Doing Harm with Uber-Dovish

Doug Nolan

This week’s FOMC meeting will be debated for years – perhaps even decades. The Fed essentially pre-committed to no rate hike in 2019. The committee downgraded both its growth and inflation forecasts. Having all at once turned of little consequence, we can now dismiss the 3.8% unemployment rate and the strongest wage growth in a decade. Moreover, the Fed announced it would be scaling back and then winding down balance sheet “normalization” by September. This put an impressive exclamation point on a historic policy shift since the December 19th meeting. At least for me, it hearkened back to a Rick Santelli moment: “What’s the Fed afraid of?”

Markets came into this week’s meeting fully anticipating a dovish Fed. Our central bank returned to the old playbook of beating expectations. In the process, the Federal Reserve doused an already flaming fixed-income marketplace with additional fuel.

After trading to 3.34% during November 8th trading, ten-year Treasury yields ended this week a full 90 bps lower at 2.44%, trading Friday at the lowest yields since December 2017. Yields were down 15 bps this week – 17 bps from Tuesday’s (pre-Fed day) close - and 28 bps so far in March. And with three-month T-bill rates at 2.40%, the three-month/10-year Treasury curve flattened to the narrowest spread since 2007 (briefly inverting Friday). Five-year Treasury yields ended the week inverted 16 bps to three-month T-bills – and two-year Treasuries were inverted about eight bps.

Collapsing sovereign yields were a global phenomenon. Japan’s 10-year JGB yields declined four bps Friday to negative eight bps (-0.08%), the lowest yields since September 2016. With Germany’s Markit Manufacturing index sinking to the lowest level since 2012 (44.7), bund yields dropped seven bps to negative 0.03% - also lows going back to September 2016. Swiss 10-year yields sank 12 bps this week to negative 0.45%. Two-year German yields closed out the week at negative 0.57%. UK 10-year yields dropped 20 bps (1.01%), Spain 12 bps (1.07%) and France 11 bps (0.35%).

The destabilizing impact of the Fed’s shift back to an uber-dovish posture was more conspicuous by week’s end. The S&P500 dropped 1.9% in Friday trading, with financial stocks coming under heavy pressure. In just three sessions, the KBW Bank Index was slammed 8.3% and the Broker/Dealers (NYSE Arca) lost 5.3%.

It wasn’t only the banks’ shares under pressure. Bank Credit default swap (CDS) prices reversed sharply higher this week, with European bank debt in the spotlight. Deutsche Bank 5yr CDS surged 24 bps this week to 168 bps, the largest weekly gain since late-November. UniCredit CDS jumped 22 bps (150bps), Intesa Sanpaulo 21 bps (159bps) and Credit Suisse 16 bps (84bps). An index of European subordinated bank debt surged 31 bps this week (to 177bps), the largest weekly gain since October 2014. Pressure on European bank CDS spilled over into European corporates. After trading to one-year lows in Tuesday trading, a popular European high-yield CDS (iTraxx Crossover) reversed 22 bps higher in three sessions (to 281bps) – posting its worst week since mid-December.

Friday trading saw European CDS instability jump the Atlantic. Late-week losses saw most major U.S. bank CDS rise modestly for the week. After closing Tuesday near one-year lows, U.S. investment-grade corporate CDS jumped 10 bps in three sessions to end the week about 10 bps higher. This index suffered its largest weekly gain (higher protection costs) since the week of December 21 (reducing y-t-d decline to 20bps). The week saw junk bonds notably underperform. Sinking financial stocks, widening spreads and rising CDS prices fed into equities volatility. After ending last week at the lows (12.88) since early-October, the VIX popped to 16.48 (also the largest weekly gain since the week of December 21).

It’s now commonly accepted that the Federal Reserve erred in raising rates 25 bps in December. I hold the view that Chairman Powell had hoped to lower the “Fed put” strike price. The Fed was willing to disregard some market instability, hoping to begin the process of the markets standing on their own. The Fed just didn’t appreciate the degree of latent market fragility that had been accumulating over the years. I don’t fault them for trying.

In the name of promoting financial stability after a decade of extraordinary stimulus measures, it was prudent for the Fed to adhere to a course of gradual rate normalization even in the face of some market weakness. GDP expanded at a 3.4% rate in Q3 and slowed somewhat to 2.6% during Q4. After a decade-long expansion, periods of economic moderation should be expected (and welcomed).

Some analysts see this week’s dovish posture as part of a FOMC effort to rectify its December misdeed. Markets now see about a 60% probability of a 2019 rate cut – with zero likelihood of a hike through January 2020. The Fed’s dot plot - still with one additional rate increase in 2020 – has lost all market credibility.

March 22 – Bloomberg (Matthew Boesler and Jeanna Smialek): “Federal Reserve policy makers have concluded that when in doubt, do no harm. Welcome to the new abnormal. Six months ago, U.S. central bankers thought they’d soon be returning to the days of on-target inflation, full employment and interest rates that, while lower than in decades past, would still need to rise into growth-restricting territory to keep things on track. But in a watershed moment, the Federal Reserve surprised investors… by slashing rate projections to show no hike this year. Officials signaled expectations for a slowdown in the economy… and they no longer expect inflation to rise above their 2% target. The move was a serious about-face. Since September 2017, they had signaled they would probably need to eventually raise rates above their estimate of the so-called neutral level for the economy… to slow the expansion and protect against the possibility of higher inflation. That was based on a longstanding view in the economics profession about how the economy works: If central bankers allow the unemployment rate to fall too far below its lowest sustainable level by keeping rates too low, then inflation will rise.”

