500 Years Later... The Revolution Is Just Beginning

Authored by Simon Black via SovereignMan.com,

500 years ago to the day, on October 31, 1517, a German monk of the Augustinian order named Martin Luther sent a letter to his Archbishop expressing concern about certain practices of Church officials.

In Luther’s era it had become typical for clergymen to sell ‘indulgences’ to anyone who wanted to be pardoned for sins.

Martin Luther felt this practice was a terrible affront to Christian doctrine, so he sent a letter up the chain of command outlining 95 logical points in his argument.

Luther’s letter was hardly a revolutionary work. He was polite. Formal. Almost apologetic.

He actually asks forgiveness of the Archbisop for having “dared to think of a letter to the height of your Sublimity.”

And yet this letter is responsible for kicking off one of the most important social transformations in all of human history, what we now call the Protestant Reformation.

The Reformation was ultimately about rejection of central authority… specifically, the Church.

When the fall of Rome in the 5th century AD left a power vacuum across Western Europe, it was the Catholic Church that stepped in to fill this void.

By the 1500s the Church had firmly cemented its influence over nearly every aspect of life– commerce, politics, economics, family affairs, war, social trends, etc.

At the core of the Church’s power was its theological monopoly.

Remember that the Bible was written in Latin back then… a language that few commoners could speak, let alone read. So Church officials had uncontested control over their flock.

Imagine that benevolent space aliens came to Earth tomorrow morning brandishing a book filled with hidden secrets of the universe.

Sounds exciting. Except that the book is only written in their alien language. So anyone who wanted to understand the secrets would have no choice but to listen to the aliens.

The Church had this same authority 500 years ago… though there was already a growing constituency that had become tired of blind obedience.

Martin Luther became the champion of Catholics who were weary of Church authority.

He was immediately viewed as a threat by the Pope in Rome, and Church officials ordered their top scholars to refute Luther’s arguments.

Luther responded by writing a short, simple explanation of his views in the local German language so that common people could read it and understand it.

It was incredibly popular and widely circulated… which infuriated the Pope even more.

With the Church’s every effort to silence and malign Martin Luther, he responded with more simple, German language essays for the locals.

His popularity grew. Young people flocked to his aid, to the point that they seized and destroyed some of the Church’s anti-Luther propaganda.

By the time the Church excommunicated Martin Luther in 1521, he was already a hero and symbol of the revolution.

The following year, Luther’s German-language translation of the New Testament was published.

It was revolutionary. For the first time in 1,000 years, people had the resources to reject Church authority and explore their own spiritual beliefs.

Suddenly there was no more middle man standing between an individual and his relationship with a higher power– it was the ultimate in decentralization.

Underpinning this entire revolution was relatively new game-changing technology– the movable-type printing press.

The printing press had already been around in Europe for several decades. But it wasn’t until Martin Luther that the invention factored so heavily into social change.

With this powerful technology at their disposal, Luther and his followers were able to rapidly publish their ideas (including the German-language Bible) and spread them across the continent faster than had ever been achieved before.

I thought this was appropriate to bring up today because, on the 500th anniversary of Martin Luther’s 95 Theses, the echoes of history remain with us… and it’s easy to see similar examples of decentralization and rejection of authority underpinned by game-changing technology.

Over the past several years, for example, there have been a number of revolutions (starting with the Arab Spring movement) supported by relatively new technologies like social media and mobile mesh networks.

But perhaps the most prevalent example today is Bitcoin and the blockchain.

Cryptocurrencies represent the antithesis of the traditional monetary system.

While our dollars, pounds, pesos, and euros are all highly centralized and under the total authority of unelected central bankers, cryptocurrencies are decentralized.

There is no central authority with Bitcoin. Its value is determined by the market… its community of users, not some bureaucratic committee.

And whenever there is disagreement within the community about a cryptocurrency’s fundamentals or technological limitations, participants have the option to split off on their own.

This is known as a ‘hard fork’. And Bitcoin alone has had a few so far.

Bitcoin forked in July with ‘Bitcoin Cash’ splitting off. And just last week Bitcoin forked again with the creation of ‘Bitcoin Gold’.

Bitcoin Gold and Bitcoin Cash both have technological differences from the original Bitcoin. But the larger point is that the community can choose which one they want to follow.

(I wish traditional currencies could fork; that Greece and Germany are in the same monetary union suggests that the EURO is in DESPERATE need of a hard fork.)

