Gold Is Cheap. Inflation Is Coming. You Do the Math

By Andrew Bary

Gold Is Cheap. Inflation Is Coming. You Do the Math
Illustration: Jonathan Bartlett

Gold has gotten a bad rap.

Long seen as the investment choice of the cranky and the fearful, the metal yields nothing; as Warren Buffett has said, it just “looks at you.”  
This year has been especially lackluster for gold. Its price has slumped 8%, to about $1,200 an ounce, and is off more than 35% from its high of $1,900 in 2011. Adding insult to injury, Vanguard will soon rechristen the largest gold-oriented U.S. mutual fund and shift its focus away from the metal.
But this out-of-favor asset class now deserves a place in investment portfolios.

Compared with stocks and other financial assets, gold looks inexpensive. More important, inflation is starting to pick up in the U.S. and in much of the world as central banks shrink their enormous balance sheets. And gold has represented a good defense against inflation eroding the value of a stock or bond portfolio. Over time, it has held its value against the dollar. Gold was $20.67 an ounce 100 years ago and that bought a good men’s suit. At $1,200 an ounce, the same is true today.

“Gold is rare, and it’s hard to rapidly increase the supply of it,” says Keith Trauner, co-portfolio manager of the GoodHaven (ticker: GOODX) mutual fund, which holds Barrick Gold(ABX), a leading mining company. “People have historically viewed it as a hedge against government depreciation of local currency.”

There are an estimated six billion ounces of gold in the world, worth more than $7 trillion, about 30% of the value of the S&P 500. Annual new mined supply adds less than 2% to the global total.

“Virtually every government in the world is trying to promote inflation partly because there is so much sovereign debt,” Trauner says. When there is so much debt, he contends, governments have three choices: default, restructure, or inflate the currency. “Politicians, when given the chance, will choose the latter.”

Naysayers point to higher interest rates as a negative for gold because it increases the allure of holding cash. But gold had one of its best decades during the inflationary 1970s, when rates soared.

One catalyst that could change investor sentiment on gold is a decline in the U.S. dollar.

“Gold is the anti-dollar,” says Pierre Lassonde, the chairman and a co-founder of Franco-Nevada(FNV), a gold and mining royalty company with an $12 billion stock market value. “When the dollar is strong, there is no need for gold. But when the dollar is weak, people go back to gold.”

Historically, gold and the dollar have a negative correlation of 80% to 85%. The dollar has been supported by expectations that the Federal Reserve will keep tightening and lift its benchmark, the federal-funds rate, to 2.5%-3%, from the current range of 1.75% to 2% by the end of 2019.

Trey Reik, a metals strategist at Sprott USA, says the Fed may have to relent, in part because the upward pressure on rates is squeezing developing economies that have dollar-denominated bonds or other obligations. If the markets sense that the Fed is about to hold off, the dollar could drop and gold would probably rally. His view is that “gold offers enormous portfolio utility in today’s complex and treacherous investment environment.”

Currently, many U.S. investors own little or no gold, but there are a few prominent bulls on the metal. One is Jeffrey Gundlach, the outspoken and often prescient CEO of DoubleLine Capital, the big bond-oriented investment firm.

“In my June webcast, I recommended that gold bugs wait until $1,200 to buy because it had just broken below” a chart point at $1,290, Gundlach wrote in an email to Barron’s. He turned positive early this month when gold hit $1,196. Based on the technicals, “I am now bullish,” he concluded.

Gold has been a traditional hedge against financial and economic crises, playing that role during the 2008-09 meltdown. Gold rallied 17% from the collapse of Lehman Brothers on Sept. 15, 2008, until the stock market bottomed on March 9, 2009—a period during which the S&P 500 fell more than 40%.

Cryptocurrencies have lately been touted as taking over gold’s role in a crisis. But a 55% drop in Bitcoin this year to about $6,700, and slumps in other cryptocurrencies, have taken the shine off that market. And there is still no easy way to get exposure to Bitcoin.

In comparison, gold has had allure as a store of value and measure of wealth for thousands of years. And gold remains so in much of the world, including China and India. Before the 1930s, it was used as money in U.S.

How cheap is gold today?

One way to measure it against stocks is a comparison with the Dow Jones Industrial Average. It effectively takes 22 ounces of gold to buy one unit of the Dow, which finished on Friday at a record 26,743. The most recent low in that relationship occurred in 2011, when the Dow/gold ratio dropped to 7.8. Then, gold was near its all-time high of $1,900 an ounce.

The century-old peak of 40 occurred in 1999, when gold traded at about $290 an ounce and the Dow stood around 11,500. The low came at the top of the commodity boom in 1980, when the metal and the Dow were at parity around 800 after a decade-long stretch when the Dow moved little. Commodities overall are historically cheap versus stocks.

In the futures markets, speculators, who are normally long gold, are now in the rare position of being net short. Many analysts view speculative positions as a contrary indicator and the current situation as bullish.

The knocks against gold are many. It’s a static asset that yields nothing, and physical gold costs money to store. Berkshire Hathaway CEO Buffett says he would rather own productive assets like businesses, farms, or stocks. “Gold gets dug out of the ground in Africa or someplace,” he noted 20 years ago. “Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Worse still, doubts have arisen over whether gold remains a good hedge against disaster, even if it did shine during the 2008 financial crisis.

The recent troubles in emerging markets, for example, have not given the price a lift. “With the markets and economy doing well, people don’t feel the need to have the defensive protection that they presumably get from gold,” says Byron Wien, a vice chairman in the Private Wealth Solutions Group and an investment strategist at the Blackstone Group.“In a severe bear market, it likely will provide some protection, but in a correction in a bull market, it may or not.”

Last month, Wien held his annual series of lunches with 100 leading investors and others in the Hamptons. There was little interest in gold.

For those who are interested in gold, there are plenty of ways to play it. Commodity exchange-traded funds include the industry-leading SPDR Gold Trust(GLD), trading around $114, and the lower-fee (IAU), now around $11.50. The SPDR ETF has an annual fee of 0.4%, and the iShares, 0.25%. The newer MiniShares Trust (GLDM), at $12, has a fee of just 0.18%.

It’s a measure of gold’s unpopularity that the size of the SPDR ETF is now $29 billion, about a 10th the size of the largest equity exchange-traded fund, the (SPY). When gold peaked at about $1,900 in 2011, the two ETFs were around the same size at $75 billion.

Indeed, open-end precious-metals mutual funds have had a decade to forget. On average, they’ve fallen 5% annually, according to Morningstar. Big funds include Fidelity Select Advisor Gold Portfolio (FSAGX), First Eagle Gold (SGGDX), and VanEck International Investors Gold (INIVX).  

In July, Vanguard announced that the $1.8 billion Vanguard Precious Metals & Mining fund (VGPMX), the largest gold-oriented U.S. mutual fund, would be renamed Vanguard Global Capital Cycles later this month and that its precious-metal mining exposure would be reduced in favor of other commodity-related industries and global infrastructure, such as telecommunications. Gold and precious-metals mining stocks will make up at least 25% of the fund.

Gold bulls see the action as a sign of capitulation. Vanguard’s move in 2001 to take the “gold” out of the fund name and broaden its mandate coincided with a bottom at about $255 an ounce.

Some closed-end funds own physical gold. For example, Sprott Gold & Silver Trust(CEF), holds roughly two-thirds of its assets in gold and a third in silver. That longstanding fund, formerly known as the Central Fund of Canada,trades around $11.75, a 4% discount to its net asset value. Toronto-based Sprott also runs the Sprott Physical Gold Trust (PHYS). Both funds, unlike the SPDR ETF, allow holders to take physical delivery of the yellow metal. This appeals to survivalists, who populate the ranks of gold bugs.

Gold-mining stocks, like other natural-resource producers, can offer a leveraged play on the commodity. When gold prices rise, mining earnings typically increase by a greater percentage. Take a mining company with an all-in cost of $1,000 per ounce. If gold rises 25%, to $1,500, profits could more than double, with margins going from $200 to $500 an ounce.

Now however, gold-mining shares are even more depressed than the metal itself because financial leverage cuts both ways. The largest gold-mining ETF, the $8 billion VanEck Vectors Gold Miners(GDX), is down 19% this year, to about $19, after hitting a 52-week low recently. Its largest holdings include industry leaders Newmont Mining(NEM), Barrick Gold, Newcrest Mining(NCMGY), Goldcorp(GG), and Franco-Nevada.

Mining companies have many challenges, to be sure. Countries in Africa and elsewhere are trying to gain greater control of their resources, and projects can face environmental opposition. Major finds are rare. But the mining companies are showing greater capital discipline and now trade at historically low levels of cash flow.

Reflecting the frustration with the miners’ performance, a group including billionaire hedge fund manager John Paulson announced on Friday the formation of a coalition of 16 investment managers called the Shareholders’ Gold Council to publish research and “promote best practices” in the industry.

Newmont is the industry leader with a $17 billion market value, a strong balance sheet with under $1 billion of net debt, and a dividend yield of almost 2%. The only gold stock in the S&P 500, it trades for $31, or 24 times projected 2018 earnings of $1.30 a share. That’s not a cheap multiple, but Newmont and other big miners rarely trade at low price/earnings ratios and often are evaluated on their “option” value, meaning they offer a long-term play on potentially higher gold prices.

“Newmont has been one of the most successful majors in fixing its balance sheet and rebuilding its production,” says John Bridges, a mining analyst with JPMorgan. He has an Overweight rating on the stock, with a $40 price target. Newmont’s production is seen holding steady at about five million ounces annually over the next five years.

