Unparalleled Credit and Global Yields

Doug Nolan
New Fed Q4 Z.1 Credit and flow data was out this week. For the first time since 2007, annual Total Non-Financial Debt (NFD) growth exceeded $2.0 TN – a bogey I’ve used as a rough estimate of sufficient new Credit to fuel self-reinforcing reflation. Based on some nebulous “neutral rate,” the Fed rationalizes that it’s not behind the curve. Robust “money” and Credit growth argues otherwise. A Bloomberg headline from earlier in the week: “Taylor Rule Suggests Fed is About 12 Hikes Behind.”

Though not so boisterous of late, there’s been recurring talk of “deleveraging” – “beautiful” and otherwise – since the crisis. Let’s update some numbers: Total Non-Financial Debt (NFD) ended 2008 at $35.065 TN, or a then record 238% of GDP. NFD ended 2016 at a record $47.307 TN, an unprecedented 255% of GDP. In the eight years since the crisis, NFD has increased $12.243 TN, or 35%. Including Financial Sector (that excludes the Fed) and Foreign U.S. borrowings, Total U.S. Debt has increased $11.422 TN to a record $66.079 TN, or 356% of GDP. It’s worth adding that the $2.337 TN post-crisis contraction in Financial Sector borrowings was more than offset by the surge in Federal Reserve liabilities.

For 2016, NFD expanded $2.117 TN, up from 2015’s $1.929 TN - to the strongest growth since 2007’s record $2.501 TN. Household borrowings increased $521bn, up from 2015’s $384bn, to the strongest pace since 2007’s $947bn. Household mortgage borrowings jumped to $248bn, up from 2015’s $129bn. On the back of an unusually weak Q4, total Business borrowings declined to $724bn last year from 2015’s $812bn (strongest since ‘07’s $1.117 TN).

The Bubble in Federal debt runs unabated. Federal debt jumped $843bn in 2016, up from 2015’s $725bn increase to the strongest growth since 2013’s $857bn. It’s worth noting that after ending 2007 at $6.074 TN, outstanding Treasury debt has inflated more than 160% to $16.0 TN. As a percentage of GDP, Treasury debt has increased from 42% to end 2007 to 86% to close out last year.

Yet Treasury is not Washington’s only aggressive creditor. GSE Securities jumped a notable $352bn in 2016 to a record $8.521 TN, the largest annual increase since 2008. In quite a resurgence, GSE Securities increased almost $1.0 TN over the past four years. Treasury and GSE Securities (federal finance) combined to increase $1.194 TN in 2016 to $24.504 TN, or 132% of GDP. For comparison, at the end of 2007 Treasury and Agency Securities combined for $13.449 TN, or 93% of GDP.

The unprecedented amount of system-wide debt is so enormous that the annual percentage gains no longer appear as alarming. Non-Financial Debt expanded 4.7% in 2016, up from 2015’s 4.4%. Total Household Debt expanded 3.6%, with Total Business borrowings up 5.6%. Financial Sector borrowings expanded 2.9% last year, the strongest expansion since 2008.

Securities markets remain the centerpiece of this long reflationary cycle. Total (debt and equities) Securities jumped $1.50 TN during Q4 to a record $80.344 TN, with a one-year rise of $4.80 TN. As a percentage of GDP, Total Securities increased to 426% from the year ago 415%. For comparison, Total Securities peaked at $55.3 TN during Q3 2007, 379% of GDP. At the previous Q1 2000 cycle peak, Total Securities had reached $36.0 TN, or 359% of GDP.

The Household Balance Sheet also rather conspicuously illuminates Bubble Dynamics. 
Household Assets surged $6.0 TN during 2016 to a record $107.91 TN ($9.74 TN 2-yr gain). This compares to the peak Q3 2007 level of $81.9 TN and $70.0 TN to end 2008. Q4 alone saw Household Assets inflate $2.192 TN, with Financial Assets up $1.589 TN and real estate gaining $557bn.

With Household Liabilities increasing $473bn over the past year, Household Net Worth (assets minus liabilities) inflated a notable $5.518 TN in 2016 to a record $92.805 TN. As a percentage of GDP, Net Worth rose to a record 492%. For comparison, Household Net Worth-to-GDP ended 1999 at 435% ($43.1 TN) and 2007 at 453% ($66.5 TN). Net Worth fell to a cycle low 378% if GDP ($54.4TN) in Q1 2009. In terms of Credit Bubble momentum, it’s notable that Net Worth inflated over $2.0 TN in both Q3 and Q4.

March 5 – Bloomberg: “China’s credit engine will keep humming this year, adding the rough equivalent of Germany’s annual economic output to its already massive stock of total social financing, according to estimates derived from the nation’s 2017 targets. Adding higher equity market financing and about 5 trillion yuan ($725bn) worth of local government bond swaps to the official credit growth target of 12%, analysts at UBS Group AG see TSF expansion of 14.8% this year. They calculate that’s equal to a whopping 23 trillion yuan, or $3.3 trillion, addition to the amount of total credit already swishing around the world’s second-largest economy.”
UBS analysts forecast (above) $3.3 TN of 2017 Chinese Total Social Financing (TSF). And with TSF excluding national government deficit spending, let’s add another $300bn and presume 2017 Chinese system Credit growth of around $3.6 TN. As such, it’s possible that China and the U.S. could combine for Credit growth approaching an Unparalleled $6.0 TN. There are, as well, indications of an uptick in lending in the euro zone, and Credit conditions for the most part remain loose throughout EM. Importantly, the inflationary biases that have gained momentum in asset and securities markets and, increasingly, in consumer prices and corporate profits provide a tailwind for Credit expansion.

March 9 – Bloomberg (Hugh Son, Jennifer Surane, and Francine Lacqua): “Jamie Dimon said President Trump’s economic agenda has ignited U.S. business and consumer confidence and he expects at least some of the administration’s proposals to be enacted. ‘It seems like he’s woken up the animal spirits,’ Dimon, chairman and chief executive officer of JPMorgan Chase & Co., said Thursday… Confidence has ‘skyrocketed because it’s a growth agenda,’ Dimon said, adding that he’s not overly concerned about the possibility of a correction in equities markets…”
There are any number of developments that could bring this global Credit party to an end, including a spike in yields and resulting speculative de-leveraging. U.S. Credit expansion did slow meaningfully in Q4. With Business borrowings dropping to 2.6% (Q3 6.3%) and federal debt growth sinking to 2.9% (Q3 8.2%), NFD growth dropped to 2.9% from Q3’s 5.8%. But both should bounce back strongly in Q1. We’ve already seen a huge surge in corporate debt issuance. And it would be atypical if Credit growth failed to respond to surging stock prices and business confidence, loose financial conditions and strengthening inflation trends. And with the nation’s most influential commercial banker talking “animal spirits,” I’ll assume Jamie Dimon is currently observing generally robust demand for Credit.