For some reason the media always makes a big deal about these forks, viewing them as a weakness.

They’re wrong. It’s a BIG strength. And it’s quite common in software.

GNU/Linux is an operating system kernel, for example, that has forked countless times since its creation.

Today there’s Redhat Linux, Debian, Ubuntu, Fedora, Kali, CentOS, and dozens of other distributions. Each has its own particular strengths and weaknesses.

But the user is free to choose based on his/her specific needs.

Microsoft Windows, on the other hand, is 100% centralized. The user has no choice.

Forks are crucial for any idea to evolve… which means the concepts behind crypto will only get better.

This is just the beginning. The monetary revolution is absolutely underway. And at a minimum, it’s worth learning about.

Do you have a Plan B?

The World Is Creeping Toward De-Dollarization

The issue of when a global reserve currency begins or ends is not an exact science. There are no press releases announcing it, and neither are there big international conferences that end with the signing of treaties and a photo shoot. Nevertheless we can say with confidence that the reign of every world reserve currency has to come to and end at some point in time. During a changeover from one global currency to another, gold (and to a lesser extent silver) has always played a decisive role.

Central banks and governments have long been aware that the dollar has a sell-by date as a reserve currency. But it has taken until now for the subject to be discussed openly. The fact that the issue has been on the radar of a powerful bank like JP Morgan for at least five years, should give one pause. Questions regarding the global reserve currency are not exactly discussed on CNBC every day. Most mainstream economists avoid the topic like the plague. The issue is too politically charged. However, that doesn"t make it any less important for investors to look for answers.

On the contrary. The following questions need to be asked:

What indications are there that the world is turning its back on the US dollar?

And what are the clues that gold"s role could be strengthened in a new system?

The mechanism underlying today"s “dollar standard” is widely known and the term “petrodollar” describes it well. This system is based on an informal agreement the US and Saudi Arabia arrived at in the mid-1970s. The result of this deal: Oil, and consequently all other important commodities, is traded in US dollars — and only in US dollars. Oil producers then “recycle” these “petrodollars” into US treasuries. This circular flow of dollars has enabled the US to pile up a towering mountain of debt of nearly $20 trillion — without having to worry about its own financial stability. At least, until now.

For a long time the basis on which this global currency system rests was poorly documented. Finally, Bloomberg published a comprehensive article in May 2016, which provided detailed confirmation of the agreement that was hitherto only known as a rumor. The fact that this article is published now also represents a subtle clue that there are simmering shifts in the global currency system.

The trend becomes ever more tangible and can be described by the following term: de-dollarization. The world is looking for alternatives to the dollar — and finds them more and more often. At the same time the big oil producers and the largest exporters have stopped accumulating US debt securities. In one sentence: Since 1973 the dollar standard has been based on “usage demand” for dollars — they were needed. But when China and Russia find alternatives for their bilateral trading activity, they need fewer dollars. The same applies to European countries which have adopted the euro since 1999.

There have been many attempts by various nations to undermine the dollar"s preeminence in recent decades.

Some were nipped in the bud by US interventions — such as the plan of Iraq"s former dictator Saddam Hussein to sell oil for euros.

Or the rumored plan of Libya"s eccentric ruler Muammar al-Gaddafi to issue a pan-African gold currency.

Others are less well known, but are indeed continuing to “bubble” below the surface: For example, since 2008, an agreement exists between Saudi Arabia, Kuwait, Bahrain, and Qatar which provides for the creation of a monetary union. The planned new currency is nicknamed — rather unimaginatively — the “gulfo.” “The project is inspired by the European currency union, which is seen as a great success in the Arab world,” according to an article by Telegraph journalist Ambrose Evans-Pritchard. He inter alia quotes Nahed Taher, the CEO of Bahrain Gulf One Investment Bank: “The US dollar has failed. We need to delink from it.” However, it appears the plan has been put on hold in recent years. As recently as mid-2013 a statement was issued according to which the common currency was going to be put in place “by 2015 at the latest.” Today it is no longer even talked about. Moreover, other potential members such as the United Arab Emirates or Oman have so far failed to join the club. One should nevertheless keep an eye on developments in the Gulf.