There’s been a bevy of interesting analysis the past few days. The “New Abnormal” from the above Bloomberg article headline caught my attention. Responding to “New Normal” (Pimco) pontification, I titled an October 2009 CBB “The Newest Abnormal.” My argument almost a decade ago was that “activist” central banks were just doing what they had done repeatedly – only more aggressively: responding to bursting Bubbles with reflationary policymaking that would ensure the inflation of only bigger and more precarious Bubbles.

I didn’t back then believe it possible for central banks to orchestrate a successful inflation. I have great conviction in this analysis today. The popular notion of inflating out of debt problems is way too simplistic. Just inflate the general price level and reduce real debt burdens, as the thinking goes. The problem is that debt levels have expanded greatly, right along with securities and asset prices – and speculative excess. Aggregate measures of consumer prices, meanwhile, were left in the dust. The Great Credit Bubble has ballooned uncontrollably; asset price Bubbles have significantly worsened; and speculative Bubbles have become only more deeply embedded throughout global finance.

Bond markets were anything but oblivious to Bubble Dynamics back in 2007 - and have become only more keenly fixated here in 2019. I strongly argue that dysfunctional global markets are in a more precarious position today than in 2007, a view anything but diminished by this week’s developments. Wednesday’s statement and Powell press conference were viewed as confirming that the Fed is preparing to reinstitute aggressive policy stimulus.

With acute fragilities revealed in December, the Fed and global central bankers are on edge and scrambling. Markets see the Fed’s aggressive dovish push suggesting that the Fed – after December’s missteps – is now poised to err on the side of being early and aggressive with stimulus measures. In safe haven bond land, the Fed has evoked vivid images of monetary “shock and awe.”

Analysts are focusing on sovereign yields and an inverted Treasury curve as foreshadowing recession. I would counter with the view that bond markets appreciate global Bubble fragilities and are now pricing in the inevitability of rate cuts and new QE programs. Yield curves (at home and abroad) are more about market dynamics and prospective monetary policy than the real economy. As such, the strong correlations between safe haven and risk assets are no confounding mystery. Safe haven assets these days have no fear of “risk on.” After all, surging global risk markets only exacerbate systemic risk, ensuring more problematic Bubbles, central bankers operating with hair triggers, and the near certainty of aggressive future monetary stimulus.

Friday’s market instability had market participants searching for an explanation. Is there a significant development moving markets? Negative news coming from the China/U.S. trade front?

There could be something out there spooking the markets. Or perhaps the big story of the week was that Fed uber-dovishness pushed global bond markets and fixed-income derivatives toward dislocation. From the above Bloomberg article: “Federal Reserve policy makers have concluded that when in doubt, do no harm.” Maybe the Fed, trying too hard to compensate for December, is doing harm to market stability.

DoubleLine Capital’s Jeffrey Gundlach (from Reuters): “This U-Turn - on nothing fundamentally changing - is unprecedented. Three months ago, we were on ‘autopilot’ with the balance sheet - and now the bond market is priced for a rate cut this year. The reversal in their stance is stunning.”

Perhaps the disorderly drop in safe haven yields has led to a problematic widening of Credit spreads. The easy returns being made long higher-yielding Credit instruments versus a short in Treasuries have come to an abrupt conclusion. Could serious problems be unfolding in the derivatives markets, along with major losses for levered players caught on the wrong side of illiquid and rapidly moving markets. Is the Fed’s stunning “U-turn” market destabilizing – with great irony, fomenting “risk off” deleveraging?

What is the Federal Reserve’s reaction function? What factors will be driving policy decisions going forward? The Fed set rates at about zero (0 to 25bps) in January 2009 and left them unchanged for six years. The Fed then raised rates 25 bps in December 2015, 25 bps in December 2016 – and then cautiously increased rates six more times spaced over the next three years. The Fed’s balance sheet was roughly stable from Q4 2014 through Q4 2017 and has been in gradual/predictable runoff for the past five quarters. For years now, Fed policy has been usually certain. Rate and balance sheet “normalization” were to proceed at an extraordinarily measured pace. No surprises. Bypassing a tightening of financial conditions, the “autopilot” Fed was conducive to aggressive market positioning/speculation (and leveraging).

An unusual era of monetary policy stability/predictability formally ended Wednesday. Balance sheet “normalization” is being brought to an early conclusion. Markets now assume the next rate move is lower. And with the Fed apparently turning its focus to persistently undershooting consumer price inflation, it is reasonable to assume it’s only a matter of time until the Fed resorts once again to QE. But when and at what quantity?

Especially with three years of rate “normalization” ending with Fed funds at only 2.25% to 2.50%, markets well-recognize there’s meager stimulus potential available in rate policy. Will the Fed even bother with rate cuts – or be compelled to move directly to QE? Suddenly, the future of monetary policy appears awfully murky.

Come the next serious stimulus push, it will be the Fed’s balance sheet called upon to do the heavy lifting. And, for those pondering a likely catalyst, I’d say look no further than a global market accident – omen December. As such, it now matters greatly that QE has evolved from an extreme policy response necessary to counter the “worst crisis since the Great Depression” - to a prominent tool in the Fed’s (and global central banking) toolkit readily available to counter risks of economic weakness and stock market instability.

Throw in the concept of late-cycle “Terminal Excess” – appreciating that policymakers, from Beijing to Tokyo to Frankfurt, London, Canberra, Toronto, Washington and beyond, are prolonging a most precarious cycle – and one can build a solid case for big trouble and big QE brewing. With this in mind, it’s not difficult to get quite concerned for the stability of global bond markets, along with securities, derivatives and asset markets more generally. And with markets unsettled, it probably didn't help to have the largest ever monthly federal deficit ($234bn), with the y-t-d deficit after five months ($544bn) running 40% ahead of fiscal 2018 - or that President Trump announced the nomination of Stephen Moore to the Federal Reserve.