Ten-year Treasury yields touched 2.61% during Thursday’s session, the high since 2014 (and above Bill Gross’s 2.60% bear market bogey). Five-year yields closed the week up nine bps to 2.10%, an almost six-year high. Finishing the week at the highest level since 2008, two-year Treasury yields jumped five bps this week to 1.36%.

Rising yields aren’t just a U.S. phenomenon. This week saw yields trade to at least one-year highs in Canada, France, Germany, Italy, Spain, Netherlands, Sweden, Norway, Denmark, Belgium, Switzerland, Japan, Australia, New Zealand, South Korea, Israel and China. Italian yields surged 27 bps this week to the high since November 2014. Spanish 10-year yields jumped 21 bps to 1.89%, the high since November 2015. French yields rose 18 bps to 1.12%, the high since July 2015. German yields rose 13 bps this week to 0.49%, the highest level since January 2016.

There’s a huge question as to how much leverage has accumulated globally throughout this Bubble period. Thus far, deleveraging fears have been held in check by the fundamental backdrop, faith in ultra-dovish central bankers and the ongoing enormous QE from the BOJ and ECB. This week saw the first indication that the ECB is preparing to back away from its extreme monetary stimulus.

March 10 – Financial Times (Mehreen Khan): “It has been nearly seven years but investors are finally beginning to focus on the prospect of a tightening in monetary policy for the eurozone. A subtle shift in the signalling from European Central Bank president Mario Draghi this week has pushed up the probability of a December 2017 rate rise to more than 50% from just odds of a tenth at the start of the month. Despite not changing much of its formal language about being ready to provide more monetary medicine to the eurozone, Mr Draghi declared victory over the deflation risks that had prompted the ECB to begin its trillion euro bond-buying programme two years ago… ‘There is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance,’ Mr Draghi told journalists… Analysts judged the remarks to be the start of a gradual shift in the ECB’s forward guidance on interest rate rises…”March 10 – Bloomberg (Jana Randow and Alessandro Speciale): “European Central Bank policy makers considered the question of whether interest rates could rise before their bond-buying program comes to an end, according to people familiar with the matter. Governing Council members meeting on March 9 exchanged views on ways of communicating and sequencing an exit from unconventional stimulus, euro-area central-bank officials said, asking not to be identified…”Crude dropped 9.1% ($4.84) this week, closing below $50 for the first time in three months. Fearing the impact lower energy prices have on leveraged energy-related borrowers, the high-yield sector experienced abrupt and meaningful outflows this week. Lipper had high-yield fund outflows surging to $2.12 billion ($2.8bn high-yield corporate outflows from EPFR).

March 10 - Bloomberg: “Exchange-traded funds focused on U.S corporate junk bonds saw net outflows of $2.8 billion in the week…, 6% of assets and the second-largest outflow in 12 months… The Bloomberg Barclays U.S. Corporate High Yield bond index is almost 25% allocated to energy and materials issuers. The index’s option-adjusted spread to Treasuries jumped 24 bps last week from a two-year low 344 bps.”
A timely reminder: It’s that combination of rising sovereign yields and widening Credit spreads that risks sparking de-risking/de-leveraging dynamics. So far the investment grade corporate debt market has remained bulletproof. Simultaneous losses in highly-correlated stocks, bonds and commodities would be problematic for “risk parity” and similar leveraged strategies. Considering that global bond yields are flirting with an upside breakout, complacency seems rather deeply embedded. Analyzing Credit trends, it's clear that monetary policy and global yields have barely even begun the long and treacherous path toward normalization.

I’m excited to announce my new endeavor working with David McAlvany of McAlvany Wealth Management.  This link (
https://vimeo.com/207711539) will direct you to the first of four short weekly video presentations, leading up to our March 30th introductory conference call.  In Episode One, David McAlvany and I introduce our new segregated/separate account portfolio, the McAlvany Wealth Management (MWM) Tactical Short strategy, and discuss my background and analytical framework, and why I believe it’s time to refocus on risk.  We hope you enjoy Episode One, “The Tactical Short,” and look forward to next week’s Episode Two, “How It Works.”

Gold And Silver's Drop Has Hit Precious Metals Investors Hard - Is It Time To Buy?