A clear signal that something is afoot would be the abolition of the Saudi riyal"s peg to the US dollar. As recently as April of this year economist Nasser Saeedi advised Middle Eastern countries to prepare for a “new normal” — and specifically to review the dollar pegs of their currencies:

“By 2025 it is clear that the center of global economic geography is very much in Asia. What we’ve been living in over the past two decades is a very big shift in the political, economic, and financial geography.”

While the role of oil-producing countries (and particularly Saudi Arabia) shouldn"t be underestimated, at present the driving forces with regard to de-dollarization are primarily Moscow and Beijing. We want to take a closer look at this process.

There exist numerous political statements in this context which leave no room for doubt. The Russians and Chinese are quite open about their views regarding the role of gold in the current phase of the transition. Thus, Russian prime minister Dimitri Medvedev, at the time president of Russia, held a gold coin up to a camera on occasion of the 2008 G8 meeting in Aquila in Italy. Medvedev said that debates over the reserve currency question had become a permanent fixture of the meetings of government leaders.

Almost ten years later, the topic of currencies and gold is on the Sino-Russian agenda again. In March, Russia"s central bank opened its first office in Beijing. Russia is preparing to place its first renminbi-denominated government bond. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. Gold is considered important by both countries.

The gradual move away from the USD to a multi-polar monetary order has several important effects, which only make sense when viewed through this lens. Contrary to what is asserted in most mainstream reports, oil-producing countries are not so much interested in a much higher oil price in USD terms, but rather in competition for market share. They are increasingly able to choose in which currencies they want to trade. The most important effect has become evident since 2014: two of the largest holders of US treasuries (China and Saudi Arabia) have abandoned their support of Washington. On the other hand, oil producers have no interest in recycling their revenues as “petrodollars.”

The process of moving away from the dollar - prepared by Europe and triggered by China and Russia - can no longer be stopped. And as a “supra-national” reserve asset, gold plays an important role in it.

A Frustrated Bank Of America Asks "What Could Go Wrong?": Here Is Its Answer

For the past 3 months, Bank of America strategist David Woo has been warning that the market is precariously unbalanced, and as a result the smallest shift away from being "priced to perfection", or spike in volatility, could lead to a waterfall event. As we first reported back in July, Woo first warned that between the ongoing standoff in Washington, and the seemingly endless showdown with North Korea, there are two "dangerous" games of chicken afoot, both of which could culminate in a market crash. Woo even want on to lay out two "chicken" payoff matrices, one focusing on the ongoing "tax reform game"...

... the other on the "US-China game over North Korea."

So far, however, not only have these two games not culminated in any of the proposed negative scenarios, but as a result of the unstable equilibrium that has since developed, markets have successfully pushed on to all time highs.

So what"s going on here?

Well, as the increasingly frustrated Woo writes in a follow up note today, "nothing has changed in September so far. Nothing at all. Equity markets are still making new highs while rates volatility is making new lows, credit spreads remain near record lows, and investors just cannot buy enough EM assets."

Still, while not validating his bearish case, Woo admits that "financial markets continue to take cues from economic data that are painting a global synchronized recovery with little inflation pressure."

The just released August PMI data show that the longest streak of simultaneous manufacturing expansion in the US, China and EMU since 2010 is extending further (Chart 1). Growth momentum looks healthy and balanced: manufacturing new orders are in expansion territory for all of the nine largest economies in the world (Chart 2). All this with continued subdued price pressure.

And yet despite the seemingly benign macro and economic environment, and record S&P, BofA clients are increasingly on edge, very much like Goldman"s clients, who last week had just one question “Is an equity correction imminent?”  As Woo adds, "against this benign economic backdrop, the question we are getting the most from clients (institutional and corporate) is what could possibly go wrong?"

To this, BofA"s answer has been the same in the past three months:

"political risks are less benign than economic risks. We continue to believe that the greatest political risks are the showdown ahead over US tax reform in Washington and the brinksmanship between US and China over North Korea. With both coming to a head in the coming weeks, we believe that markets have not fully appreciated their significance and market implications."

As a result, expecting the two ongoing games of chicken to finally come to a violent, and risk-negative conclusion in the coming month(s), Woo retains his bearish stance, while taking stock of recent developments and provides an update of the bank"s view on how to position for these risks.

First on Tax Reform, BofA remains skeptical that a favorable outcome will manifest itself. Furthermore, even if a deal is reached, its implications, especially for the bond market would be to send rates higher, sparking a potential jump in rates vol that could trigger a similar reaction across equities. Furthermore, Woo also warns that the likelihood of a government shutdown has also risen proportionately

As Congress returns from summer recess, the momentum behind tax reform seems to be picking up. Kevin Brady, the House Ways and Means Chairman, promised last week to release the long-awaited tax reform plan on September 25, complete a budget by mid-October, and move onto drafting the tax reform legislation shortly after.

