Cracks are opening in the global monetary system

Central bankers have bought growth by sacrificing financial stability

Russell Napier

© AP

While many investors are fretting over what stage of the business cycle we are in, the global monetary system is collapsing — with a whimper initially, but ultimately a bang. The whimper is causing losses for equity investors. The bang will impact global asset prices as much as the end of the Bretton-Woods system or the end of the gold standard.

The system that is ending has no name. It is a system patched together in the embers of the Asian economic crisis, when many countries intervened in the foreign exchange markets to prevent the appreciation of their currencies. The impacts for investors were profound. The roughly $10tn rise in world foreign exchange reserves between 1999 and 2014 resulted in the forced purchasing of US Treasuries. Foreign central bankers owned just 13 per cent of the Treasury market in 1995, but held a third of it by 2014.

This monetary system thus provided a funding holiday for global savers, freeing them to focus on funding the private sector instead. Meanwhile, central bank liabilities increased by $10tn. What could be better for global investors than a monetary system that depressed the global risk-free rate while boosting growth through an explosive rise in the money supply of emerging markets, particularly China? For equity investors the combination of a low discount rate and high growth rate drove prices and valuations higher until 2014.

Since then, though, as foreign exchange reserves have stopped climbing, the job of funding the US government has fallen to savers, not central bankers. Foreign central bank ownership of US Treasuries has fallen from a third five years ago to just under a quarter today. Savers must take up the funding slack, while also buying the Treasuries now being sold by the Federal Reserve. This structural shift in the demand for Treasuries comes as supply is boosted by the Trump administration’s fiscal policy. Savers now have to fund the US government, and to do so they have to either sell other assets or save more. All the movements in asset prices over the past six months bear witness to the huge shift in savings under way, with negative implications ultimately for economic growth. The whimper is evident, but how will the bang look?

Lower growth, lower inflation, lower asset prices and the prospect of declining cash flows will always raise questions about solvency. The global ratio of non-financial debt to gross domestic product is 234 per cent, compared with 210 per cent in December 2007, just before the last credit crisis. If the bang of credit default was possible 12 years ago, how much more likely is it today? For 10 years the growth of debt has outstripped growth in broad money and nominal GDP. Central bankers have bought growth by sacrificing financial stability.

The other side of low growth in world foreign reserves is the low growth in the money supply of exchange-rate targeting regimes. These problems are particularly acute in China, with broad money growth at its lowest in the post-Mao era. The country’s debt-to-GDP ratio is rising at probably the fastest rate ever for a big economy in peacetime. This is the economy that we are told is de-gearing and reflating! It is not, and the burden of the economic adjustment enforced by the end of the growth in its foreign exchange reserves, and hence money supply, will probably be deflationary and will involve debt default. China will probably move to a flexible exchange rate, thus creating the freedom to grow and inflate away these debts. It is that exchange-rate adjustment that will destroy the current global monetary system.
 The key consequence of this collapse will be the destruction of the euro. The expected success of the far-right and far-left in the European parliamentary election in May this year augurs the beginning of the end for the currency union. Both extremes share a commitment to the return of sovereignty to their parliaments that is incompatible with a single currency. That end will come even more quickly with the resultant economic pain from the collapse of the global monetary system, and it is likely to begin with the imposition of capital controls by key eurozone countries.

In the financial, political and social maelstrom of a eurozone dissolution, investors should not expect property rights to be respected. The UK, where democracy and the rule of law will remain largely unchallenged, will become an attractive safe-haven investment for European investors facing increasingly authoritarian regimes and property sequestration on the mainland. Monetary collapses bring social and political ruptures and we now face two such collapses. It would be naive for any investor to assume that “government of the people, by the people, for the people” will survive such ruptures. The risks remain highest in Europe.

Russell Napier is an independent market strategist and founder of the online research platform, ERIC

IMF flags trade war threat and warns of global economic slowdown

Fund revises down growth forecasts to 3.5% this year and 3.6% in 2020

Chris Giles in Davos

The IMF’s revised estimates represent a significant shift for the global economic outlook © AFP

The global economy is weakening faster than expected as trade wars and financial market volatility further undermine the investment climate, the IMF said on Monday at the start of this year’s World Economic Forum in Davos.