by: Hebba Investments

- Gold and silver prices dropped hard last week primarily on the realization that the Fed will hike interest rates during its upcoming meeting.
- Speculators sold off gold positions with the price drop but we still remain fairly high compared to historical net long positions at this price level.
- Silver speculators barely sold their speculative positions despite the silver drop and thus we remain very wary of silver.
- Asian premiums are rising with the recent drop in gold and that provides investors with some green shoots as we move forward.
- We are moving our outlook for gold from short-term bearish to neutral.
The latest Commitment of Traders (COT) report showed a predictable fall in speculative long positions and a rise in speculative short positions - which pretty much tracked the gold price.
We were surprised that we didn't see a larger drop in the speculative long position as gold dropped over 3% during the COT week (Tuesday to Tuesday).
But there were some green shoots for gold bulls as evidently physical demand in China and India both started to pick up signified by rising premiums in the physical gold market. While it didn't make up for the drop in both the speculative and ETF bullion sales, it is an important factor we look at as it can change the short-term bias of gold traders and obviously soaks up gold inventories.
We will get more into some of these details 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 investors a way to see what larger traders are doing and to possibly position their positions 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 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 showed a decrease in speculative gold positions as longs shed 19,148 contracts during the COT week while shorts added 8,659 contracts to the gross speculative short position.
While it is good for the bulls that some weak hands sell their positions, we still point out that the net long position of 93,893 contracts is higher than the previous net long position of around 59,000 net long contracts from January where we hovered at the same $1216 levels. That shows we still have many more bulls than we had previously at the same price levels, and that is still a bit bearish from a contrarian view.
On the positive side, we do note that the net short position of 28.15% is still well above the average level (around 10%) that we see during short-term gold market upswings. There is plenty of shorts that can abandon positions and correspondingly push gold higher.
Moving on, the net position of all gold traders can be seen below:
Source: GoldChartsRUS
The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, we saw the net position of speculative traders decrease by 28,000 contracts to 94,000 net speculative long contracts.
As for silver, the action week's action looked like the following:
Source: GoldChartsRUS
The red line which represents the net speculative positions of money managers, showed essentially no move in the net positions as speculative longs decreased their position by around 500 contracts and speculative shorts increased their own positions by less than 100 contracts on the COT week. Silver Producers/Merchants decreased their own positions on both the short and long side by around 2,000 contracts for the week, which is a neutral move on their part as they simply decreased silver exposure on both sides.
The speculative change in silver was a bit surprising as the metal fell during the COT week by a little under 3%, thus we would have expected to see a much larger drop in the net speculative bullish position than we did. Silver continued to fall after the COT report closed to end the week close to 5% lower than the price it closed this report at so COT positions are certainly lower, but still it looks like speculators are holding tight to their silver positions - which is bearish from a contrarian point-of-view.
Asian Gold Premiums Jump
As we mentioned earlier one thing we do look for as a bullish indicator is Asian gold premiums as they signal important physical gold buying. Investors need to remember that while speculators can easily push around the gold market with billion-dollar paper gold trades, the physical market is what underlies the paper market and it is many degrees smaller.
That means moves in the paper market eventually catch up to the physical market, so in our view physical premiums represent a future indicator for the gold price, thus we pay attention to them and give them a lot of weight when making short-term gold trading decisions.
Evidently, gold demand picked up slightly across Asia this week, fueled by a drop in international prices as the dollar gained on expectations of a near-certain increase in U.S. interest rates, traders and market participants said:
In top consumer China, physical demand for gold has been strong, traders said, with premiums quoted between $15 and $17 an ounce over international spot prices, as against the $9-$12 levels seen last week. "We are starting to hear clients coming and enquiring about inventories, so we expect physical demand to increase," said Brian Lan, managing director at Singapore-based gold dealer GoldSilver Central.
Indian premiums also surged to some of the highest levels we have seen in the past few years, as can be seen in the long-term and short-term gold premium charts below.
Source: GoldChartsRUS
This is good news for gold bulls as this physical buying can absorb some of the ETF and speculative selling that we have seen and certainly can affect the short-term psyche of gold traders to reverse some of that bearish sentiment.
Our Take and What This Means for Investors
Now that a March rate hike is priced in by pretty much all market participants and should be no surprise when the Fed meets next week, our short-term view on gold is getting a bit more bullish as some speculative traders sell out and the potential negative consequences of the Fed move start to dawn on participants. Rising physical market premiums also mean that we have a margin of error when dipping our toes back into the gold market with short-term trades.
Our short-term position of gold is shifting from a bearish position that we have had over the past few weeks to a more neutral short-term position. Since we are still very bullish on gold for the medium to long-term, we are now buying back some of our previously sold gold positions with the expectations that we could see further selling in gold.
As for silver, we remain on the sidelines for the short-term as we still believe the speculative and ETF positions are too high for our comfort levels. With a rise in gold, silver may rise as well but the risk-reward here is less comfortable for us than in gold, we will sacrifice some of the potentially superior returns in silver to focus on more conservative gold. But we do note that with a further decline in silver to the lower $16 levels, it may become much more attractive to start building back positions.
In summary, we are starting to buy back some of our previously sold gold positions with this recent drop but we are keeping some powder ready for further drops in gold especially with a bearish knee-jerk reaction to Wednesday's Fed meeting statement. Thus we think investors should considering increasing their positions in the miners and gold ETFs, like the SPDR Gold Trust ETF (NYSEARCA:GLD), and ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL). For silver, we are still not ready to really begin aggressively adding to our positions in the ETF's like the iShares Silver Trust (NYSEARCA:SLV), ETFS Silver Trust (NYSEARCA:SIVR), and Sprott Physical Silver Trust (NYSEARCA:PSLV), as gold simply has a better risk-reward profile at the current time but with a further drop in silver we may consider buying back some of our previously sold positions.

The World’s Most Radical Experiment in Monetary Policy Isn’t Working

A generation of Japanese accustomed to falling prices have diminished the impact of negative interest rates and other stimulus policies that were supposed to spur wage and price increases; ‘people love to save’

By John Lyons and Miho Inada

During Japan’s go-go 1980s, Hiromi Shibata once blew a month’s salary on a cashmere coat, wore it a few times, then retired it. Today, her daughter’s idea of a shopping spree is scrounging through her mom’s closet in Shizuoka, a provincial capital.

“About a third of my wardrobe is hand-me-downs from my mom,” says 26-year-old Nanako Shibata, who lives in Tokyo. To save on the 112-mile trip home, she rides the bus instead of the speedy bullet train, once a symbol of Japan’s rise.

The U.S. appears to be leading other parts of the globe out of an extended era where central banks relied heavily on low and negative interest rates and stimulus to jump-start growth and keep prices from falling. The Federal Reserve has raised U.S. interest rates, and the European Central Bank is considering easing its stimulus.

Japan remains definitively stuck, despite a long and aggressive experiment with ultralow rates. A quarter-century after its property bubble burst, a penny-pinching generation has come of age knowing only economic malaise, stagnant wages and deflation—a condition where prices fall instead of rise.

The belief that deflation will continue has become so ingrained it has presented seemingly insurmountable challenges to monetary policy, a lesson for other countries that are traveling a similar path.

“It is hard to change the deflationary mind-set even with radical policies,” says Frederic Neumann, co-head of Asia economics for HSBC. “I would argue Japan will remain in its funk and will remain there for many years.”

Japan is nearly four years into a Central Bank stimulus effort involving printing trillions of yen and guiding interest rates into negative territory, perhaps the globe’s most aggressive such efforts under way. Bank of Japan governor Haruhiko Kuroda’s shock-and-awe stimulus, launched in April 2013, fizzled after a short-lived spurt of growth and rising prices. Japan fell back into deflation last year. More recently, the inflation rate has been bouncing around near zero.

In November, Mr. Kuroda postponed his goal of reaching 2% inflation, all but admitting he is out of ideas. He said in a series of speeches last year that an entrenched “deflationary mind-set” stifled hope that wages or prices will rise, limiting the impact of monetary policies such as negative rates. Mr. Kuroda declined to comment through a spokesman.