Newmont’s gold output generally comes from relatively safe locations, with North America and Australia accounting for about 70% of it. Bridges says that the U.S. is now viewed as one of the best places to mine gold, thanks to the cut in the corporate tax rate and other tax breaks. So, Newmont and other miners are expanding domestically.

Barrick Gold has been a turnaround story. In recent years, the company has cut debt by nearly $10 billion, to $5 billion, through asset sales and internally generated cash flow. The shares, at about $10.50, trade for 19 times projected 2018 earnings of 55 cents a share and yield just over 1%.

The driving force at Barrick has been its chairman, John Thornton, a former top Goldman Sachsexecutive. Reflecting his Goldman roots, he has sought to bring what he calls a “partnership culture” to Barrick. He wants the company to focus on increasing shareholder returns and not fall into a common industry trap of chasing “ounces,” or production, without regard to costs.

“Barrick is a relatively low-cost operator, with people at the top who are focused on profitable capital allocation, rather than growth for growth’s sake,” says Trauner, the GoodHaven portfolio manager, which holds Barrick. He argues that at its current share price, Barrick offers a nearly free option on higher gold prices. In a better environment, the stock could be a lot higher. Barrick earned more than $4 a share and traded at $50 in 2011 when gold peaked at $1,900 an ounce.

The knock on Barrick is that Thornton’s focus on returns has gone too far and that the miner’s annual gold production, which is expected to decline to about 4.75 million ounces this year from 5.3 million ounces in 2017, could drop further. The company has run into political problems with mines in Argentina and Tanzania.

“Barrick fixed the balance sheet and stabilized the business. Now, it needs to show that it can grow in a sensible way,” Trauner says. Some think that Barrick could become a takeover target for a Chinese buyer. Thornton has cultivated a strong relationship with the Chinese, with Shandong Gold buying a half-interest in a large South American mine from Barrick.

Franco-Nevada has been the top-performing major gold-mining stock since its inception in late 2007, returning 16% annually, handily topping the metal, the VanEck ETF, and the S&P 500 index.

The company owes its success to an attractive portfolio of assets and a capital-light business model that give investors effective exposure to the equivalent of nearly 500,000 ounces of annual gold production. Franco-Nevada doesn’t own or operate mines. Instead, it makes investments in new and existing gold, precious metals, and energy assets in return for revenue streams from ongoing production. Franco-Nevada’s operating margins of 70% to 80% are double that of the typical miner.

Lassonde, the Franco-Nevada chairman, calls it “the best business model on the planet” because of its exposure to a growing portfolio of what he considers to be appealing mining properties. The company has just 31 employees.

Investors have recognized Franco-Nevada’s strengths: The company, whose shares trade around $65, fetches 53 times estimated 2018 earnings. The stock yields 1.5%.

Bridges, the JPMorgan analyst, calls Franco-Nevada the “Mercedes” of the gold-mining industry because the company has been able to protect investors in down gold markets while giving them upside in a rising market. He carries a Neutral rating on the shares with an $85 price target. With the stock down from a peak of $85 in late 2017, investors can get the Mercedes at a discount.

U.S. stocks are at record levels exactly at a time when global stress—trade tensions, populist nationalism, and the like—appears to be growing. This may be an opportune moment for investors to shift at least a portion of their portfolios to gold: both the metal and depressed mining shares.

To flip Buffett’s phrase, gold may do more than just look back at you in the coming years.

Wheeler dealer

A draft deal clarifies what populist trade policy means in practice

A bilateral breakthrough for America and Mexico, with Canada on the sidelines: can NAFTA negotiators pull it off?

“IT’S a big day for trade, a big day for our country,” boasted President Donald Trump on August 27th. The cause of this jubilation was progress in renegotiating the North American Free Trade Agreement (NAFTA), a deal between America, Mexico and Canada. Enrique Peña Nieto, Mexico’s president, confirmed that Mr Trump had managed to secure a bilateral “understanding” with Mexico. According to the White House’s spin doctors, Mr Trump had kept his pledge to renegotiate NAFTA and had produced a “mutually beneficial win for North American farmers, ranchers, workers and businesses”.

The deadline for publishing a more concrete version of the deal is August 31st, when the American administration plans to notify Congress of Mr Trump’s intent to sign. The rush is to enable Mr Peña to sign before December 1st, when he will be replaced by Andrés Manuel López Obrador, a firebrand leftist. Both men are keen to have the deal wrapped up by then, Mr Peña to make it part of his legacy and Mr López Obrador so he can concentrate on his domestic policy agenda.

As The Economist went to press, negotiators were still hard at work. Most significantly, Canada was not yet on board, though its negotiators were sounding optimistic. Mr Trump has said he will go ahead without the Canadians—and apply tariffs on Canadian cars—if they resist his terms. Canada, however, may be emboldened by hostility within America to anything less than a trilateral deal, and by the domestic political payoff from standing up to Mr Trump.

But even if it collapses, this week’s tentative deal is significant. It brought into sharper focus the sorts of terms Mr Trump seeks to impose on America’s trading partners. A Trumpian trade deal, it appears, involves not only spin (as all trade deals do), but threats (far more than is usual). Compared with other trade agreements of recent years, it is an uneasy blend of sweeteners for the left and for business interests. It increases uncertainty for companies. And it manages markets with a much heavier hand.

Playing to the left, the Trump administration is touting what it says are the “strongest, fully enforceable labour standards of any trade agreement”. These will supposedly give teeth to rules that American unions complained were easy to ignore (though how, exactly, remains unclear). Provisions allowing investors to sue foreign governments will be fudged, with some sectors carved out (whether enough to please those fretting about corporate power also remains unclear). Several provisions are intended to please corporate lobbyists, among them protection for ten years for drugs known as biologics and an extension of copyright from 50 years to 75.

Mr Trump had originally said he wanted a sunset clause, with the new NAFTA expiring after five years unless all sides agreed otherwise. He has settled for less. After six years in force NAFTA will be reviewed, and terminated after ten more if all sides cannot agree to continue it.

As long as the deal remains in force, further reviews will come every six years. This is supposed to prevent imbalances Mr Trump claims built up over time in the original, to America’s detriment, while giving companies notice to rearrange their affairs should a deal be impossible to make.

Automatic transmission

The Trumpian imprint is most visible in new rules of origin for cars, an industry that captured negotiators’ attentions in part because of its contribution to America’s bilateral trade deficit with Mexico. All trade deals set conditions for products to qualify for preferential treatment. Otherwise European or Japanese parts makers, say, could benefit from deals their governments never negotiated. This rewrite is striking for the extent to which existing conditions have been tightened and new ones introduced.

The Mexicans have agreed to a higher threshold for regional content in cars (up from 62.5% to 75%) and to the removal of loopholes that meant some auto parts were, in effect, exempt. A minimum share of steel and aluminium must be sourced from the region. Most unusually, a minimum share of production must be done by workers earning above $16 an hour.

All this is supposed to sharpen carmakers’ incentives to locate production in America. Juan Pablo Castañón, head of the Mexican Business Co-ordinating Council, says that 70% of Mexican car plants comply with the new rules for parts and metal. So the renegotiation could shift employment towards the United States, if carmakers rejig their supply chains in response or ramp up the supply of compliant vehicles there while selling non-compliant ones elsewhere. But they might simply choose instead to import more parts from outside the NAFTA region, and swallow the resulting 2.5% tariff. In any case, consumers will probably have to pay more.

The most distinctive Trumpian feature is the bullying that is being used to impose the new deal. Reports emerged on August 28th of a separate side letter that would exempt some level of Mexican car exports from any new American tariffs imposed in the name of national security. Flavio Volpe, the president of the Canadian Automotive Parts Manufacturers’ Association, an industry group, worries about how enforceable any new arrangement would be. Normally, trade agreements are self-reinforcing, with members sticking to them because they generate gains for all concerned. This one is clearly being held together with threats.

Some of these features of the new NAFTA may help sell it to American voters suspicious of conventional trade deals. It may even be better than no NAFTA at all. But the way talks have been conducted, and the gap between the promises made for it and the likely reality, have stored up problems for the future.

The civil war in the Catholic Church

Conservative priests are using outrage over sexual abuse to try to force Pope Francis to resign

David Gardner and Hannah Roberts

Some call it a Catholic civil war, others a culture war. But, clerical decorum very much to one side, war it is.

Pope Francis, the Argentine prelate whose ascent to the chair of St Peter five years ago has given new life to the Roman Catholic Church, is facing a bitter backlash against his progressive papacy — amid a humbling crisis he has struggled to resolve over the sexual abuse of children by predator priests.

Conservatives have regrouped to fight Pope Francis’s relaxation of old doctrinal anathemas, which he sees as vital to the spiritual renewal of a two-millennia-old institution serving a notional 1.2bn Catholics around the world. Shortly after taking over from Pope Benedict XVI — who took the almost unheard of step of resigning in circumstances the Vatican has never explained — he said the Church had to find “a new balance” or it would collapse “like a house of cards”.

Archbishop Carlo Maria Viganò published a letter alleging the pope was complicit in covering for sexual abuse by Theodore McCarrick, the former archbishop of Washington © Reuters

But now traditionalists are trying to stymie Francis’s reforms — and seek to weaponise outrage over clerical cover-ups of the rape of children to bring the pope down. As Francis’s supporters rally to defend him, the Church is being bespattered with scandal.

This new descent into the mud began last Sunday. Francis had just ended a 36-hour visit to Ireland, overshadowed by years of revelations of clerical sexual abuse the Vatican covered up and has failed to redress. The pope met with abuse victims and repeatedly expressed shame and contrition — to a shrunken turnout of the faithful that was a shadow of the vast crowds that greeted Pope John Paul II in 1979. A bombshell greeted Francis on his way home.