World leaders and business titans have converged on the Swiss ski resort, chastened by the recent economic weakness from Asia to Europe, saying that populism and the policies of international conflict are taking their toll on global economic prospects.

Corporate bosses have been left reeling by the rapid change in sentiment that has followed a ratcheting up of trade tensions over the past year and Monday’s news that China’s official growth rate had slowed to its weakest level since 1990.

Alongside the downgrades in the IMF’s growth forecasts, a survey of chief executives by PwC noted a sharp jump in pessimism compared with their almost universal buoyancy a year ago.

The PwC survey showed that almost a third of chief executives believing the global outlook would darken compared with only 5 per cent a year ago. “With the rise of trade tension and protectionism it stands to reason that confidence is waning,” said Bob Moritz, the professional services group’s global chairman.  
The IMF blamed its more pessimistic forecasts mostly on weaknesses in Europe and Japan that slowed momentum in the global economy. It said the biggest downgrades had come in advanced economies where growth was set to drop from 2.3 per cent in 2018, to 2 per cent in 2019 and 1.7 per cent in 2020.
Some of the effects of trade wars had already been felt, the IMF said, which had led to the weakening of global trade growth. More concerning, the outlook could be even worse.
“The true underlying impetus could be even weaker than the data indicate, as the headline numbers may have been lifted by import front-loading ahead of tariff hikes, as well as by an uptick in tech exports with the launch of new products,” the IMF said.
This concern about trade and globalisation was echoed on Monday by the UN’s trade and development body, which reported a 19 per cent fall in global foreign direct investment in 2018 as US companies repatriated funds to take advantage of new tax breaks, pulling money out of the global economy.
These forces led the IMF to revise down its main economic forecasts, with the fund now predicting that the global economy would slow from 3.7 per cent growth in 2018, to 3.5 per cent in 2019 and 3.6 per cent in 2020. The uptick in 2020 was due to expectations that Turkey and Argentina would suffer deep recessions in 2019, before recovering the following year.
The new estimates are 0.2 percentage points and 0.1 percentage points respectively below the IMF’s more recent forecasts in October.

The IMF report painted a fragile picture of the world economy at a time when leaders have become more focused on domestic matters. It called for greater international co-operation to give business more confidence to invest in the future.

Gita Gopinath, the new IMF chief economist, said: “The downward revisions are modest. However, we believe the risks to more significant downward corrections are rising.”

“The cyclical forces that propelled broad-based global growth since the second half of 2017 may be weakening somewhat faster than we expected in October . . . While this does not mean we are staring at a major downturn, it is important to take stock of the many rising risks,” she added.

One specific risk highlighted by the IMF was that Britain would exit the EU without a negotiated agreement — a no-deal Brexit. The fund said this outcome was a “rising possibility” that could have negative spillovers across Europe.

As China reported its weakest growth since 1990, the IMF predicted the slowdown could be steeper than expected, which Ms Gopinath said might “trigger abrupt sell-offs in financial and commodity markets as was the case in 2015-16”.

The fund also expressed concern about the budgetary position of Italy, which is suffering from weakness in its banking sector. “A protracted period of elevated [Italian bond] yields would put further stress on Italian banks, weigh on economic activity, and worsen debt dynamics,” the IMF said in its report.

The fund called on countries to resolve trade tensions and for a smooth Brexit, all of which are more difficult because the US and UK administrations will be absent from Davos due to mounting domestic crises.

“The main policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilising an already slowing global economy,” Ms Gopinath said.

Warning to Investors: Powell Is No Greenspan

Despite the similarities in the setup, Jerome Powell’s Federal Reserve will be less accommodative than Alan Greenspan’s was in 1999 following a spell of slowdown worries

By Justin Lahart

Former Federal Reserve Chairman Alan Greenspan in 2016.
Former Federal Reserve Chairman Alan Greenspan in 2016. Photo: saul loeb/Agence France-Presse/Getty Images

The 2019 playbook for the stock market is looking a bit like the playbook from 1999. This time, though, the Federal Reserve might not cooperate.

Stocks have found their footing lately and a lot of that has to do with the central bank. In response to worries that the economy will face more formidable headwinds this year than last, the Fed seems to have dialed back its plans to raise rates, and Chairman Jerome Powell has said that mild inflation allows the central bank to take a flexible approach toward setting policy. Since hitting a 20-month low in late December, the S&P 500 is up about 10%.