However, there are few signs that Republican leadership has resolved their differences over critical details of tax reform (such as the new rates, how tax cuts will be paid for, whether tax deductibility of interest expenses will stay, just to name a few). Orrin Hatch, the Senate Finance Committee Chairman, summarized the state of the affairs last week by pronouncing that his "Finance Committee will not be bound by any previous tax reform proposal or framework". He added that "We are not anyone"s rubber stamp." If this is the result of four months of negotiation, it does not bode well for the stated goal of the Republicans to complete tax reform before year-end.

Meanwhile, President Trump made a decision to side with the Democrats against his own party to raise the debt ceiling and keep the government funded until only December 15. Many commentators have suggested this reflects Trump"s frustration with the slow progress on tax reform. We view this as a potential turning point for tax reform.

The strategist lays out three takeaways from Trump"s unexpected move that could have potentially important market implications:

1. An increased likelihood of tax reform ultimately getting done, a scenario that would lead to a higher USD and higher TSY yields:

The failure of healthcare reform was a lesson about the risk of putting all the eggs in one basket. By siding with the Democrats, Trump shows he is open to a bipartisan approach to doing tax reform. An alliance between Trump and the Democrats makes sense at many different levels. To begin with, there is probably more common ground between Trump and the Democrats on fiscal policy (e.g., more infrastructure spending; lower income tax for the middle-class; higher income tax for the rich) than between Trump and his own party. Moreover, by reaching out to the Democrats, Trump may be trying to pressure the Republicans to move more decisively on their own tax reform proposal. The fact that Treasuries sold off and the USD rallied last week would suggest that the market agrees that a bipartisan approach could breathe new life into tax form.

2. An increased likelihood of a deficit-financed tax reform, a scenario resulting in higher rates and steeper curve, as well as a higher USD in the short-term but lower USD in the medium-term

A bipartisan approach could potentially remove currently the biggest road block to tax reform. Because the Republicans control only 52 seats in the Senate, a partisan tax reform bill will need to go through the reconciliation process that requires any tax cuts to be deficit neutral over ten years. This constraint implies either undesirable small tax cuts or unpopular offsetting new revenue. A bipartisan approach would circumvent this problem - if sixty votes can be secured in the Senate, tax cuts can be simply financed by debt, in other words, a bigger deficit.

What could be the size of the budget deficit in such a scenario? The US federal budget balance has been steadily deteriorating over the past two years (Chart 4). With one more month to go in fiscal year 2017, it looks like the deficit for the whole year could approach $650bn. Hurricane Harvey and Irma could add $100bn to the budget for fiscal year 2018. If tax reform just adds a couple hundred billion dollars of fiscal stimulus, we could see the deficit in 2018 approaching $1trn.

If this scenario materializes, it would be clearly quite negative for US Treasuries, especially given the increased supply of Treasuries that the market will have to absorb will come on top of those the market already has to take up from the unwinding of Fed balance sheet next year (close to $400bn). Relaxation of financial regulations, another major goal for the Trump administration, could place further upward pressure on rates as US banks will likely be required to hold less liquid assets like Treasuries in the new regulatory environment. What does this scenario mean for the USD? Certainly a combination of looser fiscal policy and tighter monetary policy would be supportive for the USD in the short-term. However, history tells us that a deterioration of the US fiscal position is almost never good for the USD over the medium-term (Chart 5).

An increased likelihood of a government shutdown in December, resulting in rates vol and USD vol set to go up over the next two months.

The fact that Trump pushed to raise the debt ceiling and keep the government funded only until December 15 reinforces our long-held view that the only real lever Trump has over Congress regarding tax reform is his ability to shut down the government (Beware of two games of chicken, July 17).  In our view, political brinksmanship may be the only way left to do tax reform and the process will be neither smooth nor pretty. Moreover, as time passes, we think tax reform is becoming increasingly binary. If it cannot get done by year-end, the odds go up that it will never get done as next year is an election year and political appetite for doing tax reform will shrink. The combination of a highly charged political process ahead and the binary nature of the outcome suggest interest rate vol remains too cheap (Chart 6). We like owning vol in the long-end of the curve that would be most correlated with relative safe haven demand and deficit concerns.

