG 14 targets, as well as additional UN conferences between now and 2030.
Current and future generations alike need – and deserve – a healthy, resilient ocean. Growing awareness of – and strong commitments to resolve – the challenges facing our oceans is heartening. But it is just the beginning. One hopes that 2016 turns out to be the year when the world enters a new era of ocean regeneration.