Brexit Chaos

Theresa May's Days Are Numbered. Now What?

By Jörg Schindler

A poster of Theresa May: Few believe the Brexit problem will be easier to solve once the British prime minister is out of office.

Even if British Prime Minister Theresa May's last attempt to get her much-maligned withdrawal agreement through parliament succeeds, she is unlikely to keep her job. But whoever comes next probably won't manage to defuse the crisis.

Boris Johnson recently had his hair cut short. In the past few weeks, he has visibly lost weight. He has even learned to hold his tongue. When the former British foreign secretary left parliament in Westminster last Tuesday, he was, as always, confronted by journalists. But the man who otherwise never avoids a microphone pushed his ski hat down and walked off.

Since then, London's political pundits have been convinced that Johnson is up to something. They claim he's merely waiting for the right moment to catapult himself back into the spotlight. That day, it seems, is not so far away.

After another bruising week in the United Kingdom, the end game has started. Not only for Brexit, but also for the prime minister. Theresa May herself pointed out in front of parliament on Wednesday that her days as prime minister might soon be numbered.

That much was already clear to anyone who saw Theresa May's unabashedly populistic televised address on Wednesday, with which she tried to deflect any blame from herself. Or who has read her listless letter to European Union leaders, in which she almost beseechingly requested an extension to the misery. Or who has listened to her level-headed fellow party member Dominic Grieve, who said that, because of her, he has "never been more ashamed to be a Conservative."

"She may stagger through London for another few months," says a long-time ally, predicting that, even if she manages to push through the widely hated withdrawal agreement at the last moment, "she can longer save herself."

During the biggest crisis in postwar United Kingdom history, many leading politicians are ever more blatantly positioning themselves to succeed May. This includes a handful of incumbent ministers, who should have their hands full preventing their country from drifting into chaos. It reflects the situation's core problem: While Brexit is a foreign-policy issue for the rest of Europe, in London it revolves primarily around a battle for domestic power.

Backstage at Westminster, a shameful performance is taking place. No matter what happens, everything suggests that this power struggle will make the perpetual-motion machine that is Brexit harder to solve. Considering the way things are going, the second phase of negotiations with the EU -- should they, at some point, occur -- will likely be carried out by a Brexit hardliner.

Europe needs to prepare itself for the worst.

Contenders in the Wings

Former Brexit Minister Dominic Raab was among the first to put himself up for May's job. At a conservative think tank in mid-March, the shrewd 45-year-old gave a speech about "unleashing the great British underdog." His supporters launched a Facebook page called "Ready for Raab." Its appeal, however, has remained modest. Thus far, only 114 people have become fans.

Foreign Secretary Jeremy Hunt and Home Secretary Sajid Javid have been subtler. Both were recently seen in the government quarter apparently wooing members of the party over breakfast or a glass of wine. Both are supposedly recruiting employees for an election campaign.

And both are trying, somewhat clumsily, to rid themselves of their moderate image to appeal to their party's right-wing margins: Hunt by comparing the EU to the Soviet Union, Javid by denying a British woman who joined Islamic State the right to return home from Syria. But the fact that the 19-year-old recently lost her newborn in a refugee camp dealt a heavy blow to Javid's leadership ambitions. Suddenly the home secretary, the first Muslim to have one of the country's top posts, seemed like a heartless technocrat.

Aside from Raab, Hunt and Javid, at least six other prominent Tories have been ogling the move into 10 Downing Street. The Times of London wrote that it was May's own fault that countless backbenchers were seriously considering running as her successor. It quoted a conservative lawmaker as saying that the prime minister's questionable performance had made others believe they would be suitable for the office as well.

But Boris Johnson is considered the most likely to land the position. The fact that the former leader of the Brexit campaign seems to embarrass himself every time he opens his mouth doesn't seem to bother a large contingent of Conservative voters. On the contrary. People look up to the 54-year-old when he describes Muslims as looking like a "bank robber" or "letter boxes," or when he claims money spent solving old child-abuse cases was cash "spaffed up a wall."

This week, several female Tory lawmakers said they would prefer to leave the party than serve under Johnson. But the party base, which has drifted to the right during the Brexit years, would doubtless vote for Johnson. They love him for his vision of a "glorious future" for a UK, that, once free of the EU's shackles, will find its way back to greatness.

It's not clear if Johnson will ever be able to demonstrate how that is supposed to happen. According to Tory party statues, it is up to the parliamentarians to reduce the number of applicants in a multi-stage voting process. The base would then be allowed to vote between the two remaining candidates.

Boris Johnson, who is good at talking but less good at maneuvering, will thus carefully consider his behavior in the coming days and weeks. And he will have to find a way to help topple May without too much blowback falling on him alone.

A Leader On Her Way Out

Even if May emphasized this week that, as "prime minister," she will not go along with a years-long delay in Brexit, it is unlikely she will go of her own accord. However, her room to maneuver has, since the end of this week, shrunken to a minimum.

Early this coming week, May will make what will presumably be her last attempt to force the withdrawal agreement she negotiated with the EU through parliament. If she succeeds, the EU will reward her country with several weeks of additional time to implement Brexit technically.

If that happens, May will become the person who carried out the UK's divorce from the EU. But hardly anyone believes this would save her. A member of London's political apparatus said, "Maybe she will experience another honeymoon -- but it wouldn't last more than three minutes."