In summary: "We believe tax reform is turning into a very high stakes game of chicken with many things that can go wrong between now and December. The upcoming budget process could seriously undo the rapprochement between Trump and the Democrats; House Republicans and Senate Republicans may not be able to reach agreement on tax rates; the White House and House Republicans may not be able to agree on the tax treatment of interest expenses; the Tea Party may try to block any deal that would significantly boost the deficit."

* * *

Tax Reform aside, the other major game of chicken which Woo laid out back in July, and which is still ongoing, is the geopolitical risk as a result of the North Korea "game of chicken." As we showed last week, according to BofA"s latest fund manager survey, investors perceive geopolitical risks as the most likely trigger of higher market volatility for the rest of 2017 (Chart 7). And yet, in what appears to be rather frustrating to Woo, "investors do not appear to be in a hurry to act on these concerns", especially when looking at the level of the Kospi which promptly recouped all recent losses and continues to trade just shy of all time highs even as the KRW remains largely unperturbed by the recent geopolitical tensions.

Here is Woo:

Implied volatility and risk premium across markets remain near their year-low. Even those markets that are most directly linked to geopolitical risks shows few signs of panic. The South Korean stock market, which has rallied 18% YTD, is just 2.6% off its year-high. The KRW has risen 6% against the USD so far this year (Chart 8), keeping pace with its Asian counterparts like the SGD and TWD.

This contradiction is puzzling but probably reflects the extreme complexity of the North Korean crisis that is making it difficult for investors to separate the facts from the noise and the true intention of the players from their rhetoric.

While Bank of America says it "does not pretend to know how the crisis will end" it thinks the market does not fully appreciate the significance of two incontrovertible facts that are emerging from the crisis. As a result, Woo is convinced that gamma may be considerably undervalued ahead of an impending North Korean showdown. He explains why below:

1. Sanctions are not working

The two UN sanctions adopted since August have not achieved their intended results. Not only they have not lead to a moderation of North Korea"s behavior, they have provoked North Korea into further escalation (Chart 9). Following the UN sanction adopted on August 5, North Korea launched three short-range missiles on August 26, followed by a missile over Japan on August 29, and it conducted its sixth nuclear test on September 3 that experts say was a test of a hydrogen bomb. Following the second UN sanction adopted on September 12, North Korea fired another missile over Japan on September 14 that flew for 3,700 km (a demonstration that it now has the ability to reach Guam). 

Why are sanctions not registering the intended reaction? Is it possible that the North Korean leadership has invested so much political capital into the brinksmanship with the United States that accepting a defeat could seriously weaken its ability to rule or remain in power? Turning back may no longer be an option. Given the likely crippling economic impact of the new sanctions (designed to reduce North Korean export by 90% and energy import by 30%), game theory suggests that the North Korean leadership has a strong incentive to bring forward the final phase of the Game of Chicken.

2. China is the only player making concessions

Of the three key players at the table (US, North Korea and China), China has been the only party that has been making concessions. Under pressure from the US, China has agreed to cut coal, iron ore, and textile imports from North Korea and reduce energy exports to North Korea. These concessions, by allowing the US to push through two UN sanctions, have helped calm investors" nerves. The market appears willing to give diplomacy the benefit of doubt as long as the US and China are seen as working together to find a solution.

Developments over the past week suggest China"s willingness to make further concession may be reaching its limit. It agreed to support the second UN sanction only after it was watered down. After the North Korean missile launch on September 14, China rebuffed US demand to cut off oil exports to North Korea. China may not want to trigger a collapse of the North Korean regime that for the past sixty years provides a buffer against US troop presence in South Korea. Scholars estimates China lost between two hundred to four hundred soldiers during the Korean War to create the current status quo on the Korean Peninsula. 

If China"s willingness to give more ground may be limited (even with the approach of its 19th Party Congress on Oct 18), the market is not pricing much in terms of the risk of a deterioration of the US-China relationship. The CNH has strengthened so much this year that USD/CNH is back to early 2016 levels. The option market paints a worrying picture of complacency. USD/CNH risk reversal is at levels we have not seen since early 2014 (Chart 13). Washington has been threatening trade sanctions against China to force Chinese compliance on North Korea. We suspect an escalation of tension between Washington and Beijing would likely be accompanied by CNH weakening (intentional on the part of Beijing or not). Investors who share our concerns should consider buying 3m USD/CNH forward outright at 6.58 (pricing only a 0.5% depreciation of the CNH) or position for a reversal of the risk-reversal.