Archbishop Carlo Maria Viganò, a former papal nuncio, or ambassador, to the US, published a letter alleging the pope was complicit in covering for sexual abuse by Theodore McCarrick, the former archbishop of Washington. Francis had forced Cardinal McCarrick to stand down and face an inquiry over alleged abuse of a 16-year-old boy, but Archbishop Viganò demanded that the pope resign.

Sulphurous and salacious, laced with innuendo but light on evidence, this 11-page broadside targeted 32 other Catholic clerics — the majority of them liberal allies of the pope — denouncing “a homosexual current in favour of subverting Catholic doctrine on homosexuality”.

At one level, this is a naked power play. “The enemies of Francis and his reforms are using Viganò’s ‘testimony’ to support calls for Francis to resign”, says Brendan Walsh, editor of The Tablet, the British Catholic weekly. “They are manipulating the child abuse scandal — which has devastated so many lives — for their own political purposes.”

Crowds gather for the arrival of Pope Francis in Phoenix Park, Dublin, last month. The pope met with abuse victims and repeatedly expressed shame and contrition — to a shrunken turnout of the faithful

Conservatives in the Church, who had things pretty much their own way for half a century but especially under popes John Paul II and Benedict XVI, are desperate to discredit Francis. For most Vatican-watchers, the shrill moral stances of men like Archbishop Viganò or Cardinal Raymond Burke, the American leader of the reaction to Francis, is inextricably linked to the fact that the pope elbowed them aside in his push to revitalise the Church.

Their intemperate attacks on Francis, of a different order to the workaday intrigue of the Vatican, betray a desperation to cripple Francis’s papacy before he can create a liberal majority in the conclave of cardinals to elect a successor who will safeguard and develop his legacy. This is about power in a future papacy, as well as power now.

Cardinals nominated by Francis, who will be 82 in December, are now thought to be close to a majority in the electoral college for the next pope. This first Jesuit pope is trying to devolve power along similar lines to the way his Society of Jesus order is run — a radical decentralisation of Church governance that would make him the last Bishop of Rome to wield absolute ecclesiastical power.

In an interview with a Jesuit magazine in 2013, Francis compared the Church to a “field hospital after a battle” where the doctors were obsessing about cholesterol levels. “We cannot insist only on issues related to abortion, gay marriage and the use of contraceptive methods,” he said. There is steely pragmatism here, alongside Francis’s expansive piety. It is hard to see, for example, how a Church so devastated by revelations of child rape could credibly keep sexual mores and personal morality at the pinnacle of its concerns.

Famously, or infamously from a traditionalist standpoint, he has called for an inclusive, non-judgemental tolerance towards homosexuality. “If someone is gay and is looking for the Lord, who am I to judge him?” he asked early in his papacy.

Revealingly, until Archbishop Viganò’s letter the traditionalists had concentrated their fire on an apostolic exhortation called Amoris Laetitia (The Joy of Love) in which Francis enjoined priests and bishops to adopt a “merciful” approach to divorced and remarried people wishing to take communion. In one sense, this merely aligned the Vatican with existing reality. To conservatives it decentralised doctrinal judgment.

Cardinal Burke, for instance, who keeps company with figures such as Steve Bannon, Donald Trump’s former strategist, and Matteo Salvini, Italy’s far-right interior minister, regards all this as motive for insurrection. At a Rome conference on “the limits of papal authority” this spring he said that a pope who has “deviated from the faith . . . must, as a duty, be disobeyed”.

Francis has not changed core doctrine. But he has cast orthodoxy in a new light. He has reordered priorities — calling for a missionary Church of the poor and telling bishops to be shepherds who “smell more like the sheep” — and made the theology that interprets Catholic teaching more dynamic and open. With his trademark beaming smile — and his more than 40m Twitter followers @Pontifex — he has caught the imagination not just of the disillusioned Catholic faithful but many people of other faiths or, indeed, no faith.

A protest against sexual abuse in the Church outside the Vatican embassy in Washington DC this week © AFP

This pontiff has also retrieved the idiom and spirit of the Second Vatican Council, convened by Pope John XXIII in 1962. That attempt to bring the Church into less abrasive alignment with its modern flock fizzed through the 1960s and 70s, debating everything from clerical celibacy to liberation theology, before it was shut down by the pinched and defensive dogma of John Paul II and Benedict XVI — the two popes today’s conservatives hope to emulate .

“He hasn’t changed the teaching of the Church on abortion or contraception but he has tried to be genuinely more pastoral, shifting the emphasis down to bishops and parish priests,” says Chris Patten, chancellor of Oxford university who has advised Francis on the media. “This has become a touchstone for the anti-Francis brigade.”

He has appointed “a sufficiently large number of cardinals to ensure that no one can turn the clock back”, Lord Patten adds. “That’s why people like Cardinal Burke continue to make a fuss.”

While the disquiet of many traditionalists’ is sincere, with the Viganò letter they are trying to discredit Francis with charges of criminal conduct. Such allegations will inevitably appear plausible to many both inside and outside the Church, given the Vatican’s history of covering up sexual abuse and complicity with those responsible.

Archbishop Viganò himself is accused of burying evidence against another US prelate in 2014 when he was nuncio. Yet his faction is now trying to conflate homosexuality with rape and paedophilia to undermine Francis.

They are “equating [child abuse] with his refusal to be judgmental about homosexuals”, says Lord Patten. “The gay-paedophile link is an awful and wrong jump by some of the rightwing in the Church.”While this power battle may do immense damage to the Church, it will also prolong the anguish of abuse victims, who are already angry at Francis’s hesitant attempts to deliver them justice.

Peter Saunders, a British abuse victim and campaigner who was kicked off a Vatican commission on child protection, is bitterly disappointed with the pope. “Francis is a very popular guy and makes a lot of sense on poverty and the environment, but on the abuse issue he remains strangely inactive, bar the occasional outpouring of pain,” Mr Saunders says. “Survivors want action” including “publishing names of abusing clergy and their whereabouts, restitution and support for victims; instead the Church continues to denigrate victims and deny them the chance to move on”.

While Pope Francis has said he would “not say one word” on the Viganò allegations, inviting journalists on his plane back from Dublin to draw their own conclusions, he will sooner or later have to respond.

If a disgruntled former employee alleges that “you deliberately covered for a pervert and serial abuser, and that your close associates have succumbed to a mafia-like conspiracy organised by a network of homosexual clergy . . . to refuse to dignify the accusation with a response might seem to show almost saintly restraint”, says Mr Walsh, the newspaper editor.

“But if there’s one thing the Church should have learnt in recent years it’s that when serious allegations of misconduct or the covering-up of abuse are made, there should be an independent and transparent investigation. They should get on with it.”

Q2 2018 Z.1 Flow of Funds

Doug Nolan

Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $2.283 TN during the quarter. While this was down from Q1's booming SAAR $3.681 TN, it nonetheless puts first-half Credit growth at an almost $3.0 TN pace. Annual NFD growth has exceeded $2.0 TN only one year in the past decade (2016's $2.05 TN). NFD expanded $2.509 TN in 2007, second lonely to 2004's record $2.910 TN.

NFD ended Q2 at a record $50.710 TN, up $2.674 TN over the past four quarters and $4.868 TN over two years. NFD has increased $15.65 TN, or 45%, since the end of 2008. NFD ended the quarter at 248% of GDP. This compares to 231% at the end of 2007 and 189% to end 1999. It's worth noting that Q2 y-o-y GDP growth of 5.4% was the strongest since Q2 2006.

The historic federal government borrowing binge runs unabated. Federal debt rose SAAR $1.186 TN during Q2, huge borrowings yet down from Q1's blistering SAAR $2.828 TN. For the quarter, Federal Expenditures were up 6.0% y-o-y, while Federal Receipts were down 2.0%. Over the past year, outstanding Treasury Securities increased $1.292 TN to a record $17.091 TN. Since the end of 2007, Treasuries have ballooned $11.040 TN, or 182%.

But let's not forget the government-sponsored enterprises (GSEs). Agency Securities expanded SAAR $236bn during Q2 to a record $8.962 TN. Over the past year, Agency Securities jumped $295 billion, with a two-year jump of $638 billion. This has been the strongest GSE growth in more than a decade. Combined Treasury and GSE Securities expanded to 128% of GDP (vs. 92% at the end of '07 and 80% in 2000).

Total Debt Securities expanded SAAR $1.579 TN during the quarter. Washington continues to completely dominate securities issuance. Federal government accounted for SAAR $1.186 TN, the GSEs SAAR $80 billion, and Agency/GSE-MBS SAAR $161 billion. With net corporate debt issuance grinding to a halt during the quarter, little wonder corporate Credit spreads remain compressed.

And while overall Bank Assets posted a marginal decline during the quarter, this was fully explained by the contraction of "Reserves at the Federal Reserve." Bank "Loans" expanded SAAR $504 billion, the strongest growth in a year. Security Broker/Dealer Assets expanded SAAR $199 billion, also the biggest gain since Q2 '17. The largest Broker/Dealer asset gains were in "Security Repurchase Agreements" (SAAR $88bn) and Treasury Securities (SAAR $133bn).