Only a small minority believe that May's situation will really change after a third vote. It's much more likely that, in the coming week, parliament will hand her a third, and final, defeat. After that, the lawmakers would then take de facto control of government business to avoid a no-deal scenario, one that would be grim for all of Europe.

The United Kingdom would need to ask the EU as soon as possible for, likely, a nine-month, but possibly a two-year extension of the Brexit deadline. At the EU summit on Thursday, several heads of state ruled out that possibility -- but nobody believes that, if worse comes to worst, the EU would actually push the UK off the cliff.

EU chief negotiator Michel Barnier recently named the price for a generous extension: The United Kingdom and Northern Ireland need to be willing to tie themselves much more tightly to the EU than had previously been planned, and stay in the common market and in the customs union. Alternatively, according to Barnier, London could carry out a new election or a second referendum.

It seems impossible that any of these scenarios could be carried out while Downing Street's current stubborn occupant remains in power. She has bound her fate too tightly to her deal. If Theresa May doesn't step down at that point, at the latest, the opposition will likely engineer another vote of no-confidence. This time, however, there might be enough rebels among the Tories to help push her out of power. In Downing Street, many are counting on the end being nigh. Tory parliamentarians are comparing the situation there, in all seriousness, to Hitler's last days in his bunker.

Few believe the Brexit problem will be easier to solve once May is out of office. "Whoever is Conservative leader after Theresa May -- Henry Kissinger, Nelson Mandela, Donald Trump -- Britain will still be in the same position, with a relatively weak negotiating hand facing a fairly united negotiating partner," columnist Daniel Finkelstein wrote in The Times of London.

That is especially relevant if the successor's name is Boris Johnson. During his three years of Brexit machinations, the former Brussels correspondent has revealed a shocking ignorance of the way the EU functions. His recommendation was always to stay hard so the EU would give in. So far, though, that strategy hasn't panned out.

People in Brussels are concerned they will have to tolerate the unpredictable political lunatic during the highly complex second phase of negotiations centering on the future relationship between the UK and the EU. Moderate Brits are also worried about "BoJo." In any case, they can't expect him to by any better at bridging the deep gaps Brexit has dug in the country. Parliamentarian Anna Soubry recently put it this way: If Boris was to take over, "then God be with us."

Has Monetary Easing Really Run Its Course?

After years of unprecedentedly easy monetary policy in the world's advanced economies, many are warning that the stimulus potential is depleted, particularly in Japan, with its negative short-term interest rate. But this view fails to account for the exchange-rate mechanism by which monetary policy is transmitted to the real economy.

Koichi Hamada

japan stocks

TOKYO – Since the 2008 global financial crisis, expansionary monetary policy has been the order of the day in most of the major advanced economies. This approach – comprising deep interest-rate cuts and large-scale asset purchases (quantitative easing, or QE) – has been credited with accelerating the recovery in the United States and the United Kingdom, and pulling the eurozone back from the brink of collapse. As for Japan – which introduced monetary easing in late 2012 as the first “arrow” of Abenomics, Prime Minister Shinzo Abe’s economic-reform program – the policy has contributed to the creation of about 2.5 million jobs.

Yet, with low interest rates implying that central banks will have little ammunition to fight the next economic downturn, has reliance on generous monetary conditions to sustain growth gone too far?

The conventional view, in line with textbook Keynesian economics, is that monetary expansion works through the interest rate: by reducing the cost of money, a lower interest rate stimulates domestic investment, spurring growth. Once the interest rate gets too close to zero, below which it usually cannot be reduced, monetary easing is no longer an effective economic stimulus. By this standard, Japan – with a short-term interest rate of -0.1% and a ten-year government-bond yield target of around 0% – would seem no longer to be benefiting from its expansionary monetary policy.

Monetarists, however, argue that Keynesian theory fails to account for the “real balance effect”: given sticky prices, monetary expansion will increase the real value of the money stock, thereby raising household net wealth and stimulating consumption. Moreover, as Harry Johnson pointed out, in a flexible exchange-rate system, monetary easing reduces a currency’s value vis-à-vis the rest of the world, thereby boosting external demand.

For some, this is not entirely good news. They fear that this will fuel a “beggar thy neighbor” dynamic, with some countries’ QE-driven currency devaluations causing severe damage to others. But this concern ignores a key fact: the exchange rate is always anchored to the relative quantity of money in the system.

Just as the relative prices of apples and oranges tend to balance out at a level that reflects the ratio between quantities of apples and oranges, the relative values of, say, dollars and yen are ultimately determined by the relative share of dollar and yen assets in the international market. Some traders call this ratio the “Soros chart,” after George Soros, perhaps the world’s premier currency investor (though Soros told me in 2014 that he knew nothing of the chart).

Given this dynamic, in a flexible system, any negative spillovers of one country’s monetary expansion can be counteracted by other countries, so long as their monetary authorities recognize the exchange-rate mechanism for transmitting monetary policy.

Consider the challenge faced by Japan since 2008. When the US and the UK introduced QE after the crisis, the increase in the relative amount of dollars and pounds in the international market drove up the yen’s value. The Bank of Japan could have taken action to counter this effect, but then-Governor Masaaki Shirakawa was apparently not fully aware of the implications of the Soros chart for the exchange rate.

Eventually, with the introduction of Abenomics, the BOJ under Haruhiko Kuroda introduced the needed monetary policy. But it was too late to change the fact that Japan experienced a sharper growth slowdown than the US and the UK, the epicenters of the global economic crisis.