How powerful the economic headwinds are is anyone’s guess. While the combination of slowing growth overseas, fading tax-cut and spending stimulus and the cumulative effects of the Fed’s rate increases suggest the economy should slow, that hasn’t shown up in the hard data. Some survey-based measures have softened, such as the Institute for Supply Management’s manufacturing report and Duke University’s quarterly poll of chief financial officers, but that may have more to do with the tumult in stocks and weakness abroad than the U.S. economy.

If not a repeat, the situation at least rhymes with what was happening around the start of 1999. Back then, markets still were recovering from the Russian debt crisis—an event that had precipitated the collapse of hedge fund Long Term Capital Management, pushed survey-based measures lower and led the Fed to cut rates three times in the fall of 1998.

Not long into 1999, it was clear that the economy wasn’t in such dire straits as feared, yet the Fed didn’t start taking back its rate increases until late June, helping fuel a massive rally in stocks. A big reason for the delayed response: Inflation was cooling, and Fed Chairman Alan Greenspan argued that technological advances were boosting productivity, allowing economic growth to accelerate without price pressures.

But the drop in inflation wasn’t really about productivity, notes Robert Barbera, co-director for the Center for Financial Economics at Johns Hopkins University. Rather the slowdown overseas had sent the dollar up, import prices down and oil prices to multidecade lows.

Unemployment kept falling and stocks reached skyward, but it wasn’t until inflation reasserted itself that the Fed started tightening the screws. In early 2000, the dot-com bubble burst and that was that.

Mr. Powell seems unlikely to confuse overseas weakness and a booming economy with a productivity miracle. Nor, if stocks start to stage a 1999-style rally, would he likely be as sanguine on the market risks as Mr. Greenspan. Indeed, 2013 Fed-meeting transcripts released last week show that Mr. Powell worries about what can happen when investors take on too much risk. “It’s worth remembering the power of another financial shock to damage the economy,” he said, according to the transcripts.

And for investors, it is worth remembering that somebody other than Alan Greenspan is in charge of the Fed.

Quantitative Brainwashing

By Jeff Thomas

We’re all familiar with the term, “quantitative easing.” It’s described as meaning, “A monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.”

Well, that sounds reasonable… even beneficial. But, unfortunately, that’s not really the whole story.

When QE was implemented, the purchasing power was weak and both government and personal debt had become so great that further borrowing would not solve the problem; it would only postpone it and, in the end, exacerbate it. Effectively, QE is not a solution to an economic problem, it’s a bonus of epic proportions, given to banks by governments, at the expense of the taxpayer.

But, of course, we shouldn’t be surprised that governments have passed off a massive redistribution of wealth from the taxpayer to their pals in the banking sector with such clever terms. Governments of today have become extremely adept at creating euphemisms for their misdeeds in order to pull the wool over the eyes of the populace.

At this point, we cannot turn on the daily news without being fed a full meal of carefully- worded mumbo jumbo, designed to further overwhelm whatever small voices of truth may be out there.

Let’s put this in perspective for a moment.

For millennia, political leaders have been in the practice of altering, confusing and even obliterating the truth, when possible. And it’s probably safe to say that, for as long as there have been media, there have been political leaders doing their best to control them.

During times of war, political leaders have serially restricted the media from simply telling the truth. During the American civil war, President Lincoln shut down some 300 newspapers and arrested some 14,000 journalists who had the audacity to contradict his statements to the public.

As extreme as that may sound, this practice has been more the rule in history than the exception.

In most countries, in most eras, some publications go against the official story line and may very well pay a price for doing so. But, other publications go along with the official story line to a greater or lesser degree and are often rewarded for doing so.

It should come as no surprise, then, that media outlets often come to report the news in a less than accurate manner.

Mark Twain is claimed to have said, “If you don’t read the newspaper, you’re uninformed. If you do read the newspaper, you’re misinformed.” Quite so.

Still, only fifty years ago, much of the then “Free World” enjoyed a relatively objective Press. Even on television, reporters such as Walter Cronkite, Huntley and Brinkley, etc. presented the news in a bland manner. It wasn’t very exciting, but at least it was relatively balanced and, to this day, most people who were around then still have no idea as to whether reporters like Walter Cronkite were liberal or conservative. Although he was a committed Democrat, he never allowed that to significantly colour his reporting.