Total (home, commercial and farm) Mortgages expanded SAAR $557 billion during the quarter. First-half growth in Total Mortgages is running just below 2017's $576 billion pace, the strongest expansion since 2007. Commercial Mortgages expanded SAAR $201 billion, one of the strongest quarters since the crisis. The Fed's Z.1 report recently created a category "Loans," which combines mortgages, other bank loans and consumer credit. "Loans" expanded SAAR $1.028 TN during Q2. This was just below 2017's $1.041 billion increase, the strongest annual gain since 2007.

And while lending has recovered strongly since the crisis, the greatest inflation has been in the securities markets. Total Debt Securities (TDS) were up $2.111 TN over the past year to a record $43.982 TN. TDS ended the quarter at 215% of GDP, after beginning the nineties near 130%, ending 1999 at 157%, and closing out 2007 at 200%. Total Equities jumped $5.141 TN over the past four quarters to a record $48.414 TN. Total Equites ended the period at 237% of GDP, after ending the eighties at about 70%, the nineties at 193% and 2007 at 172%. Total (Debt and Equities) Securities jumped $7.251 TN over the past four quarters to a record $92.396 TN, or 453% of GDP. This compares to about 200% to begin the '90s, 350% to end 1999 and 373% to conclude 2007.

The rapidly inflating Household Balance Sheet remains fundamental to Bubble Analysis. Household Assets jumped another $2.323 TN during the quarter to a record $122.657 TN. Household Assets jumped $8.628 TN over the past four quarters (7.6%) and $17.076 TN over two years (16.2%). The one-year gain in Assets lags only 2013's $10.669 TN, while the two-year gain is unmatched. By asset category, Financial Assets jumped $1.697 TN during Q2, and Real Estate assets rose $559 billion. Financial Assets were up $6.468 TN over four quarters and $12.978 TN over two years. For comparison, Household Financial Assets rose $3.923 TN in Bubble year 1999. The pre-crisis record annual gain was 2004's $5.000 TN.

With Household Liabilities increasing $132 billion, Household Net Worth (assets less liabilities) surged another $2.191 TN during Q2 to a record $106.929 TN. Household Net Worth inflated $8.106 TN over the past four quarters and $16.035 TN in two years. It's extraordinary to see $2.0 TN quarterly growth in Net Worth over eight quarters. Comparing previous peak two-year periods, the 1998-99 period saw Net Worth jump $8.208 TN and the 2004-05 period $13.232 TN. "Uncharted waters," as they say.

Household Assets ended Q2 at a record 601% of GDP. Household Net Worth ended the quarter at a record 522% of GDP. For comparison, Net Worth-to-GDP ended the seventies at 342%, the ("decade of greed") eighties at 378%, Bubble Year 1999 at 447%, and Bubble Year 2007 at 473%. The ratio of Household Financial Assets-to-GDP ended Q2 at a record 430%. This compares to 363% in 1999 and 379% in 2007. It's worth adding that Household equities holdings (Equities and Mutual Funds) ended the quarter at 132% of GDP, up from cyclical peaks 117% during Q1 2000 and 103% in Q3 2007. Total Equities-to-GDP was at 33% to end 1985 and 47% to end the eighties. Equities-to-GDP dropped to a cyclical low 59% in 2002 and 53% in 2009. Equities to GDP averaged about 77% over the past 44 years.

International flows to U.S. asset markets continue to play an integral role in fueling the U.S. Bubble. Rest of World (ROW) holdings of U.S. Financial Assets rose SAAR $467 billion during Q2 to a record $27.480 TN. ROW holdings have surged $13.325 TN since the crisis, almost doubling the 2008 level. ROW holdings jumped $3.214 TN in just the past six quarters, extraordinary growth with parallels to the surge in ROW holdings in the manic 2006/07 period. ROW holdings began the 2000s at $5.640 TN, or 57% of GDP. ROW holdings ended Q2 2018 at 135% of GDP.

ROW holdings expanded $2.782 TN in 2017. Holdings increased only (nominal) $433 billion during 2018's first half. ROW U.S. Corporate Bond holdings declined during Q2, while Treasuries were little changed. I don't believe it is mere coincidence that ROW flows to U.S. securities markets ebbed as global financial conditions tightened. Recall that U.S. 10-year yields jumped to 3.13% mid-quarter, before reversing sharply on EM market tumult.

Ten-year yields closed Friday trading at 3.06%, the high since May 17th. Safe haven bids for Treasuries and the dollar have waned of late. For the most part, EM has somewhat stabilized. But the Fed will likely raise rates again next Wednesday, returning the markets' focus to U.S. rate prospects.

It's still early innings for EM travails. Liquidity tends to ebb and flow with greed and fear, as crisis conditions unfold over time. It's been quite a short squeeze backdrop in U.S. equities the past several months. This week saw some decent squeezes in global markets. The Argentine peso jumped almost 7% this week, with the South African rand up 4.3% and the Brazilian real gaining 3.1%. Brazil's Bovespa equities index surged 5.3% and Turkish stocks rallied 3.4%. The Shanghai Composite jumped 4.3%. Hong Kong's Hang Seng Financial index recovered 5.6%. Japan's TOPIX Bank Index surged 6.6%. European bank stocks rallied 4.1%. Italian stocks were up 3.1%. Italian 10-year yields dropped 15 bps. Copper jumped 8.0%, and crude surged 2.6%.

Booming U.S. securities markets bolster the case for the Fed sticking with "normalization." This week's squeeze notwithstanding, higher U.S. rates boost the odds of another round of EM de-risking/de-leveraging - and a further tightening of global financial conditions. Such a backdrop would be conducive to tighter conditions at the "periphery" coming closer to penetrating the "core." The Q2 Z.1 report indicated waning international liquidity flowing into U.S. securities markets.

Return of the Ugly German?

The Riots in Chemnitz and Their Aftermath

In Chemnitz, refugees find themselves under threat by neo-Nazis and hooligans. Politicians have pledged to take a hard line against right-wing extremist violence, but they look helpless nonetheless. Meanwhile, the right wing seems to have the upper hand in Saxony. By DER SPIEGEL Staff

Photo Gallery: Has the Ugly German Returned?

Three cities in Germany. Three crimes. On Oct. 16, 2016, in Freiburg, the Afghan asylum-seeker Hussein K. raped a 19-year-old university student, leaving her unconscious on the banks of a river in which she then drowned. For weeks afterward, there was a palpable sense of anxiety in the city. A demonstration against the federal government's refugee policies was registered, but only very few turned up to march. Six months after the crime, the perpetrator was sentenced to life in prison, after which the anxiety dissipated. The message: Freiburg wants to remain a liberal city, despite this horrific crime.

On Aug. 16, 2018, in Offenburg, a city in southwestern Germany near the French border, a 26-year-old man from Somalia stabbed a general practitioner to death in his practice in front of his assistant. A state parliamentarian from the right-wing populist Alternative for Germany (AfD) party ascribed "direct complicity in the death of the doctor" to both the Baden-Württemberg state government as well as the federal government in Berlin "due to their misguided migration policies."

The party called for a rally, which was attended by a couple hundred people, but the counter-demonstration was just as large. Later, some 400 people -- including asylum-seekers -- held a march to commemorate the beloved doctor. A relative of the murder victim published an open letter addressed to the AfD politician. The doctor, he wrote, "had contributed to integration instead of preaching hate and revulsion like you." The message: Offenburg refuses to allow the crime to be exploited for political purposes.

Then, at 3 a.m. on Aug. 26, 2018, in Chemnitz, Yousif A. from Iraq and Alaa S. from Syria are suspected of having stabbed a 35-year-old Cuban-German man to death. Just hours after the crime, some 800 demonstrators marched through the city, some of them shoving police to the ground while others threatened people who looked like they might be refugees. The next evening, some 6,000 right-wingers and right-wing sympathizers gathered. "We'll get you all," they chanted as some of them stretched out their right arms in the Hitler salute. The message: In Chemnitz, neo-Nazis and hooligans are leading the city's response to the crime.

Three crimes, three different reactions. There are similarities: anger, disgust, grief, anti-foreigner prejudice and the question as to whether these felonies might be connected to the refugee policies that have stirred up and divided this country for the last three years. But in Freiburg and Offenburg, the sober-minded have the upper hand, those who see the crimes for what they are: isolated cases. Sad, to be sure, but not the direct result of misguided policy.

In Chemnitz, by contrast, a strike force was quickly assembled, made up of neo-Nazis, hooligans, AfD supporters and so-called "concerned citizens." They cast blame on migrants as a group and declared open season on them. The images they created are evocative of an era that Germany had thought it had left behind; they are reminiscent of the racist 1992 attacks in the Lichtenhagen neighborhood of Rostock, which saw a mob set fire to an occupied hostel for Vietnamese workers as neighbors stood by applauding. The mob is back, is the message sent by the images from Chemnitz, just like 26 years ago. We have regressed.

The revulsion over this fact can be heard in many voices, from the chancellor to the German president, from German business leaders to foreign commentators. The ugly German -- racist, xenophobic and full of rage -- is back. And his stage, once again, is in Saxony. Why is it always Saxony?

Bautzen, Freital, Heidenau, Clausnitz and now Chemnitz. These places have become shorthand for scenes of enraged crowds, their faces contorted in anger as they chant vulgarities against refugees or the chancellor. They chase down and attack migrants, they set fire to asylum-seeker hostels, they have apparently abandoned human decency itself, along with civilized debate and the political system of representational democracy. They apparently dream of a different model: nationalist, monoethnic, authoritarian and anti-liberal. A bit like Trump, a bit like Orbán.