Japan’s inflation rate has ticked above zero in recent months, which economists attribute to the election of U.S. President Donald Trump, a stronger dollar and higher oil prices—not economic fundamentals in Japan. Few see Japan returning to robust growth and rising prices.

Deflation is bad for an economy because it undermines economic growth. Businesses earn less, so they invest less, cut wages and stop hiring. Amid the economic uncertainty, consumers stop spending, furthering the downward spiral.

The idea behind ultralow rates is that they jolt consumers and businesses into spending by kindling inflation. But Japan’s deflationary expectations have become so routine that consumers and businesses refrain from spending no matter how low the central bank goes. There is evidence, in fact, that rock-bottom rates are backfiring by frightening consumers into saving for perilous economic times, not spending.

In an era of central-bank improvisation, no other nation has pushed the envelope as much. The Bank of Japan was the first to lower its benchmark rate to near zero in 1999, long before Europe, the U.K. and the U.S. did so in response to the 2008 financial crisis. In 2001, Japan began flooding its financial system with cash to try to spur inflation and growth, a practice called quantitative easing that was later adopted in the West.

Bank of Japan governor Haruhiko Kuroda has said a ‘deflationary mind-set’ is hampering the nation’s economy. Photo: Kiyoshi Ota/Bloomberg News

Mr. Kuroda in 2013 began pumping so much money into the financial system—eventually around $700 billion a year—that some investors worried hyperinflation or asset bubbles would form. That hasn’t happened. Last year, the Bank of Japan followed the European Central Bank in guiding rates into negative territory, a radical attempt to force banks to lend more money by making it costly if they don’t.

Japan’s predicament today was almost unthinkable during its 1980s boom, when Japanese tycoons bought trophy properties such as New York’s Rockefeller Center and Tokyo real-estate prices were the world’s highest. In 1989, Japan initiated interest-rate hikes that popped real-estate and stock-market bubbles.

Since then, annual growth has averaged less than 1% amid periodic recessions. Prices began falling in the late 1990s.

Japan’s economy dropped to the world’s third-largest after fast-growing China surpassed it as No. 2. The Nikkei stock-market average is around half its 1989 peak. Property prices have fallen broadly for a quarter of a century.

Frozen-dessert maker Akagi Nyugyo ran an apologetic advertisement last year after implementing a 9 cent increase, its first in 25 years. Japanese companies are sitting on nearly $2 trillion in cash, idle money that officials contend should be invested in Japan.

The deflationary landscape is deeply imprinted on the 20 million Japanese between ages 20 and 34 who grew up after prices started falling. Wage increases, rising stocks or banks that pay decent interest on deposits are all hypotheticals to them. They live in a world where anything they buy today might be had for less tomorrow. Their instinct is to do the safe thing and economize.

They reject the consumerism of their parents’ generation as excess. Some live with roommates in group homes, a new phenomenon for Japan, and dine on $3 beef bowls. If they spend on anything, it is travel. In a deflationary society, experiences don’t lose value, while anything you buy does.

Some older Japanese who knew the privations of the postwar years see a worrisome lack of ambition in younger people. Japan uses the term “neets” to describe young people “not in education, employment or training,” while “freeters” work unstable part-time or contract jobs. Japanese “parasite singles” never leave their parents’ home, and women complain about “herbivore men” uninterested in the opposite sex.

“Their problem is they are too comfortable,” says Heizo Takenaka, a former economy minister.

“Their expectations are low. We wanted to own the excellent cars. But they don’t seem to want to.”

Many economists believed the Bank of Japan’s 2013 stimulus would be enough to jolt the nation out of its downward spiral of weak growth and falling prices. Mr. Kuroda and others in Prime Minister Shinzo Abe’s government point to an initial burst of inflation and growth as signs the stimulus will eventually work. Others say the monetary policies worked until they were undermined by a 2014 sales-tax increase.

A Bank of Japan survey in October found only 5% of respondents planned to spend more next year, while 48% intended to cut.

Many Japanese millennials are dedicated to economizing, eating at places like Yoshinoya, a fast-food chain that specializes in inexpensive beef bowls. Photo: Jeremie Souteyrat for The Wall Street Journal

Keita Kameyama, a 30-year-old civil servant in Kagawa, a rural province, has been saving around 25% of his $40,000 salary each year to eventually marry his longtime girlfriend. He lives at home with his mother, drives an old Honda and rarely shops.

The central bank’s stimulus measures had no effect on Mr. Kameyama’s spending. He still salts away his money in plain-vanilla bank accounts. He fears Japan’s long stagnation will wipe out his pension, and worries he won’t have enough money to care for his mother—a growing concern in a country with twice as many people over 60 than between 20 and 34.

He sees bank accounts, which offer minuscule interest rates on deposits despite negative short-term rates, as the only way to save. Hyakujushi Bank, Ltd. the biggest in Kagawa, pays only 0.05% on deposits and has paid less than 1% since 1995.

“People in Kagawa love to save,” says Mr. Kameyama. “I have heard [the Bank of Japan] is trying very hard to get people to spend their money, but I don’t think I will be opening my wallet.”

Many young Japanese economize because they simply don’t have enough money. More are working low-paying and temporary jobs with no benefits.

“Companies aren’t growing, and they have aging workforces that they can’t fire,” says Takuji Okubo, an economist and founder of the Japan Macro Advisors research group. “So there’s no room to hire young people.”

Automobile, beer and cosmetics firms have slashed young-adult advertising and market to retirees instead, says Yohei Harada, head of the youth-marketing unit at Tokyo advertising agency Hakuhodo Inc. “The role of parents and children is getting reversed, where the parents from the bubble generation still act like children and want to buy the fancy car, while their children in the post-bubble generation worry about their parents’ spending,” he says.

Takashi Saito, a 33-year-old unmarried entrepreneur, was living in group apartment in Tokyo in 2015 when he decided to start a business. His idea: an online clothing-rental company for women who want a varied wardrobe but don’t want to pay for it. For $45 a month, clients rent three articles of clothing at a time, which they can return for others when they like.

Takashi Saito, a 33-year-old entrepreneur, launched an online clothing-rental company for women. Photo: Jeremie Souteyrat for The Wall Street Journal

Mr. Saito thought it would be easy to get a loan because Japan’s low-rate policies are meant to spur banks to lend more to small businesses. It wasn’t.