Assessing the enduring potential of expansionary monetary policy – and avoiding a repetition of the mistakes made by the BOJ after 2008 – requires us to look beyond interest rates. Columbia University’s Jeffrey D. Sachs recognizes this. Whereas most contemporary economists focus primarily on the interest-rate mechanism for the transmission of monetary easing, Sachs showed in his study of interwar currency devaluations that the direct-quantity effect of the swelling money supply on the exchange rate, which is crucial for the real economy, commanded direct attention.

Yet the narrow traditional view, formerly held by the Bank for International Settlements, remains dominant, including among top officials at major central banks, such as the BOJ. For them, the positive effects of QE since the crisis seem more like a coincidence than evidence of a reliable policy, much less one with undeployed potential. The risk of disaster should central banks like the BOJ reverse their expansionary monetary policies too quickly far exceeds that of maintaining their current stance too long.

Koichi Hamada is Professor Emeritus at Yale University and a special adviser to Japanese Prime Minister Shinzo Abe.

US waits on findings of Mueller report in to Trump Russia ties

Justice department says no more indictments to come from special counsel

Kadhim Shubber, Demetri Sevastopulo and Courtney Weaver in Washington

US attorney general William Barr leaving his home on Saturday. He is expected to brief members of Congress on the Mueller report this weekend. © Getty

The US Congress was waiting to receive the conclusions of Robert Mueller’s investigation into links between Donald Trump’s 2016 election campaign and Russia, following the end of a 22-month probe the US president has repeatedly slammed as a “witch hunt”.

The White House had still not been briefed on the contents of the special counsel report on Saturday, said Hogan Gidley, deputy spokesperson for the president. William Barr, the US attorney-general, was reviewing the report and would not be releasing its conclusions until at least Sunday, justice department officials said.

Since Mr Barr received the confidential report on Friday evening from Mr Mueller, a former FBI director who was tapped as special counsel for the Russia probe, Washington has been rife with speculation about its findings. Democrats on Saturday debated how to respond to the report once its conclusions were known, and repeated their demands for full transparency.

In a letter to key members of Congress, Mr Barr said he might be able to provide lawmakers with the conclusions of the report “as soon as this weekend”. He added that he was “committed to as much transparency as possible” and would keep Congress “informed as to the status of my review”.

A justice department official said Mr Mueller had not recommended any further indictments, and it was unclear on Saturday what conclusions Mr Mueller had reached about Mr Trump. Justice department guidelines prevent federal prosecutors from indicting a sitting president.

Mr Mueller — who was appointed after Mr Trump fired James Comey as FBI director — ended his investigation without bringing any public charges alleging a conspiracy between the Trump campaign and the Kremlin. As part of his inquiry, Mr Mueller also investigated whether Mr Trump attempted to obstruct justice by trying to pressure Mr Comey to drop parts of the initial probe and then by firing Mr Comey.

Mr Trump has faced continuing suspicion because of his odd relationship with Russian president Vladimir Putin. The US president has repeatedly refused to criticise the Russian leader even though American intelligence has concluded that Mr Putin ordered interference into the 2016 US election.

Congressional Democrats and many of the Democratic presidential contenders for the 2020 election called immediately for Mr Barr, who was recently appointed by Mr Trump to replace Jeff Sessions, to release the report to the public and to provide lawmakers with any underlying documents.

“Attorney-General Barr must not give President Trump . . . any sneak preview,” said Nancy Pelosi, the Democratic Speaker of the House of Representatives, and Chuck Schumer, the top Senate Democrat. “The White House must not be allowed to interfere in decisions about what parts of those findings or evidence are made public.”

Mr Trump, who has spent two years attacking the Russia probe, remained uncharacteristically silent, spending Saturday playing golf with musician Kid Rock in Florida.

Mr Mueller had attempted to interview Mr Trump in person but the move was blocked by the president’s lawyers who would only allow him to submit written answers to questions.

Sarah Sanders, the president’s press secretary, said the White House looked “forward to the process taking its course” and that it had “not received or been briefed on the . . . report”.

Peter Carr, spokesperson for the special counsel, said Mr Mueller would “be concluding his service in the coming days”.

The conclusion of the Mueller investigation marked the start of a new phase of the Trump presidency — one that could be dominated by the battle over how much of the report and evidence is made public.

Democratic congressional aides said the House judiciary committee would subpoena the full report and its underlying documents if Mr Barr did not release them publicly. Democrats have also left open the possibility that they could subpoena Mr Mueller to testify before Congress.

Earlier this month, the House voted almost unanimously to support the full release of the report. On Wednesday Mr Trump told reporters he was happy for the report to be published. “Let it come out. Let people see it,” he said.

The delivery of the report moves the spotlight to congressional investigators and prosecutors in New York who are investigating Mr Trump’s financial affairs. During the course of his probe, Mr Mueller spun out a swath of matters that continue to be examined by other parts of the justice department. Those inquiries pose a risk to Mr Trump, particularly from the US attorney’s office for the southern district of New York.

Should Democrats receive the conclusions of the report, they also will probably debate whether there are grounds to attempt to impeach the president.

Ms Pelosi has repeatedly indicated that she has no intention of leading impeachment proceedings against Mr Trump. In recent weeks, she has argued that impeachment would be divisive for the country, unless there was compelling evidence that would spark bipartisan support. Other Democrats have warned that any attempt at impeachment would energise Trump voters ahead of the 2020 election.

Jerry Nadler, the Democratic head of the House judiciary committee who holds the power to launch impeachment proceedings, has also played down that likelihood. This month he said members of Congress would need very convincing evidence to prove they were not merely attempting to overturn the 2016 election.

While the implications for Mr Trump remain unknown, Mr Mueller, a respected former head of the FBI and a Vietnam war veteran, has racked up several indictments and guilty pleas that detail Russian activities during the 2016 election campaign.