Fertile Soil

The hoodlums are, of course, far from being in the majority in Saxony. But they are currently much louder than the majority. And the effect they are having becomes apparent when you read the back pages of the newspaper. The advertising agency Wurzelschläger & Friends, for example, has announced that it has withdrawn its bid for the image campaign being launched to attract companies to Leipzig. "Our feeling is that Saxony's image cannot be translated into a global selling point," the agency said in a statement. It is a disaster for Saxony, a state that, on the one hand, has been remarkably successful. Its economy is doing well, its schoolchildren score well on the international PISA test comparing educational attainment, its tourism industry is flourishing and it has the second-lowest unemployment rate among the five eastern German states. On the other hand, though, it is widely seen as having a neo-Nazi problem.

Saxony is the fertile soil out of which Pegida (which stands for Patriotic Europeans Against the Islamization of the West) sprouted, the xenophobic group that has been staging weekly marches against Muslims since autumn 2014. And the group is still going strong in Saxony, with hundreds of sympathizers still taking to the streets each week. In Saxony, demonstrators confront reporters, as happened most recently in Dresden, when a (now former) employee of the State Criminal Police Office accosted a television team from public broadcaster ZDF. The man's German-flag hat quickly became a symbol of right-wing simpletons who join such marches. But since then, he has been supplanted by the Hitler salutes seen in Chemnitz.

The police in Saxony likewise hit the headlines with predictable regularity when they, for example, prevent journalists from doing their jobs or fail to mobilize enough officers, thus forcing them to stand by passively as right-wing extremists rampage through the streets.

Right-wing extremism is a nationwide phenomenon, not a specifically Saxon one. That has been the mantra of Saxony's political leadership for years, whenever the criticism has mounted. It is half true, and half false. Saxony has become a breeding ground of right-wing activists, with right-wing structures having become solidified shortly after German reunification. In no other German state is the AfD so successful: According to the most recent surveys, the party stands to win 26 of the 60 direct mandates in the state in next year's election. Every fourth voter plans to cast their ballot for the right-wing populists, putting the party in second place behind Chancellor Angela Merkel's conservative Christian Democratic Union (CDU).

It is, of course, inaccurate to say that AfD supporters are synonymous with right-wing hooligans. But they do have quite a bit in common: They all believe that they are part of a rebellion against the West, against its established political parties and against the "lying press." Indeed, against the liberal, universal values of an enlightened, cosmopolitan society. The scenes from Chemnitz are merely the ugly symptoms of a gradual process of separation.

The violence in Chemnitz "is the intentionally provoked apex of a development that has been coming for almost 30 years," Christian Wolff, the former pastor of St. Thomas Church in Leipzig, writes on his website. "The systematic implementation of ethnonationalist, right-wing nationalist ideas in too many heads and hearts, rejection of liberal democracy, militant xenophobia, suspension of fundamental rights -- and all of it with the acquiescence or even support of the Saxony CDU, consummated by Pegida/AfD and violence-prone neo-Nazis."

Colorful Lights

Even if you might not agree completely with all aspects of Wolff's analysis, it makes one wonder: What has happened in eastern Germany, in Saxony, in the 29 years since the fall of the Berlin Wall? The question isn't exactly new, but it must be asked once again following the escalation seen last weekend.

It was a weekend in which the people of Chemnitz actually wanted to celebrate. The city was observing its 875th birthday and organizers were expecting more than 250,000 visitors. Six stages had been set up along with a Ferris wheel and more than 200 booths. The rapper Namika performed and City Hall was lit up by colorful lights.

Daniel H., 35, was also at the festival along with his friends. The son of a Cuban father and a German mother, Daniel H. grew up in Chemnitz and had been working for the last two years at the commercial cleaning company Hausgeister. His co-workers liked him and his friends say he was always in a good mood, always ready with a smile.

At 3 a.m. that night, the group wandered over to the central boulevard of Brückestrasse, apparently to get money from an ATM machine. That's where they ran into Yousif A. and Alaa S. An argument ensued, perhaps over money, perhaps over cigarettes -- many details remain hazy, though alcohol was likely a factor. Yousif A., allegedly the main perpetrator, apparently began stabbing Daniel H. suddenly. He succumbed to his injuries in the hospital a short time later.

Yousif A. was registered in Annaberg-Buchholz, a village of half-timbered houses where cows graze in the fields. He lived with three other refugees -- one from Syria, one from Iraq and one from Iran -- in a shared apartment located in multifamily dwelling. Yousif A. had a room to himself even though he only ever slept there twice a month. The rest of the time, he lived in Chemnitz, apparently at a friend's place.

Even if they didn't know him well, his apartment-mates describe him as a nice guy who liked to drink, sometimes to excess. Yousif A. came to Germany in late October 2015 by way of the Balkan Route, as did so many others from Iraq and Syria during the peak of the refugee crisis.

Initially, according to his files, officials wanted to send him back to Bulgaria because they believed that he had submitted an asylum application there. And Bulgaria had already approved the application. Indeed, it is unclear why he was never deported back to Bulgaria. Following the passage of a deadline in fall 2016, Germany assumed responsibility for him. On two occasions, the Federal Office for Migration and Refugees (BAMF) interviewed him, most recently just a few weeks before the murder of Daniel H. -- almost three years after he had entered the country.

Falling Afoul of the Law

Yousif A. told the officials why he had to flee the northern Iraqi province of Ninive, and it had nothing to do with the political situation there. He said he had fallen in love with a girl, but her father and uncle were not happy with the situation. They threatened and beat him, he said, and even injured him with a knife. It was "a question of honor," he told the BAMF officials.

The officials didn't believe the story was particularly credible. And there was another thing that fueled their doubts about its veracity: Two personal documents that he presented were, according to a BAMF examination, "complete falsifications." On Aug. 29, 2018, the agency rejected the 22-year-old's asylum application -- three days after he is suspected of having stabbed Daniel H. in Chemnitz.

Yousif A. already had a police record for criminal assault, among other things. He first fell afoul of the law just a few months after his arrival in Germany. And repeatedly thereafter.

On one occasion, he sprayed pepper spray into the faces of two refugees in the Annaberg-Buchholz asylum-seekers' hostel. Another time, in February 2016, he ran drunk in front of a snowplow and other vehicles at around 3:30 a.m. and was charged with traffic interference and given a fine. Public prosecutors believe he had intended to commit suicide.

Alaa S., his alleged accomplice, was likewise approachable, at least according to Mohamed Yousif, the boss of the Zana barber shop in Chemnitz who taught S. how to cut hair. They knew each other because they both come from the same city in Syria. "I tried to take care of him a bit," says Yousif. When asked about the knife assault on Daniel H., Yousif says: "It simply doesn't fit."

Two weeks ago, Alaa S. returned to Germany from northern Iraq, where he was apparently visiting his parents. His father is involved in a pro-Kurdish political party. "I asked him: 'Why did you come back?'" says Yousif. He answered: "'I have a future in Germany.'" Alaa S. has been in pre-trial detention since Tuesday and has apparently cooperated with the police.

Triggering the Fury

Not even five hours after the bloody crime, the tabloid website published a report under the headline: "35-Year-Old Dies after Stabbing in the City." Rumors relating to the news item spread quickly: Daniel H., it was said, had been trying to protect a woman from sexual assault. Though the police have said that there is no evidence for that version of events, the story has persisted. After all, it fits perfectly into the right-wing cliché of the instinct-driven refugee. It triggers the fury that drives people out onto the streets.

Even before the first official police announcement, the hooligan group "New Society 2004" issued a call for a protest march on Facebook, a post that was widely shared on the internet, along with slogans like "our city, our rules!" and "let's show who has the last word in the city!" The meeting point was set for 4:30 p.m. in front of the "Nischel," as the people of Chemnitz call the Karl Marx monument in the center of the city. Out of fear that festival goers might be attacked, organizers called off the party on Sunday afternoon.

Around 800 people collected not far from the site of the stabbing. Without registering with the police, the group set off, with some participants chanting "We Are the People!" Bottles were thrown. The police didn't have enough officers available and were overwhelmed by the situation. They requested backup from Leipzig and Dresden, but videos of the rampaging mob spread quickly on the internet. Neo-Nazis began threatening people they took to be immigrants.

The right-wing group "Pro Chemnitz" then called for a protest to be held the next evening and mobilized 6,000 people. The organization "Chemnitz Nazifrei" (Keep Chemitz Free of Nazis) quickly arranged a counter-demonstration to which 1,500 people showed up. The two groups were separated only by a meager chain of 591 police officers. In some spots, there were no law enforcement officers at all between the two blocks.

Firecrackers and smoke bombs flew through the air, as did paving stones. Some participants covered their faces to avoid being identified while others raised their right arms in the Hitler salute. Again the police were overwhelmed and again, they were unable to disperse the demonstrations. They allowed the march to proceed hundreds of meters through the city center and advised immigrants to stay at home.

A Hardline Approach

Federal prosecutors have since gotten involved in the incident. DER SPIEGEL has learned that the chief federal prosecutor has launched a formal investigation with agency sources saying they were "concerned" about the events in Chemnitz. The sources say that prosecutors are particularly interested in the speed with which the right-wing extremists mobilized for the protests in Chemnitz and are eager to find out if hidden structures may have played a role. Part of the mandate of federal prosecutors in Germany is the prosecution of terrorist groups.

Shortly after assuming his current position in 2015, Public Prosecutor General Peter Frank told DER SPIEGEL that he would take a hardline approach when it came to right-wing extremists. Should "pogrom-like situations" against refugees develop in which people were killed or injured, he said, then the government would have to "send a counter-signal."