He asked Japan Finance Corp., a state-owned institution set up to lend to small businesses, for $200,000. After much haggling, he got less than $50,000. A year later, as the business grew, he asked for more. He was rejected. Japan Finance Corp. declined to comment.

Bank analysts say Japanese lenders have become more conservative, particularly with startup companies that have no collateral, because low rates cut into profits. In the 11-months after Japan’s rates went negative last year, Japan Finance Corp.’s loan portfolio shrank.

Mr. Saito raided savings, borrowed from family and is hoping for venture capital.

Japanese clothing brand Uniqlo became a hit in the deflation era, appealing to a nation of penny pinchers with inexpensive casual wear. But customers stopped buying Uniqlo after price increases in 2015, forcing the retailer to cut prices to win back sales.

Uniqlo founder Tadashi Yanai blames negative rates and other central bank policies, such as quantitative easing, for worrying consumers. “It’s anxiety about the future,” he said in an interview. “They have to stop negative rates. That’s idiotic.”

Nanako Shibata cut her hours at a job-placement service and moved into a less expensive apartment. Photo: Jeremie Souteyrat for The Wall Street Journal

J.P. Morgan Chase & Co.’s Japan economist, Masaaki Kanno, says the deflation mind-set is entrenched because it is rational. With wages unchanged for 25 years, young adults don’t believe they will earn more in the future.

Some economists contend the government should try even more fiscal stimulus and monetary easing. Others argue the stimulus has already saddled Japan with so much debt—now 230% of gross domestic product—that it could end in an economic collapse.

Ms. Shibata, the Tokyo resident who raids her mother’s closet, recently cut her hours at a job-placement service to three days a week. To do so, she moved into an apartment that rents for half what she was paying. She has stopped shopping altogether. She sees no point in pouring her time into a career. She is pursuing contemporary dance instead.

“I think it’s not fair if I get consumed completely by a company,” says Ms. Shibata.

“Nowadays, we can hardly expect a raise.”

—Atsuko Fukase and Megumi Fujikawa contributed to this article.

Erdogan's Perfect Storm

Netherlands Dispute Gives Turkey Perfect Election Fodder

By Maximilian Popp in Istanbul

A Turkish flag hangs from the Dutch Consulate in Istanbul

Ankara is piling on in its dispute with the Netherlands after the country refused to allow key government members to hold political rallies in the country over the weekend. Turkey is calling for retaliation in the "harshest ways" and President Erdogan has found the perfect election issue.

Turkish President Recep Tayyip Erdogan, it seemed, had run out of stories to tell. He had retold the legend of his rise from the very bottom of society to the political pinnacle, and of his energetic battle against his country's enemies, so often that his referendum campaign had long felt like a repeat of earlier elections.

Turkish voters are slated to cast ballots on April 16 on the introduction of a presidential system that would transfer virtually all power in the country to the president. But Erdogan has had a tough time persuading voters of the need for these reforms.

Now, though, it is the Europeans, of all people who are feeding Erdogan the arguments he needs. The moves in recent days by politicians in Germany and the Netherlands to prevent Turkish politicians from making campaign appearances in those countries have once again lent relevance to Erdogan's campaign. The dispute with Europe allows Erdogan to play his favorite role: that of a fearless outsider taking on the world's powerful.

Merkel Deflects Criticism

In Germany, a number of cities in recent days banned events that had been planned with members of Erdogan's government. Various pretexts were cited, from concerns about fire safety to an alleged lack of parking spaces. In response, Erdogan accused the German government of "Nazi practices." German Chancellor Angela Merkel responded with cool reserve, deflecting the criticism in a way that made it appear the issue had been laid to rest.

But now the conflict has escalated again. On Saturday, the Netherlands revoked landing rights for Turkish Foreign Minister Mevlüt Cavusoglu's plane and then blocked Family Minister Beytül Kaya from entering the Turkish Consulate in Rotterdam that night before forcing her to drive back to Germany, from whence she had come.

The Turkish government reacted with outrage. Erdogan's spokesman, Ibrahim Kalin, lamented a "dark day for democracy in Europe" in a tweet. "Shame on the Dutch government for succumbing to anti-Islam racists and fascists," he added in another. Turkish Finance Minister Naci Agbal said Europe was in the process of reestablishing National Socialism.

Erdogan Exploits the Dispute

In the Netherlands and in several Turkish cities, demonstrators took to the streets to protest against the event ban. In Istanbul, a man scaled the Netherlands Consulate and replaced the Dutch flag with the Turkish one. The government-aligned Yeni Akit newspaper even hinted at civil war, writing: "The Netherlands has 48,000 soldiers. There are 400,000 Turks living in the Netherlands."

President Erdogan appears determined to exploit the commotion in the final month before the referendum. Family Minister Kaya appeared before the press in the Istanbul airport following her return flight on Sunday morning. Standing together with Erdogan's step son, Energy Minister Berat Albayrak, who had received her, she accused the Dutch authorities of "ugly" and "inhumane" treatment. Erdogan himself said to the Dutch: "You will pay a price. We will teach them international diplomacy."

Prime Minister Binali Yildirim also threatened on Sunday morning to retaliate in the "harshest ways." Meanwhile, Turkish Foreign Minister Cavusoglu said an "apology was not enough" and that there "will be repercussions" for the Dutch actions. The Turkish government has no interest in resolving the conflict because it knows that it stands to profit from it.

Tuna Beklevic, the head of the "No" Party, a group opposing the proposed constitutional reforms, has described the events as the "perfect storm." The dispute with Europe, he said, was precisely the kind of thing Erdogan had hoped for. Beklevic fears the scandal will mobilize nationalist voters. "It could provide Erdogan with exactly the 2 to 3 percentage points that will ultimately decide the referendum."

Is It All About The Donald?

By: Captain Hook

While everybody's attention is glued to The Donald on this side of the pond (for all the wrong reasons?), big things, national election things, are happening in Europe this year, starting next month. First we have the Dutch General Election on March 15, which could start the ball rolling towards a breakup of the Europe Union (EU) this year, and not a word from the mainstream media (MSM) in America, only a month away now. Then we have French Presidential Election in April, and Legislative Election in June, which are more important than whatever happens in the Netherlands, but not as important than the coming Federal Election in Germany this Fall, on September 24. And if this weekend's election of a pro-Russian President in Germany is any indication, the EU is in big trouble.