But today, we have a very different corporate structure as regards the media. The same six corporations hold the controlling interest of over 80% of the media. And those same corporations also own a controlling interest in the military industrial complex, Wall Street, the major banks, Big Pharma, etc.

What we’re witnessing today is media having been transformed into something more akin to a three-ring circus than journalism of old. This is no accident.

The present travesty that is the 21st century media, is journalism in name only.

So, why should this be so?

Well, as it happens, people tend not to like governments dominating their lives – simple as that.

And yet, the primary objective of any government is to increase its size and power as rapidly as the populace will tolerate it. The only reason that they rarely do this quickly, is that they can’t get away with it. Like boiling a frog, it takes time to lull the populace into submission, bit by bit.  
Once having had enough time to do so, there comes a point at which the government becomes woefully top-heavy, as well as unworkably autocratic. At such times, all that’s necessary to make people rebel is an economic crisis.

Such is the case in much of the world today – the EU, the US, Canada, etc.. Even in their arrogance, the powers that be have to be aware that they’re right at the tipping point. An economic crisis would almost certainly push the situation over the edge.

When truth threatens to undermine machinations for self-aggrandizement, individuals tend to obfuscate in order to delay the inevitable fallout. Governments are no different.

So it was that, in 1999, the largest banks entered into a massive lending scam that would most certainly collapse within a decade. However, before putting the scam in place, they arranged for a “bailout” by the government, which would effectively pass the bill to the taxpayer, while the banks themselves simply increased their own wealth massively.

Of course, QE, as massive as it was, was a mere Band-Aid solution. All those involved (big business and the government) understood that it would hang like a sword of Damocles over the economy until it inevitably came crashing down – a fate far worse than if QE had never been implemented.

And so, for those entities to have invested into the domination of the media was, in fact, essential. Had they not done so, it’s entirely likely that, with a free press, the man on the street would, by now, have figured out that he’d been hoodwinked.

Thus do we see the journalistic equivalent of Quantitative Brainwashing, in which the inevitable realization is delayed for as long as possible.

And, in order to make sure that the public do not figure out what’s been done to them, the news reporting becomes Orwellian in its endless repetition of a false narrative.

It is, however, true that, “You can’t fool all of the people all of the time.” Eventually, the Band-Aid peels back to reveal an infection that’s far beyond what had been generally perceived. It then falls away in layers, as increasing numbers of people become aware that they’ve been scammed – that the media is entirely corrupt and that the media’s owners – big business - have, with the enthusiastic compliance of the government, robbed them on a wholesale basis.

Historically, that’s when the jig is up. What happens then is a matter of historic record.

miércoles, enero 23, 2019



Ukraine’s Crumbling Economy

The country’s persistent economic strife is veering toward crisis.

By Ekaterina Zolotova         

Ukraine is in internal disarray. Driving the disarray is its deteriorating economic situation. While poor economic conditions predate the 2014 revolution, the subsequent Russia-backed insurgencies and annexation of Crimea exacerbated the underlying economic problems and forced Ukraine to attempt a rapid reorientation toward the West. Ukraine staved off potential disaster in December when the International Monetary Fund, as part of its four-year assistance program, approved a new $3.9 billion standby loan, $1.4 billion of which has been disbursed. (Ukrainian government debt is now approaching 70 percent of gross domestic product.) But the program is just a Band-Aid. This year will be a serious test for Ukraine, as millions of citizens – already hurting from the current conditions – will feel the pinch of economic reforms mandated by Ukraine’s creditors.
Rising Prices, Plummeting Conditions
Although some official statistics paint an artificially rosy picture, by almost any metric the economic situation in Ukraine is in danger of becoming critical. According to the U.N. resident coordinator in Ukraine, while 4 percent of the Ukrainian population lives below the national poverty line (defined as 75 percent of the median income), some 60 percent live below the subsistence minimum. Ukraine’s social policy minister noted that between 2014 and 2017, poverty in Ukraine rose from 8 percent to 55 percent. Improvements in the economy can more often be traced back to bureaucratic siphoning of budget funds to prop up entrepreneurs than to any actual improvements among the general population.