The right-wing demonstrators used the victim of the knife attack as an excuse to stage their demonstration of power. Yet Daniel H. doesn't really fit the role of martyr for the right-wing cause. Cheerful, good-natured, more to the left of the political spectrum: That is how his friends describe him. On Facebook, he liked Bob Marley and Left Party floor leader Sahra Wagenknecht in addition to following groups like "No Need for Nazis." "These right-wingers that are now taking advantage of this incident, we used to have to fight them because they didn't think we were German enough," wrote one of Daniel H.'s friends on Facebook.

This friend, who is also named Daniel, had known him for almost 20 years. They met at a party when they were teenagers and discovered that both of their fathers had been allowed to attend university in East Germany because they were foreigners from socialist countries. The father of this friend is from Tanzania while Daniel H.'s father is from Cuba. "Daniel was the kind of person who would have done anything for his family and friends," says the friend. "He never would have wanted the protests." He has no explanation for why acquaintances of his friend nevertheless called for revenge. "There are idiots everywhere," he says. But he also notes he has seen an increasing number of people drifting to the right, even within his own circle of friends.

Chemnitz and its surroundings have been a right-wing stronghold ever since reunification, even if Germany's domestic intelligence agency, the Office for the Protection of the Constitution, currently counts only 150 to 200 extremists in the city. The organization "Blood & Honor," which was banned in 2000, had a foothold in Chemnitz and distributed right-wing music from the city to extremists across the country. It was also the place to which Beate Zschäpe, Uwe Mundlos and Uwe Böhnhardt -- the three members of the right-wing terror group National Socialist Underground (NSU), which murdered 10 people between 2000 and 2006 -- fled when they went underground in 1998. Even today, the right-wing scene has its own shops in the city and PC Records is also based here, one of the most important right-wing extremist music labels in Germany. "One could see from the participants in the marches that the old structures can still be used for mobilization," says Ulli Jentsch of the Anti-Fascist Press Archive in Berlin.

The archive has been monitoring the right-wing scene across Germany for almost three decades, including the one in Chemnitz. The spectrum of those active in the region is extensive, he says. "From functionaries with the New Right to ethnonationalists, Reichsbürger to the neo-Nazi party Third Path, they have everything," Jentsch says. Initiatives that seek to put a stop to the right-wing groups repeatedly have the windows in their offices broken. In November 2016, an explosive device blew up in the shop window of the culture center Lokomov, after it staged a play about the NSU. In the Chemnitz neighborhood of Sonnenberg, where Lokomov is located, right-wing extremists wanted to establish a "national liberated zone" a few years ago, an area that would adhere exclusively to radical right-wing ideology. Over the course of several months, there were attacks on alternative cafés and clubs while a Left Party lawmaker was forced to find a new office. After 20 attacks, her landlord cancelled her lease.

In Chemnitzer FC, the local football club, there are a lot of neo-Nazis among the fans. "There are tight links between hooligans and Kameradschaften," says hooligan expert Robert Claus, the latter a reference to loose alliances of neo-Nazis.

 Germany has been rocked by right-wing riots in the eastern city of Chemnitz...

The Consequences of Hate

One group, called "HooNaRa," has attracted particularly close attention over the years, its name standing for "Hooligans Nazis Racists." Officially, the militant right-wing group dissolved back in 2007, but networks among its members are still active.

One of those networks is the fan group "New Society," whose members refer to themselves as "NS Boys," a clear play on National Socialism. Its logo includes the image of a Hitler Youth member. Like the right-wing fan group "Kaotic," members of "New Society" used their channels to mobilize people for the demonstrations in Chemnitz. Both groups are under surveillance by the Office for the Protection of the Constitution and have been banned from the football stadium for years, but their influence on the more moderate scene is considered to be extensive.

On the second floor of a villa, Andreas Löscher scrolls through Twitter and Facebook in an attempt to find reports of attacks on migrants and to verify them. He is a social worker with RAA Sachsen, a project that helps victims of racist violence. Löscher has drawn up a list on a piece of paper. "Summary of Attacks on Aug. 26, 2018," it says. A Syrian man was pulled to the ground and kicked while another Syrian was hassled. A Bulgarian filed a criminal complaint for assault. In total, Löscher counted seven incidents on Sunday, with 11 more coming on Monday.

"These are just preliminary numbers," Löscher says. And yet he is certain that he has never seen anything like it before in Chemnitz. Thirty-seven years old, Löscher has been familiar with the right-wing scene in Chemnitz for more than 20 years. Last year, he counted 20 attacks. In 2016, there were 32. This year, he believes the total will be higher, given the number of incidents that have taken place in the last several days.

On Monday, Löscher presciently posted a warning on Facebook. On the page belonging to RAA Sachsen, he wrote at noon: "Even if it is difficult to express these thoughts, we recommend that migrants avoid the city center this afternoon." Essentially, the post said that the center of Chemnitz, a German university town, had become a no-go area for immigrants. "For us as an organization, it was basically a capitulation," says Löscher. "But we can't put anyone in danger."

Two young women relate just how quickly things can become dangerous in Chemnitz. Indeed, they are even afraid to use their real names, so we will call them Antonia and Marie.

Fear as a Dominant Feature

"Chemnitz is a big village," says Marie. "You run into right-wing extremists here as soon as you walk out your front door. For many in Chemnitz, there is absolutely no problem with being right-wing. But those who become active as political leftists run the risk of being threatened," says Antonia.

The two women live in Kompott, a leftist-alternative cultural and residency center. It has lots of graffiti on the walls, homemade furniture in the yard and quite a few cats wandering around. Kompott has frequently been the target of right-wing attacks. In 2017, for example, neo-Nazis threw rocks through the front window of the reading café. A mother and her son were sitting on the other side but were luckily unharmed.

Fear seems to be a dominant feature of life in Chemnitz. Senior city official Miko Runkel has been in charge of security in Chemnitz for the last 10 years. Prior to that, he was a public prosecutor and a judge. In recent days, he says, he has seen citizens of his city saying on television that they no longer dared go out on the streets, adding that he was at a loss.

"Every attack is one too many and terrible for the victims," Runkel says. "But in every city of 250,000, murders and rapes unfortunately occur. I can't confirm that refugees play an outsized role in such crimes." In 2015, Chemnitz hosted the initial reception center for all refugees who came to the state of Saxony. "We had 70,000 refugees in the city," Runkel says. "Of course there were scuffles," he says, before adding that the situation has calmed down significantly since then. Runkel can't remember a single crime from the last few years that was comparable to the one that just took place. In the city council responsible for crime prevention, loitering youth from all nationalities are an issue, as is better lighting. But not stabbings.

Recently, the city began investing 80,000 euros annually in a project aimed at promoting democracy, tolerance and cosmopolitanism in Chemnitz. Video cameras have recently been installed and a mobile police station has been set up where citizens can report their concerns. "The security situation in Chemnitz is good," Runkel says.

Nevertheless, even before the deadly attack on Daniel H., nothing had been so vigorously debated in the city as crime and alleged no-go areas in the city center. Customers were no longer frequenting restaurants. "But if you ask people, they say that nothing has ever happened to them," Runkel says. "There is a large amount of irrational fear."

Crime statistics for the state of Saxony support Runkel's assessment. The number of all crimes committed in Saxony dropped slightly last year, by 0.5 percent. There were fewer break-ins, fewer car thefts and fewer robberies. The number of crimes committed in communities along the border to the Czech Republic and Poland is at its lowest number in more than 10 years.

Who Cares About Statistics?

When it comes to serious crimes like murder and manslaughter, the number of cases is so low that fluctuations are more indicative of chance than of shifting trends. Last year, there were 27 murders and 69 cases of manslaughter in the state, which has a population of just over 4 million. Between 2011 and 2014, there were only around 110 cases of rape and aggravated sexual assault reported in Saxony each year. In 2015, the year of the huge influx of refugees, there were only 81 such cases. The numbers from 2017 can no longer be compared because of changes made to sex crime legislation and to the way in which statistics on such crimes are kept.

But who cares about the official statistics? Three AfD parliamentarians from Saxony certainly don't. They presented their own view of events at a press conference, with Tino Chrupalla, deputy AfD floor leader in the federal parliament, saying that citizens feared for their own safety and that of their children. He said there has been an increase in crime, "particularly in serious crimes like murder, theft and rape." A correspondent from public broadcaster ARD asked how he could reach that conclusion given that official statistics show that violent crime is dropping in Saxony. "I am not aware of your statistics," Chrupalla replied. "You'll have to show them to me, where they come from." They were from the State Criminal Police Office in Saxony.

Those statistics, though, also show that around one-fifth of the perpetrators -- exactly 18,949 of them -- are non-Germans, with around half of those being migrants. Police officials believe that 677 repeat offenders, mostly from Libya, Morocco, Tunisia and Georgia, were responsible for over 7,000 infractions.

Around 17 percent of the cases related to bodily harm, with sex crimes making up 1.5 percent of the total. Crimes that resulted in a death accounted for just 0.2 percent. But who are the victims? The statistics contain a number of conflicts inside of refugee hostels in addition to incidents of domestic violence. The statistics do not show how many Germans have been the victims of crimes committed by migrants.

At the same time, Saxony has long been at or near the top when it comes to right-wing crimes committed in Germany. According to a report compiled by the Office for the Protection of the Constitution, there were 95 such crimes in Saxony in 2017.

Those who are responsible for ensuring that the citizens of Chemnitz can live in the city free of fear now find themselves in the position of having to explain how they underestimated the size of the right-wing protests. Despite the fact that the Office for the Protection of the Constitution had warned of a number in the "mid four-digit range," the Chemnitz police declined to request backup ahead of Monday's protests. The "ugly images" from Chemnitz could only have been prevented with a "significantly larger force," says Jörg Radek, deputy national head of the Union of Police, one of two main police unions in Germany. "They certainly could have been requested from other states and from the federal government." But that didn't happen. "We underestimated the situation," a police spokesman admits.