As you can see then, while last year was all about the US Presidential Election, this year could be all about the cavalcade of upcoming elections in Europe, each gaining importance in order, but all still critical in terms of being potential dominos that could topple the entire union. So again, while this understanding appears lost on the US MSM, the money has noticed, make no mistake, which partially accounts for the strength in US markets (capital has been fleeing the EU), given the dollar($) has been on waivers since the beginning of the year. That said, this might be set to change again however, as election time approaches/EU's demise looks probable, where the $ might be set to surge again.

Of course once you listen to this pearl of wisdom courtesy of Grant Williams, one could think what's happening in China this year might be more important to the financial markets given the Dragon's role in the global economy these days, especially concerning gold. So although not billed as an official election, the 19th National Congress of the Communist Party of China this Fall could be the stopper for the financial markets, again, with gold's role at center. As pointed out in an article earlier this year, this is the Year of the Rooster in the Chinese zodiac - the year of the Fire Rooster - that tends to favor both the color gold and metals. Given the deteriorating backdrop in China right now, which is scary, visions of a fiery rooster seems appropriate.

Circling back to Europe before leaving this part of the world, it should be pointed out that although thus far traders have seen fit to reward stocks over gold with this backdrop, a breakup of the EU, euro, etc. should be viewed as a very bullish development for gold (and silver) in the full measure of time, as a great deal of reactivated sovereign currency printing will need to take place - you know - French Francs, German Marks, and so on. Now that might not matter for some time because such liquidity would go where the algos tell it to go initially - where who needs gold when stocks are going through the roof - right? At some point all the games will come back to haunt the social planners however - maybe sooner rather than later.

In the meantime however, the news under the economy's hood (see here, here, here, here, and here) on both sides of the pond (see here, here, and here) just keeps getting worse, not that it matters much with central banks (including the Fed) still printing money, and using that freshly manufactured currency to prop up stocks, bonds, and any other tape they choose to paint. If you were wondering why stocks keep going up despite an increasingly bearish backdrop this is the reason, where central banks are now so beholding to buoyant equities, literally (because of all the stocks they own and implications associated with the wealth effect), they can't afford to let them go down. Stocks have become an integral part of the economy unfortunately, and eventually we will all pay a heavy price due to this harebrained thinking.

That said, as noted in previous recent commentary, one must be aware it's quite possible they intend to rid themselves of Donald Trump by backing off this strategy however, if only temporarily, evidenced in contracting money supply growth rates, so don't be surprised if it hits the fan later this year when it doesn't look so obvious. The plan goes something like this: 1) Pull the rug out from underneath Trump once he owns the responsibility for the economy to discredit him with American voters; 2) Let stocks plunge like 2008, only this time delay the bailouts until closer to the mid-term elections in 2018 in order to get the House under right wing/liberal control; and 3) Then reinflate the bubbles later on once Trump is humiliated, disenfranchised, and possibly impeached.

The fact the powers that be (TPTB) were able to stop the decline in the S&P 500 (SPX) right on the sign of the devil (666) in 2009 is testament to their cockiness in this regard. They think the printing presses can fix anything and as long as COMEX is around gold and silver are going nowhere. And who knows - maybe they are right. But what if they are wrong and the genie gets out of the bottle this time around. What if they need to start monetizing everything that isn't nailed down? It's difficult envisioning hyperinflation as being a ‘good thing' no matter how America, and the world, arrives there. We are getting a taste of such conditions right now as the SPX melts up for all the wrong reasons, where if present resistance doesn't hold, 2450ish is likely just around the corner. (See Figure 1)

Figure 1
SPX Weekly Chart

Naturally, the rally in stocks could end before touching the bottom of the long-term channel shown above, but the big question would be for how long? One would think with all the signals out there flashing caution right now (see here, here, and here) any kind of top in stocks would be lasting, especially considering what's happening in Europe and China (see above). However again, The Donald is an insistent fellow, so who knows for sure.

The Threat of Threats

Dominique Moisi
 .Far right Poland


ARIS – “Tell me what you fear and I will tell you what has happened to you,” the psychologist D.W. Winnicott wrote in the early twentieth century. It sounds straightforward, until one considers how much has happened – and how much there is to fear.
The sheer diversity of the threats facing the world today evokes the tragic farces of Luigi Pirandello.
In the West, some focus on religious extremism – in particular, the terrorism supposedly being carried out in the name of Islam.
Others point to Russia, warning of a new cold war, already apparent in Eastern Europe and the cyber realm. Still others, highlighting the rise of virulent right-wing populism in the United States and parts of Europe, declare that the real danger lies within.
Even those who recognize all of these threats struggle to prioritize them – which is vital to addressing them. If, say, Islamist terrorism is the principal threat, then it might make sense for the West to align itself with Russia in the fight against it.
But what if right-wing populism, which the Kremlin actively supports, is the biggest menace?