Mr Mueller has secured guilty pleas from five associates of Mr Trump for crimes that include lying about their contacts with Russians, including Paul Manafort, who served as his campaign manager, and Michael Flynn, a retired general who was fired after several weeks as national security adviser.

Mr Mueller also indicted a sixth associate of the president, Roger Stone, who has pleaded not guilty and has yet to be tried. The special counsel also charged 28 Russian nationals and entities with interfering in the election through social media propaganda campaigns and the hacking of Democratic emails.The nearly two-year long investigation, which began in May 2017, was remarkable for both its speed and the absence of leaks to the media. At a recent event, Abbe Lowell, an attorney for Jared Kushner, Mr Trump’s son-in-law, said: “Nobody has done it better than Mueller and his team.”

In his letter, Mr Barr said Mr Mueller had not been prevented from taking any steps he had wished to take. The disclosure, which is required by the special counsel regulations, indicated that Mr Mueller carried out his investigation without interference from the officials who oversaw the probe.

The report was delivered to Mr Rosenstein on Friday by a security officer from the special counsel’s office and was relayed to the attorney-general within minutes, according to the justice department official. The White House was notified that the report had been received around 4.40pm on Friday.

The moment came during a congressional recess, meaning most lawmakers were out of Washington and in their home districts.

Kamala Harris, the California senator who is running for the Democratic presidential nomination, said Mr Barr must ensure there was “total transparency”.

“A declassified report must be made public immediately, and all underlying investigative materials should be handed over to Congress,” said Ms Harris, who called on Mr Barr to testify under oath before Congress.

Other Democratic presidential contenders — ranging from Cory Booker to Elizabeth Warren to Amy Klobuchar — also called for the report to be released.

Many Republicans also want the report to be made public, including Doug Collins, the top Republican on the House judiciary committee.

Geopolitics and Necessity

By George Friedman

I began this series with thoughts on Athens and Jerusalem not only because they were the roots of Christianity and Western civilization but because they both encountered Persia, in different ways and toward different ends. This leads me to the question: What determines the fates of nations and cities? In part, it is the question of why two proximate cities, which both uncover the principle of moral absolutes, approach those absolutes in such different ways. It also raises the fundamental question of geopolitics – that is, what makes various political entities so different, and what leads them to act as they do? These questions are extremely difficult to answer, but it is the last question that is central to geopolitics.

In all human things, there is a distinction between free will and determinism. Free will assumes that our lives are the result of our choices. Determinism assumes that, to an overwhelming degree, life is determined by forces beyond our control. Any theory of political life – or of our own lives for that matter – pivots on this distinction. There are certain things that we choose, but many of those choices are determined by the places where we are born and live. Consider an Eskimo living in the Arctic circle. Consider an Egyptian peasant born in a poor village of the Nile Delta. Consider someone born in Austin, Texas, and attending a fine private school. Each of them has limits imposed on them and opportunities given to them by place. The Austinite may reasonably dream of many things, but he may neither want nor have access to the lives of the other two. The life of the Eskimo excludes many of the Austinite’s options and places those options outside his awareness. But there are other things he may dream of that others can’t conceive. The Egyptian may visit Cairo and imagine many things, but his circumstances likely preclude them.

Free will exists within the framework and limits of the place you inhabit. This is not an absolute; individuals may somehow carve their way out of their matrix. But they are the outliers. When we consider the general condition of humans, their lives are constrained by the place in which they are born. Free will exists, but the menu from which we choose is determined, and, for most of us, there is no ordering outside of the menu.

The notion of free will often assumes we are free of constraints. But the reality is that our lives are lived within constraints, limiting the options we have to make the most of what is possible.

Our lives are shaped by necessity, and it is this necessity, the choices it imposes on us and the vast number of choices it precludes, that determines our lives. It is the concept of necessity that

I am driving at and that I am applying to communities even more than to individuals.

I’m using the term “community” here to describe the wide array of political arrangements in which human beings organize themselves. There are tribes, cities, nations, empires – and within this array of groups, innumerable ways to organize them. But they all have a single characteristic: They have leaders. How leaders are selected, what power they have and how they can use it varies enormously, but in the end, all communities have leaders. The question of our personal free will and necessity leads to the question at the core of geopolitics. To what extent does the nature and will of the leader matter? Put differently, is the leader trapped in the necessity in which the nation finds itself?

Aristotle leads us to the broader point: If humans are political animals, and if, as I argued, humans do not fully rule themselves, then how can political leaders rule their communities?

Are leaders simply agents of a necessity imposed on them by the circumstances of their communities, or are they free to take their communities where their wisdom leads?

Do political leaders matter, and is the political process of a nation so shaped by circumstance that it can do nothing other than what it is doing? To what extent did Solomon craft Israel’s policy, and to what extent did he simply execute a policy imposed on him by the circumstance in which Israel found itself?

Geopolitics is founded on two assumptions. The first is that a community’s location defines the community. Second, the political system, particularly the leader, is trapped within that reality, and the leader’s decisions are shaped by that reality. To state it bluntly, on the most basic level, political leaders don’t count.

Neither Sparta nor Athens could survive under Persian rule. The Spartans’ mode of fighting, imposed by their rugged, landlocked environment, was built on infantry, and the infantry was the heart of the state. The Persians were attacking Sparta through hills and chokepoints. Spartan infantry had to resist the Persians at a chokepoint to buy time. Athens was a maritime city and, as such, a naval power.

Persia was attacking by land but supplying and reinforcing its army by sea. Therefore, Athens had to engage and defeat the Persians at sea. Sparta’s moral code was based on its strategic necessity: an infantry force honed from birth. Athens’ moral code was far subtler and more nuanced, as befits a great port city. And its navy, manned by men of complex values, was a superb instrument of war.