Difficult Balancing Act

It isn't the first time that the Saxony police find themselves faced with suspicions of failing to confront the right wing with the necessary determination and force. The police, says a senior officer in an attempt to explain the sympathy held by some officers for AfD and Pegida, is a reflection of society and its development. The center of society is eroding, and the fringes are becoming stronger, he says. The police are not immune to such developments. "The balancing act is becoming increasingly difficult," the officer says. "Either you are a pro-refugee extremist or a Nazi."

Add to that frustration and an overload of work. In the early 2000s, Saxony began systematically cutting jobs in the police force. Each year, more people retired from the force than were recruited. Precincts were closed, leaving entire regions with almost no police. Hagen Husgen, state chairman of the police union, complains that there is little continuing education still available to the police forces in Saxony. Political education, he says, has been "entirely eliminated."

But there have also been some positive changes in Saxony, and Sebastian Reissig is keen to talk about them. Reissig is managing director of Aktion Zivilcourage, a nonprofit organization with 22 full-time employees that promotes civil courage. The initiative was launched 20 years ago as a voluntary youth association in the town of Pirna in response to the strong election showing by the neo-Nazi political party NPD and to violent acts carried out by far-right extremist groups. Reissig, who was 21 years old at the time, was one of the association's founding members. Today, he and his staff teach the basics of democracy and personal respect in schools and day care centers. "The support provided by the state has grown, but so has the need," says Reissig.

That such work can have a long-term effect can be seen in Pirna, a town south of Dresden that is home to a large number of active civic organizations and where those groups have a good working relationship with the responsible government authorities.

Reissig also points to the positive example set in Heidenau, the site of an incident which saw hundreds of demonstrators seeking to prevent asylum-seekers from entering their dormitory. Hundreds of people from around the region responded to a call for a civil courage initiative, one that resulted in many helping and volunteering to work with the refugees. But the 40-year-old laments that the national media are no longer interested in that story.

He says he's also aware of how big the right-wing extremist problem remains in Saxony today. "Political education and the addressing and discussion of controversial issues at school" has long been frowned upon, he says. "Neutrality in party politics was misunderstood as socio-political neutrality." But the new state government under CDU Governor Michael Kretschmer has finally made the issue a focus and has launched an extensive education program called "V as in Values" in schools. Saxony also has one of the most comprehensive extremism prevention programs in all of eastern Germany.

A History of Failure

But the history of the CDU in Saxony and the handling of right-wing extremism has for the most part been one of failure. Even Marco Wanderwitz, today a top official in the Federal Interior Ministry, admits: "We as the CDU in Saxony didn't look closely at right-wing extremism for many years and didn't do enough about it."

The troubles began immediately after the fall of communism, when Kurt Biedenkopf scored an election result of 53.8 percent, becoming the state's first post-communism governor. At that time, in September 1991, 500 people rioted in front of two foreigners' hostels in Hoyerswerda. The scenes were gruesome. Biedenkopf explained in an interview that people from the east simply weren't used to living together with people from other cultures. The conversation culminated in his realization that: "The real problem is immigration."

Only nine years later, he would claim that the Saxon population was "completely immune" to right-wing extremist temptations. In Saxony, he said, no buildings had been burned and no one had been killed yet. The truth, however, is that five people had been killed since the fall of the Wall in crimes fueled by far-right extremism. Even back then, the political opposition accused the government of having lost touch with reality.

Rather than dealing with the problem of radical youth in his state, Biedenkopf preferred to cultivate a brand of cozy regional patriotism. He promoted the image of "Saxons as being a particularly intelligent, particularly proud of their state and particularly amiable, possessed of a wonderful nature and producers of a fabulous generation of technicians," says Frank Richter, a theologist who was an East German civil rights activist and has long been the head of Saxony's State Center for Political Education. The tenor was: "Yes, perhaps we are better than the others." There was never a trace of self-criticism.

Little changed in terms of the state's commitment to combatting right-wing extremism under Biedenkopf's successor, Georg Milbradt. In 2007, an extreme right-wing mob attacked a group of Indians in the town of Mügeln in Saxony. The authorities refused to acknowledge that the crime might have been motivated by right-wing extremism, in part because Milbradt was concerned about the state's image. The official line was not that migrants has been attacked in Mügeln, but that the reputation of Mügeln itself had been attacked by outsiders.

For his part, Stanislaw Tillich, the subsequent state governor, a man who some rejected as a true Saxon since his family belonged to the state's Sorbian ethnic minority, at least changed the rhetoric. In a major speech delivered in July 2015, he issued a plea for greater international character and cosmopolitanism, and he strongly condemned violence and hatred against refugees. "I expect everyone in the Free State of Saxony to categorically oppose this," he said at the time. "We will not tolerate any of this." The attacks in Heidenau followed a short time later. Once again, Tillich offered clear words. "This is not our Saxony. A minority here is brutally violating Germany's values and laws." The problem is that, by that point, he was constantly having to make statements like that -- because similar events were happening all over the state.

Ugly Images Dating Back to Communism

To get a better picture of why the east, in particular, seems to provide so many ugly images of aggressive neo-Nazis, it helps to dive into history. Even under communist rule, pogroms took place in the state. Berlin historian Harry Waibel searched the East German archives and listed more than 8,600 instances of neo-Nazi, racist and anti-Semitic propaganda and violent crimes in the GDR and found that at least 10 people died.

During the communist era, foreigners, most of whom originated from the so-called "brother states" of the Eastern Bloc, were accommodated in their own halls of residence. The state didn't actually want those residents to integrate with the domestic population. Waibel's research shows that at least 40 racist attacks on these dormitories took place in the GDR since 1975. By contrast, Waibel notes that there were no known racist mob attacks on foreigner hostels in western Germany until 1992.

The reasons the researcher provides for the attacks sound familiar: social envy and social Darwinist views. Foreigners were accused of having the wrong attitudes toward work, and their personal hygiene habits were disparaged as "disgusting." The dissatisfaction of many Germans about their own political and economic situation manifested itself in aggression against migrants. The authorities in the east routinely turned a blind eye to what was happening.

The same slogans and epithets being used today were also present back then. In 1987, 50 Germans and 50 Arabs clashed in Leipzig, with the mob calling out: "Germany for the Germans," "Foreigners get out," and "Germany awaken." In the town of Merseburg, a rampaging mob drove a group of Cubans into the local Saale River, resulting in two drownings. No one was ever held accountable. The investigation was closed with the consent of the East German public prosecutor's office. "Particularly since there are no significant health and material damage," officials noted in the file.

The Mob Is Raging Again

Now the mob is rampaging once again, and one politician from the center-left Social Democrats (SPD) believes that only one thing can help restore democratic attitudes among the electorate in the long term: People need to start talking to each other. Saxon Economy Minister Martin Dulig is one of the few politicians who has spoken out clearly for years when the state has been hit by right-wing extremist riots, in part due to his own personal experience. In June 2015, right-wing extremists used baseball bats to strike a car they suspected was carrying supporters of a refugee hostel in the town of Freital. Dulig's son was one of the five passengers.

In response, Dulig literally donated his kitchen table to the cause of societal enlightenment two years ago. The state cabinet member takes it with him as he travels across the state to lend people his ear and a bit of support. Thus far, he has taken the so-called "Kitchen Table Tour" on the road 44 times.

On Tuesday, the table was high above the city of Meissen, in the ballroom of the former royal castle. The event was well-attended and there were eight chairs around Dulig's kitchen table. One of the chairs was occupied by the city's representative in federal parliament, Frank Richter. Like Dulig, Richter is a member of the SPD and would like to become Meissen's next mayor. The unoccupied chairs could be used by members of the audience who wanted to participate. As always at his events, the rules were clear: No interrupting and stick to the facts.

The main issue, of course, was Chemnitz. "I'm very depressed," Dulig said in the ballroom, adding that he had nothing but compassion for the family of the man who died, "but that nobody has the right to engage in vigilante justice." He also said, though, that the fight against right-wing extremism cannot be delegated solely to the politicians.

A woman took a seat and asked if it was acceptable to boo the AfD. Richter responded in the affirmative, but also warned that it might fall into the right-wing's strategy of driving society into combat mode. As such, he said, it's helpful to pull back and look at the forest through the trees and to focus the discussion on the actual issues. "With loud resistance, they get what they want," he said.

A restaurant owner who has employees from all over the world complained that people don't want to be served by foreigners. "I just ask those people to leave," he said. He then made a plea for immigration, reminding the audience that the German society is aging. "We need more offspring -- we haven't produced enough ourselves."

The subject of the AfD came up repeatedly. Dulig interjected. "Our greatest political opponent is not the AfD. It's the fear. We have to counter it with hope and confidence."

Odd Contradictions

In the summer of 2017, the German pollster Infratest dimap surveyed around 1,000 Saxons on behalf of the governor's office. The results revealed some odd contradictions: That the overwhelming majority of those surveyed consider Saxony to be a well-governed state, but they are deeply distrustful of the "politicians," for example. Some 81 percent want more direct democracy, but when it comes to political participation, they prefer to stay away.

They consider the most important problem facing the state to be "asylum policy" and "too many foreigners" as opposed to poverty among the elderly or public infrastructure. Fifty-six percent already consider the number of foreigners in the country to be "dangerous" although most of them claim that they hardly ever have any personal contact with foreigners. A full 38 percent would like to ban Muslims from immigrating to Germany.