In that case, aligning with Russia could prove destructive for Western liberal democracy. In fact, exaggerating the threat of Islamist terrorism, while downplaying the threat of right-wing populism, could well play directly into Russian President Vladimir Putin’s hands.
The struggle to prioritize threats is not exclusive to the West. In the Middle East, countries are trying to figure out who should be contained. Among the frontrunners are the Islamic State (ISIS), Iran, and Israel.
For Israel (and Saudi Arabia), the answer is clearly Iran. For Iran, the answer is Israel (despite high tensions with Saudi Arabia). The West, too, has opinions on the matter: the European Union is convinced that ISIS should be the top priority. A few months ago, the US might have agreed, but President Donald Trump, despite citing the eradication of ISIS as a major policy goal, may also be prepared to fight in Israel’s corner to contain Iran.
In Asia, too, countries are finding it difficult to sort the dangers they face. Should they focus on a North Korean regime that is as volatile as ever, and that recently launched a ballistic missile toward the sea off its eastern coast? Or should they be keeping their eyes on China, which has gradually expanded both its regional influence and its revanchist claims?
For Japan and South Korea, North Korea seems to be the top priority. But for Vietnam, Indonesia, and Singapore, it is difficult to discern whether North Korea actually poses a greater threat than the giant and increasingly nationalistic China. This is to say nothing of other acute risks, such as strains between two local nuclear powers, Pakistan and India.
When it comes to prioritizing today’s threats, there are no easy answers. But unless we find them, we risk repeating some of history’s great mistakes.
The French philosopher Paul Valéry believed that history teaches nothing, “for it contains everything and furnishes examples of everything.” But, at this point, it is difficult not to make historical comparisons, particularly in Europe.
In the late nineteenth century, surging nationalism underpinned an era of revolutions and civil wars. In the 1930s, the rise of populism in Europe opened the way for disaster. Many Europeans, so fearful of the “reds,” were prepared to compromise with the “browns.” It didn’t take long to find out the true threat the Nazis posed.
The lesson is clear. Rather that attempting to prioritize the threats we face – compromising on one goal to advance another – we must tackle them all at once. As the assassinated prime minister of Israel, Yitzhak Rabin, used to say, we should “fight terrorism as if there is no peace process, and pursue peace as if there is no terrorism.”
The battle against Islamist terrorism is important, but it should not overshadow – much less undermine – the imperative to protect our democracies from the threat of right-wing populism.
To accept, for example, the victory of the National Front’s Marine Le Pen in France’s presidential election, arguing that it is at least better than allowing radical Islamism to proliferate further, is to ignore the lessons of history – and, indeed, to ignore reality.
ISIS may be born of a culture of humiliation and driven by a spirit of revenge, as was Nazism, but it does not possess anything like the industrial and military resources of Germany in the 1930s. ISIS is not the “modern Nazism” we should fear; it is the terrorism that, in the spirit of Rabin, we should fight.
The peace we should pursue, meanwhile, is within our own countries. To allow right-wing populism to continue to advance is to succumb to fear, rather than behaving according to a clear-headed analysis of our interests and, above all, our values. It is to compromise with the brown shirts for fear of the reds.
There was a time, not so long ago, when the EU – a model of reconciliation, peace, and prosperity – inspired countries from Latin America to Asia. Today, Europe, along with the once venerated US, is a model of fear – and it is scaring others. If Europeans cannot develop – with lucidity, firmness, and dedication – enlightened solutions to the threats they face, who can?

The War Between the President and the Press

Both sides are helping each other, whether they know it or not.

By George Friedman

A war has broken out between the president and the press. A better way to put it is that an ongoing war has escalated to new heights. President Donald Trump has declared the press the enemy of the people. The press is declaring Trump a threat to all American liberties and a vile monster. I use the term press rather than media, incidentally, because that is the language of the Constitution and in some ways this is a constitutional battle.

The president has refused to allow certain TV and publishing outlets to attend press briefings. He has demanded investigations for how the press has obtained classified information. He has refused to attend the White House Correspondents’ Dinner, which in Washington is holy terrain. At the dinner, politicians and reporters pretend that they actually like each other.

U.S. President Donald Trump takes questions from reporters during a news conference announcing Alexander Acosta as the new labor secretary nominee in the East Room at the White House on Feb. 16, 2017 in Washington, D.C. Mark Wilson/Getty Images

Journalists are taking every opportunity to find ways to criticize Trump. The Washington Post recently reported that a passenger asked a Pakistani couple on a United Airlines flight if they had a bomb in their bag and continued to harass them. Normally, a man acting like a jackass on a United flight would not be news. The Washington Post made it news, with the obvious intent to demonstrate how the president’s positions had triggered such rage. The president views the press as his enemy. The press views itself as the unbiased defender of the republic.

Rage between a president and the press is not new. The rights of the press were built into the Constitution. The founders gave them these rights along with an obligation – to hold government officials accountable for their actions. Not trusting government, the founders commissioned a nongovernmental entity to turn challenging the state into a business. The press’ job was to monitor the state. Since this was a republic in which ordinary citizens were supposed to control the state, the role of the press was to be the guardian of the republic.

The problem is the one posed by the Roman poet Juvenal: Who will guard the guardians? Journalists are human, and they have their likes and dislikes. Moreover, people who become journalists arrive with common views of things, which is why they became journalists. In the course of their careers, their views are further shaped by the business they are in and by the need to get raises and promotions. All institutions have a sort of template to determine who is praiseworthy, and the press is no different. Therefore, journalists have a tendency, out of choice, experience and pressure, to have similar views.

The founders knew that government officials needed to be monitored by the press. They assumed that the press would be monitored by internal accountability. It has not always worked, particularly for what used to be called the prestige press. A generation ago, this included The New York Times, The Washington Post, the three broadcast networks and the two major newsweeklies. They had an overwhelming power to shape public opinion and thereby the republic. They could help bring down presidents, as The Washington Post did with Richard Nixon. They also could elevate presidents far beyond their achievements, as was the case with John F. Kennedy.

We are now in an extreme moment in the relationship between the president and the press. In fact, it is a unique moment because the president and the press, knowing it or not, are working together. The president needs the press to attack him to maintain his political center. The press needs the president to attack it to convince its politically skewed readership that it is defending their interests. The president’s attacks solidify the press’ customer base. The founders’ vision of the tension between the privately owned press and the elected president has turned into a magnificently complex rage that actually serves the political and business interests of both.

Although Trump claims that he could have won the popular vote if millions of illegal ballots were not cast, the fact is that he lost the popular vote by a significant margin. Various polls put his popularity rating between 37 percent and 51 percent. Given the high approval ratings of past presidents after inauguration, which tend to be around 60 percent, even a 51 percent rating is bad, and a 37 percent rating is disastrous. An approval rating in the 30s shows that only his core supporters back him. Even his highest rating says that he has failed to convert any of his enemies. Presidents tend to disappoint their most ardent followers within a year. This is because presidential candidates make promises they can’t keep, a fact as true of Barack Obama as it is of Trump. Congress won’t go along with his plans, the Supreme Court will block them, the bureaucracy will delay them or the promises prove to be simply undoable. Therefore, after the euphoria, there is disappointment.

Trump must hold on to his base at all costs if he hopes to govern. The strategy he used to win the presidency was built on the assertion that Trump was engaged in a struggle against those who are indifferent to his supporters’ needs. At the center of this group was the press. Demonizing the press was not difficult. The low regard in which the press is held is extraordinary. According to a Pew Research Center poll, only 18 percent of respondents said they trust news organizations “a lot.”

According to a Gallup poll, 32 percent of the public find the press reliable. One number is catastrophic and the other is merely disastrous. The press admires itself far more than the public it serves does.