Success was not guaranteed. But the strategy was built into the geography – as were the capabilities of each city and a culture that aligned with their strategy. Leadership may have been needed because political rhetoric takes a community to a necessary war. But there were no strategic decisions to be made. No one who would have chosen a different course could have risen to the leadership of either city. Victory was not certain, but the strategy arose from necessity.

Consider Israel’s national strategy, which has been the same since antiquity and is comprised of four pillars. First, maintain the unity of Israel. Second, defend the Jordan River line against Babylon or Persia. Third, block Egypt by controlling the coastal road and engaging in the Negev Desert when needed. Finally, hold the Sea of Galilee to prevent the forces of Phoenician cities from heading south.

Israel was only occasionally robust enough to pursue all these imperatives. And given the multiple enemies it had has and its long defensive lines, the more ambitious the state, the more widely its forces were dispersed. But for a nation situated where Israel is, this was the strategy it had to pursue. And Israeli culture stemmed from it: It encouraged maximum wealth while maintaining a substantial military reserve. Leaders would have little alternative.

Of course, I am focusing here on military matters, rather than more complex economic and political issues. But when we eliminate those we call “decision-makers,” we find that the choices are few, and the decisions dictated. The obsession with the personality of leaders is natural. Leaders are the totems that comfort or frighten a nation. But rulers are forged through a national culture born of necessity; by the time they lead, they have been trained to understand the necessity, and they are constrained by reality.

This is a radical argument, and it touches on Karl Marx’s argument that the course of history was set, and ideology and leaders were mere “superstructures.” (He derived that idea from Georg Hegel, upon whom I also depend.) But Marx argued that class was the fundamental division in human history. I am arguing that it is the nation that matters today. In the wars of the 20th century, the proletariat and bourgeoisie remained committed to their nations. Marx understood necessity, but not, in my opinion, the nature of community.

And that requires thought on the nature of the nation – a fragment from the heart of geopolitics and political philosophy as well. Is it possible to think of a human being outside the context of a political community?

‘There’s No Money Right Now’: China’s Building Boom Runs Into a Great Wall of Debt

A county in China’s deep south went on a borrowing binge to fund development. Several unfinished projects later, investors want their money back.

By Chao Deng

An unfinished outdoor stadium in Sandu, which missed its first payment in September, catching investors off guard.
An unfinished outdoor stadium in Sandu, which missed its first payment in September, catching investors off guard. Photo: Chao Deng/The Wall Street Journal

SANHE, China—A building splurge in this impoverished pocket of rural China ended in half-finished projects and a trail of angry investors from some of the country’s wealthiest areas.

On a recent winter workday, investors and representatives from private fund companies in Shanghai and elsewhere descended on Sandu, a county in the deep south where tens of thousands of locals live on less than a dollar a day. After taxi rides from the high-speed rail station that took them past incomplete buildings and a gigantic golden statue of a man on horseback, they sat in government offices, demanding repayment.

“We sympathize with you investors,” Jian Shiwei, deputy general manager of a Sandu government-backed investment company that borrowed hundreds of millions of yuan to develop the area. “But there’s no money right now.”

The standoff in Sandu is a microcosm of China’s mounting debt problem. Across the country, local governments and their more than 2,000 financing companies have run up trillions of dollars of debt to borrow and build their way to prosperity, tapping into ready financing from well-off investors chasing higher returns. Now the bills are coming due, and China’s slowing economy, curbs by Beijing on risky financing—and the massive scale of borrowing—are plaguing repayment and leaving some investors in limbo.

After the confrontation with investors and just before this month’s Lunar New Year holiday, Sandu hustled out interest payments for some overdue obligations. Still, investors and brokers estimate that the government and its companies will need to deliver two billion yuan ($297.6 million) more in payments this year, nearly three times Sandu’s annual revenue.

“Sandu has its problems, but we can’t blame it,” said Jiang Xiaqiu, a factory owner and investor who bought 1.6 million yuan of Sandu’s debt via a private fund in Beijing, with an advertised 9% annual return. “It’s the whole financial system and how poorly regulated the private fund industry has been.”

Sandu’s government debt totaled 3.73 billion yuan in 2017, according to official figures. Deputy propaganda chief Wu Maohua declined to comment on what the sum includes; some economists, analysts and experts say it doesn’t cover recent borrowings by government-backed investment companies, including off-the-book borrowing from private funds.

Mr. Wu said the county is working to resolve its debts, pointing to the overdue payments given to some investors. “You can see the government is being very diligent,” he said.

For its borrowing spree, Sandu turned to funds like the one Ms. Jiang invested in. These privately offered funds have mushroomed, with more than 74,000 of them, nearly 10 times the number five years ago. Independent brokers and wealth advisers market the funds to well-off clients. Ms. Jiang said a broker connected her with fund managers.

The proliferation of private funds and other money-raising channels for local governments makes it difficult for economists and for Beijing to track the total amount of borrowings. Official figures pegged the sum of local and central government debt at 29.95 trillion yuan ($4.457 trillion) in 2017, roughly 36% of the economy.

An unfinished horse-racing track, adjacent to an Olympic-scale sports center.
An unfinished horse-racing track, adjacent to an Olympic-scale sports center. Photo: Chao Deng/The Wall Street Journal 

Off-balance-sheet borrowings by local governments are estimated to be nearly just as much, at 23.6 trillion yuan by 2017, according to Zhang Ming, an economist at the Chinese Academy of Social Sciences, a government think tank. When this hidden debt is factored in, he said, total government debt is about 67% of the economy. But the proportion is much higher in some places, such as less-developed areas trying to catch up, and Mr. Zhang’s estimates don’t capture all borrowings, especially those involving private funds outside banking channels.