At the same time, most in the state are satisfied with their own life situation -- their work, housing and free time -- and Saxons tend to be optimistic about the future. Yet many remain deeply convinced that they are not getting their fair share. Many Saxons feel that they are treated like second-class citizens.

"This ambivalence is typical of Saxony," says Hans Vorländer. The professor of political science at Dresden Technical University offers an explanation that focuses on the population's feeling that it is somehow being slighted. The first slight the professor identifies is the state's history. "There's a very specific Saxon victim narrative," he says. "It is rooted in the myth of the innocent, beautiful baroque city of Dresden, which was laid to ruins by British and American bombers." The Nazis cultivated that myth, as did the East German Communist Party. The city hosts an annual event commemorating the destruction of Dresden on Feb. 13, 1945, and with each year, the feeling gets more firmly entrenched among the population that they were the victims of uncontrollable events.

Then came the fall of communism and the invasion of outsiders: The West Germans, or Wessies, who occupied important positions in the state and often acted as if they were better at everything. This time, says Vorländer, the feeling of being slighted, the feeling of being punished through no fault of their own, spread far beyond Dresden and across the entire state.

And, finally, the third slight: the immigration of numerous Muslim migrants in 2015, which many Saxons perceived to be the next foreign invasion. "For many, this marked the final collapse of a world that had defined itself as Saxon."

But the state government, he says, ignored these slights and the lurch to the right that followed them. Even the middle classes for the most part kept quiet about what was happening. "There was a lack of a middle-class sounding board that could clearly articulate itself," Vorländer says. The emergence of a civil society with strong institutions and organizations, which took decades to establish in the West after the war, never happened in the GDR. The middle class defined itself in its niches through art, culture, science and literature. That's how things were -- at least until the strangers came from the West and thoughtlessly and often arrogantly turned things upside down according to their own rules. That, at least, is the perception of many who lost out as a result of the changes that came after reunification in 1990.

As Vorländer emphasizes, however, many in the state are now standing up against right-wing extremism. They provide support to the refugees and, as a civil society, do not accept hatred and violence. "They may be less visible, but they are the majority," he says.

A Surge in Support for Right-Wing Populists

In many places, Vorländer says, a crack is now running through the middle class in Saxony. Take, for example, the confrontation in Dresden between Durs Grünbein and Uwe Tellkamp, two authors born in Dresden who can no longer stand each other. Grünbein, a cosmopolitan type with homes in Berlin and Rome, and Tellkamp, who has spent most of his life in academic circles in Dresden's upscale Weisser Hirsch neighborhood. "Two different worlds are colliding here," says Vorländer. "Terms like heimat (homeland) and a strong regional identity on the one hand, and a cosmopolitan openness on the other."

This is where AfD and Pegida come into play, he says, "with the way they project things onto the foreigner, the Muslim and the black man from Africa who sexually harasses women. That's what the right-wing populists do. They give people a voice and explain the world to them. Migrants take away our jobs, they threaten our culture and they threaten our women. We have to get rid of the migrants, so that everything will go well for us again."

The AfD benefits demonstrably from this victim narrative. Polls conducted by Infratest dimap for German public broadcaster MDR, which broadcasts in the states of Saxony, Saxony-Anhalt and Thuringia, show that support for right-wing populists has risen significantly in the region. In Thuringia, support for the AfD currently stands at 23 percent, an increase of 10 percentage points over the previous year. In Saxony, the party is at 25 percent (an increase of 4 percentage points) in the polls, trailing the CDU by only 5 points. At the time of the most recent polls, the deadly knife attack in Chemnitz hadn't happened yet. But few doubt that it will fuel pro-AfD sentiment.

For quite some time, right-wing populists have been deliberately searching for suitable violent crimes they can exploit to gain political capital. And the wording of their propaganda often even surpasses the inflammatory jargon of the right-wing extremist NPD. Just look at the rhetoric of AfD parliamentary floor leader Alice Weidel, who said after the attack: "The slaughter goes on and on." AfD parliamentarian Markus Frohnmaier tweeted: "Today it is a civic duty to stop the deadly knife migration." He also indirectly called for vigilante justice. If "the state can no longer protect its citizens," then "the people will have to take to the streets to protect themselves."

When criticism mounted against Frohnmaier's tweet, AfD party boss Alexander Gauland stepped in to try and mollify critics. "Self-defense is certainly not vigilante justice. It doesn't mean anything more than that." But in the state of Hesse over in western Germany, AfD officials felt so empowered by events in Chemnitz that they waged a general attack on press freedom and issued a massive threat against journalists not to their liking.

Militant Voices

In a Facebook posting on Tuesday, the AfD chapter in a town near Frankfurt wrote that reporters would "still be given a chance to turn away from the system and report the truth." But then they added a warning: "In the revolutions we've known, at some point the offices of the broadcasters and publishing houses were stormed and the staff dragged out onto the street. Media representatives in this country should think about that, because if the mood finally flips, it will be too late." In this instance, too, the heads of the Hesse state chapter of the party distanced themselves from the posting and it was eventually deleted.

The militant comments made by the AfD politicians don't appear to just be a couple of off-the-cuff remarks made by loose cannons. There's a method to them. Confidential documents from the AfD "Convent," a body that helps to determine the party's political direction, show that considerations were made early on about how the party could strategically exploit headline-grabbing violent crimes.

In late summer of 2016, leading members of the AfD state chapter in Hesse made plans for turning public sentiment against the chancellor in the event of "Islamic attacks with fatalities or serious injuries." One motion made to the party convent was for "professional signs and banners" to be made that were to be emblazoned with "Thank you, Mrs. Merkel," that could be posted at "highly frequented sites." The banners should be "designed in the typical AfD look," distributed to state and district chapters and kept "in stock" there.

It isn't without irony that it is in eastern Germany where Angela Merkel, herself of East German extraction, is so passionately hated. There are few public spaces where the chancellor can make appearances there without being subjected to verbal attacks. As soon as she appears, people show up to scream at the "traitor to the people."

Merkel has never given a lot of consideration to eastern Germans' sensitivities. For the young physicist from Templin, the GDR was a small, old-fashioned world that she quickly left behind once the Wall fell. She didn't share the nostalgia that many eastern Germans had after the fall of communism. On the contrary: She was never able to completely hide her contempt for people who failed to seize the opportunities brought by the new era.

But nothing has alienated eastern Germans from Merkel to the degree the refugee crisis has. Of course, resistance against her open borders policy also quickly formed in the West, but it has never been as hate-filled as it has been in the east.

It was an alienation that could be felt on both sides. Merkel had no sympathy whatsoever for the special mixture of self-pity and aggression that enabled xenophobia to flourish in the east. And, in turn, many eastern Germans feel doubly betrayed by Merkel -- because she never came across as a champion of the east and when she suddenly found a heart for people during the refugee crisis, it was for ones who couldn't even speak German. The ugly term "traitor to the people," which Merkel is now slammed with in every corner in the east, speaks not only of anger, but also of a strange affront fueled by the belief that Merkel, in particular, must take special account of the complex emotional state of her compatriots.

'We Can Win This Battle'

Michael Kretschmer, who has been governor of Saxony since December 2017, also faces the challenge of determining where he will yield and when he will draw red lines when it comes to the needs of the people in his state. But the 43-year-old has already been astoundingly clear where he stands in the fight against right-wing extremism. When a far-right rock concert was scheduled to take place in Ostritz in Saxony in April, he took over the patronage of the counter-event. During that event, he said: "Let's send out a strong message together." Combating right-wing extremism is most successful, he said, when it comes from the center of society. He then joined a human chain. On May 1, he stood in the stands during a rally held by the labor union DGB in Chemnitz and called on all people to fight right-wing extremism.

The result was that Kretshmer's reaction following the riots in Chemnitz -- when he said that the events "need to wake up all of us" and that we "cannot let up in the fight against right-wing extremism" -- were broadly accepted as being authentic.

Kretschmer is from the city of Görlitz in Saxony. He's fond of pointing out the city's experiences when it comes to the right-wing. At the beginning of the 1990s, the city was home to a strong right-wing extremist scene. But prudent prevention efforts on the part of the police, the public prosecutor and schools have brought "peace and quiet" to the city. He now wants to apply the concepts there to the entire state. "We can win this battle," he says.

But that also seems like an astonishingly optimistic goal at a time when fear is still prevailing in Chemnitz. When the governor traveled to Chemnitz on Thursday for a long-planned town hall meeting, Pro-Chemnitz once again sent out a call to protest. There was no counter-protest because the participants' safety could not be guaranteed.

Chemnitz at the moment resembles a city in a police state. After Saxony sent out a request for help, the federal police sent hundreds of officers to the city, and other states also dispatched police reinforcements. Police officers can be seen at almost every intersection. A private security service stood guard at the meeting in City Hall.

But foreign students at the Technical University still aren't daring to leave home, even to just go to the library. The local theater's ballet director has also recommended to her dancers, many of whom come from other countries, that they not walk through the city alone.

In Chemnitz right now, it's clear who's winning this battle.

By Matthias Bartsch, Maik Baumgärtner, Jörg Diehl, Jan Friedmann, Lothar Gorris, Nils Klawitter, Martin Knobbe, Beate Lakotta, Katharina Meyer zu Eppendorf, René Pfister, Christopher Piltz, Sven Röbel, Fidelius Schmid, Charlotte Schönberger, Andreas Ulrich, David Walden, Wolf Wiedmann-Schmidt, Steffen Winter