Therefore, attacking the press in order to hold Trump’s base together is good politics. In this strategy, Trump is aided by the press’ daily and unremitting attacks on him. When you look up articles about Trump in The New York Times and The Washington Post, they appear as an unending barrage of attacks, some reasonable and some preposterous. But they all serve Trump’s interests. The prestige press’ unmodulated hostility helps Trump make the claim that he is under attack by elites hostile to his supporters. It allows him to make the reasonable claim that the press wants to destroy his presidency. Having as your opponent an institution distrusted by the public is very good politics.

The press does this because they see Trump as a threat to the republic and because it is good business. The readers, listeners and viewers of the prestige press tend to be a minority of the market. Many draw news from other sources seen by the prestige press as beneath them. The press must hold on to readership, because if that readership falls even moderately, news organizations’ ability to stay in business would be in doubt. The readership consists overwhelmingly of people who despise the president. Every time the president attacks the press, their readers become more loyal to these publications. When Trump attacks these publications by name, their readers, like Trump’s followers, enter that interesting place where rage at your enemy turns into pure pleasure.

As you may recall, after 2008, the publishing industry and news organizations were badly hurt by the economic crisis. The situation has stabilized, but the financial instability of the press is far from over.

Since the values of journalists and editors at these publications and those of their readers are congruent, reporters are happy to write constant negative articles on Trump that dominate their publications. In doing this, they mobilize their own base, not so much to vote – they will vote against Trump anyway – but to remain faithful to a publication now focused on reinforcing readers’ hatred of Trump.

From a political and business point of view, this is not a time for nuance. Each side must demonize the other, and each side feels aggrieved at having been demonized. Trump must hold his support, and the press is working hard every day to make sure that this happens. The press must hold on to its readership, and Trump is doing his part to help make sure the press survives, and even flourishes. The humor of the situation is that both are trying to hold on to their base and keep it from evaporating. Each is doing that by demonizing the other.

The Constitution saw a free, privately owned press as a bulwark against tyranny. The founders were not in awe of journalists since they knew that journalists, as part of a business, would do and say things that appeal to readers. The 18th century was not a time for truth-telling by the press. But people still valued journalism as useful. The president was the alternative to a king, but Washington expected politicians to savage each other, and the press to savage all. The hope was that from this would emerge a civil society free to run businesses and farm the land unimpeded by the state or journalists. The founders devised a system of mutually assured destruction. Therefore, while you go off to work to make money, you can express your loathing of your favorite target, Trump or the press, and enjoy their rage at the other. Thomas Jefferson and John Adams would be pleased.

This is all pretty awful and utterly disgusting, and also, when you think of it, more than a little funny.

I guarantee that the founders are cracking up, more at the self-righteousness of all sides than anything else.

The End of the Asian Century by Michael Auslin – strategic games
An examination of the rise of China and the future role of the US in the región

by Lucy Hornby 

No sooner had we got used to thinking of ourselves as living in the “Asian century” than it might be all over. So argues Michael Auslin in The End of the Asian Century: “We are on the cusp of a change in the global zeitgeist, from celebrating a strong and growing Asia to worrying about a weak and dangerous Asia.”

One early outcome of Donald Trump’s presidency has been a shake-up in assumptions about America’s strategic role in Asia. The message from this book is ultimately one that supports maintaining a US presence in the face of a strengthening China. It is, though, a product of pre-Trumpian Washington, when the Obama/Clinton “pivot to Asia” and the Trans-Pacific Partnership dominated the agenda.

This book will bring readers up to speed on recent history: “We in the west have not yet caught up mentally with the way globalisation has transformed the Asia-Pacific,” Auslin writes. But there’s little insight into how Asians view China’s re-emergence, America’s presence or the region’s future. The book is a crash course on the risks in Asia, without exploring the solutions Asians can offer.

The author, a Japan expert at the American Enterprise Institute, attacks the idea that Asia (read China) will continue booming, resulting in that elusive crown of “global leadership”.

Many in the US do buy into this without understanding China’s limitations, so it is a useful starting point: “Western observers assumed in the 1980s that Japan would continue to grow forever; a similar assumption still dominates many discussions of China,” he says. The analogy isn’t lost on Chinese scholars and policymakers, who worry about the future costs of China’s serial asset bubbles.

China’s spectacular growth is indeed slowing, but Auslin doesn’t delve deep into how that plays out. Historically, when China is at peace, the sheer size of its economy sucks littoral states into its orbit. Cambodia and Laos are under Beijing’s sway; Mongolia, Myanmar, Thailand and North Korea have struggled against China’s gravity.

Ironically, a sharply slowing China also creates problems for the region. Debt from white elephant projects and infrastructure orientated towards a shrinking market, combined with a corrupted pro-China elite, could sour into popular discontent.

This scenario might tempt China to intervene abroad, and ethnic tolerance could turn into racial tension. Then there’s the appeal of Middle Eastern fundamentalism in Asia’s diverse Muslim communities.

Auslin is on more familiar ground with the arms race around the South China Sea, which leads to a proposal for “concentric triangles” of American alliances to contain China. By focusing on potential flashpoints, however, he underestimates how much the multi-faceted Sino-American relationship has served as ballast, allowing China’s “peaceful rise”.

Auslin laments Asia’s lack of a “security architecture”, a theme that dominated a recent security conference in Beijing. As Chinese participants pointedly remarked, Nato in Europe was founded with a common enemy in mind. Would China be the enemy of an Asian Nato? China’s importance makes that undesirable for every Asian state and most American interest groups.

Rather than clear lines dividing allies and baddies, strategy in Asia involves webs of relationships, allowing frequent recalibration based on relative strengths and weaknesses. Think of Go, the game where a strategic build-up of pieces allows the winner suddenly to flip the board.

China is gaining ground in the South China Sea and probing US willingness to defend Taiwan, even as many Chinese technocrats (and quite possibly Xi Jinping himself) doubt the abilities of their boastful military. Others worry that foreign (including Taiwanese) investment in China would decamp, poleaxing the economy and dooming China. Meanwhile, a brittle impasse between the US and North Korea is frozen by Washington politics that prevent directly engaging Pyongyang, an approach that would shift the board.

Does the US presence in the region enable the Asian century, or hinder it? Washington needs to figure out what Asians want, and what it wants, before losing its balance.

The reviewer is the FT’s deputy bureau chief in Beijing