Inflation is becoming a pernicious problem. While the official inflation rate has been around 10 percent since last June, Ukrainian research and media firms suggest it’s much higher. Vesti-UA reported the prices of 87 percent of consumer staples have increased. Info-Shuvar reported that the price of potatoes doubled since the beginning of November, and Obozrevatel said that such increases were not limited to potatoes. According to the State Statistics Service, the price of onions has increased by 115 percent, cabbage and carrots by 60 percent and beets by 30 percent (compared to the same time last year). Bread, flour, semolina and bacon have seen price hikes between 14 and 17 percent, while the prices of beef, fish and sausage have reportedly increased between 9 and 11 percent.


Other consumer goods and services are feeling the effects of inflation, too. Public transit fares have risen by 26 percent. Cigarette prices are up 16 percent, and antibiotics cost around 10 percent more than they did a year ago. Looming largest, however, are natural gas price increases. The IMF has mandated that Ukraine cut natural gas subsidies if it wants to remain in good standing. Ukraine has resisted; still, starting May 1 the price of natural gas is slated to increase by 15 percent, and beginning in 2020 it will be sold at market rates. (Due to previous price hikes, Ukrainians are now paying roughly 40 percent of the market price for gas. In 2015, they paid only 12 percent.) At the same time, the volume of natural gas in Ukraine’s underground storage facilities has fallen to 43 percent of capacity. Ukrainians should prepare to pay more for this key commodity or fall back on the coal industry.

Reports suggest that deepening poverty and fear of increasing military activity are prompting a new wave of migration as Ukrainians seek better economic conditions elsewhere. This is not a new phenomenon: According to the IMF, between 2 million and 3 million Ukrainians work abroad, while the government estimates that 3.2 million Ukrainian citizens are living abroad permanently. (The U.N. estimated that in 2017, roughly 6 million Ukrainians were living abroad in total.) The IMF has said the increase in the number of Ukrainian emigrants is becoming a domestic political issue. One opposition party leader said that “poverty makes Ukrainians [want] to work abroad, sometimes people have to work in terrible conditions and with old equipment.”

The increased migration has resulted in long queues at the Uspenka checkpoint, on the Ukraine-Russia border near occupied Donetsk. Eyewitnesses said there were more than 200 cars queued up to enter Russia – though apparently, it’s possible to purchase a better place in line for 2,000 Russian rubles ($30). Details on this specific outflow are sparse, and at least some of the increased traffic may be a result of people returning to Russia after Christmas, which the Orthodox world celebrated Jan. 7. It remains to be seen if the situation will stabilize in the coming days.
Government Inaction
It’s hard to know whether the Ukrainian government’s inability to tackle these problems is a symptom or cause. Either way, Kiev is increasingly unable to support its citizens. The government needs cash to pay off the foreign loans it took out in 2014-2015, valued at roughly $17 billion. (Coincidentally, that’s about the value of the country’s entire gold and foreign currency reserves, which total $17.7 billion.) The bulk of these repayments are due in the second half of 2019, just as natural gas subsidies are slashed, prices are climbing and elections are held.

Meanwhile, Kiev has increased military spending, a political necessity considering that the government has made the threat of Russian aggression a key campaign talking point. In December, Interfax reported that the government planned to increase spending on the army in 2019 by 16 percent – for a total of about $16 billion. Funding for the defense and security sectors will top 5 percent of GDP. (In 2017, only 5 countries spent a greater percentage of their GDP on the military.) Russia is a real threat to the government. But so are elections – and they go a long way to explaining why President Petro Poroshenko, who after 2014 promised to “live in a new way,” now touts the slogan, “Army, Language, Faith.”

What this boils down to is that Ukrainian authorities – whether pro- or anti-Russia – will need an infusion of cash in 2019. Oligarchs have money, but they’re not going to spend it on Poroshenko. (Instead, they may throw their own hats into the ring this election cycle.) The IMF remains a key option for the president. Decisions on the next tranches of the standby program will be made in May and November this year. They will hinge on Ukraine’s ability to slash its budget, reduce inflation while maintaining a flexible exchange rate, privatize state-owned businesses and increase natural gas prices. Ukrainian citizens won’t be happy with these reforms, and it won’t be easy for presidential candidates to appeal to the population while staying on good terms with the IMF.

Pursuing one of these imperatives necessarily hinders the other, which puts Ukraine in the unenviable position of having to choose between choices that are all bad.