In southern Guizhou province, where Sandu is located, infrastructure investment has risen more than 20% each year for much of the past decade, according to official data, and Mr. Zhang estimates that the debts of the local governments reached 120% of gross domestic product.

When Sandu launched ambitious plans to renovate dilapidated housing, promote tourism and boost local incomes, it turned to brokers working with private fund managers, local financial exchanges and others. One prospectus to back construction of a road from Sandu’s high-speed rail station touted Guizhou’s fast growth, pictured idyllic mountain villages and offered up to 10% annual returns. The Wall Street Journal identified seven products packaged by private firms and sold to investors or on local financial exchanges. In some cases, a Sandu investment firm borrowed on behalf of the government in 2016, after Beijing had barred such practices.

Then, Sandu’s Communist Party secretary was removed in a bribery investigation, and the costs of the massive-scale projects began to fall due. The county missed its first payment in September, catching many investors off guard. 
With courts lacking the power to enforce judgments on governments or state-backed companies, Ms. Jiang and other investors knew they would have to confront Sandu officials to get repaid, and started investigating the county’s finances.

Some were shocked to find how poor Sandu is: Its revenue totaled 712.3 million yuan in 2017, a fraction of that in big cities. They were also stunned by the scale of construction in Sandu and how much lay incomplete.

On their repayment quest, some of them visited an abandoned outdoor stadium, an Olympic-scale sports center with a horse-racing track, and a building that looked like an unfinished Roman Colosseum with concentric circles of cement arches. At a sprawling hotel, amphitheater and indoor basketball complex that was collecting dirt and rain, construction workers complained about not being paid.

An unfinished Roman Colosseum-like structure; Sandu locals don’t know what the government planned to use it for.
An unfinished Roman Colosseum-like structure; Sandu locals don’t know what the government planned to use it for. Photo: Chao Deng/The Wall Street Journal

Mr. Wu, the deputy propaganda chief, declined to comment on specific projects. He said the county of roughly 400,000 people is now focused on alleviating poverty, a national priority. Its goal by 2020 is to eliminate poverty—defined by the government as living on less than 95 cents a day—from 17% in 2017.

The investors trying to get their money back found themselves largely stymied. Officials shunted some of them into different offices, trying to reduce the numbers in a conference room where Mr. Jian, the local asset manager, was outnumbered.

“We are being trampled to death by you guys,” said an investor from the provincial capital. Another investor said: “Can’t you go hungry and just pay?” Mr. Jian chain-smoked and looked at his two mobile phones.

Liu Min, a private fund manager from Shanghai in a white overcoat carrying a Louis Vuitton handbag, had raised millions of yuan for Sandu by selling its debt to high-net-worth clients. After a futile meeting with two lower-level officials, she went to the office of Sandu’s party secretary. Getting no clear answer, she left town.

Days later, a 500,000-yuan ($74,400) transfer came through, followed by 700,000 yuan in January, making up for her overdue interest. As for 20 million yuan in principal her company is due this March, she expects to be forced into a delayed repayment plan.

“I guess they’ll want us to talk to our clients about an extension,” she said. “They really don’t have the money.”

Chinese Banks Will Rise or Fall With the Property Market

China’s banks are increasingly exposed to the country’s noxious property market

By Mike Bird

Residential buildings in China’s Jiangsu province. The financial health of the country’s main lenders hinges on what happens in the property market.
Residential buildings in China’s Jiangsu province. The financial health of the country’s main lenders hinges on what happens in the property market. Photo: china stringer network/Reuters 

Chinese stimulus is here and the country’s banks are riding the rally that’s come with it. CSI 300 bank stocks are up 16.6% this year, after being spared the worst of 2018’s selloff.

As policy makers in Beijing attempt to arrest the recent economic downturn, commercial lending to the private sector is in focus. Regulators have asked Chinese banks to raise their lending to small firms by 30% this year.

But the financial health of the country’s main lenders depends most on what happens in the precarious property market, leaving would-be investors exposed to one of the thorniest challenges for China’s economic model.

During the last decade, the share of the loan books of Bank of China, Agricultural Bank of China and the Industrial & Commercial Bank of China made up of commercial and real estate-mortgage loans have each risen by about 10 percentage points. Lending for real-estate transactions has made up the lion’s share of growth in banks’ outstanding assets.

As a result, it’s what happens in the housing market that drives bank shares.

Research published by two Federal Reserve economists last year showed that between 2010 and 2017, a 1% increase in house prices in a Chinese city that a bank had particularly large exposure to—measured by the proportion of its branches located there—was associated with a 1.64% rise in that bank’s share price on average.

Near term, the good news is that Chinese house prices were already ticking up before the recent stimulus efforts got under way. In the 12 months to January, price growth in China’s cities rose at its sharpest pace since mid-2017.

Longer term, there’s little to be optimistic about. Beijing will do its best to avoid property prices falling, given the importance of tax revenue from land sales and the fact that property is the main savings vehicle for ordinary citizens. But policy makers will also want to prevent further big price increases, with homeownership currently out of reach for millions of young workers.

The composition of commercial lending is important for China’s economy, which needs to find a way to redirect credit from its megalithic state-owned industrial firms to private entrepreneurship. But the immediate and crucial factor for the country’s large banks lies elsewhere.

Rather than be trapped in the toxic triangle of politics, finance and property, investors should instead ask whether they want to own Chinese bank stocks at all.