Putting it together, BofA"s analysis suggests that the risk is growing that the crisis - deferred for months - may come to a head in the not too distant future. This flies in the face of the current market consensus that the crisis is likely to drag on, as evidenced by the flatness of vol curves across markets. Incredibly, USD/KRW vol curve remains not only upward sloping (Chart 10) but steep, with 6m implied vol trading at an average premium over 1m (Chart 11). 

As such, in the context of the ongoing North Korean "game of chicken", Woo concludes that "The market is clearly not priced for any short-term shock. Investors who share our concerns should consider accumulating short-dated KRW puts or buying KRW gamma against selling long-dated vol (position for curve inversion on escalation)." Finally, Woo still thinks that the JPY would be a beneficiary of any escalation of geopolitical risks. "The JPY"s correlation with risk-off has been increasing. We are inclined to fade the bounce in USD/JPY last week after the adoption of UN sanctions. We believe investors should consider taking advantage of any further JPY depreciation before and after the upcoming FOMC meeting to selling USD/JPY. "

* * *

In summary, while the market may now be ignoring, or at least giving the benefit of the doubt to potential adverse outcomes from political risks in the form of both the tax reform process and the North Korean "games of chicken", BofA is convinced that since the "market is clearly not priced for any short-term shock", any adverse outcome could result in a potential risk-off move, one which breaks the market"s unstable equilibrium, and result in either a spike in KRW gamma or TSY yield and/or vol.

Will Bank of America be right? With both showdown in Washington over tax reform and brinksmanship over North Korea coming to a head in the coming weeks, we will have the answer very soon.

Why Every European Country Has A Trump Or Sanders Candidate

Authored by Richard Drake via TheAmericanConservative.com,

The suicide in the Friuli region of northern Italy earlier this year of a 30-year-old man, identified in the newspapers only as Michele, has become a symbol of the country’s unemployment tragedy, particularly as it affects young people.

Though much worse in the South, the country’s economic crisis also has had a blighting effect on the North. The national unemployment rate now stands at nearly 12 percent. A 40 percent youth unemployment rate nationwide, however, has people speaking of a generational apartheid in Italy. There is no work to be found for young people. In the workplace, comparatively speaking, they have been walled off from the rest of the population.

Friuli is a region of plain and mountain in the northeastern part of Italy, flush against borders to the north with Austria and the east with Slovenia. The annals of Friuli antedate by many centuries the arrival of the ancient Romans, who founded the colony of Aquileia there nearly two hundred years before Christ. The barbarian invasions swept over Friuli in the general wreckage of the Roman Empire. An Aquileian state arose in the Middle Ages, but was absorbed in the 15th century by the expanding Venetian empire. Then Friuli passed through French and Austrian phases of occupation and control before becoming part the newly founded Kingdom of Italy, in 1866.

The Friulani, a highly energetic and resourceful people steeped in the work ethic common to the peasant and artisanal cultures of traditional Europe, tilled the land and also gained a well-deserved reputation for their skill in specialty crafts and the building trades. Typically in such cultures, the work that a man did defined him. The modern world has changed those old ways of life, but the culture they generated persists. More recently, Friuli became renowned for its small businesses and factories, which played a vital role in the national economy. There was still hard work for the Friulani to do.

From his mother’s milk, Michele would have imbibed the work ethic of his native region. He would have thought of work as dignity and honor. In a suicide note, he claimed to be bereft of such things and of hope. “Desire has passed me by,” he wrote. Michele never had been able to find a meaningful job and had despaired of ever finding one. Contemplating his blank future, a sense of deep frustration had crushed his spirit. He hoped that his parents would forgive his dreadful act, but could not envisage a place for himself in a society without work.

No less than many other regions in the country, Friuli has been devastated by the economic crash of 2008 and its seemingly permanent aftermath. Hundreds of its small businesses and factories have closed, leaving many thousands unemployed. Michele’s father called his son’s death “the defeat of a moribund society.” What other way is there to describe a society unable to create work for its young people?

One of Italy’s rising political figures, Beppe Grillo of the politically eclectic Five-Star Movement, has proposed a guaranteed citizen income for all Italians. His reasoning appears to be that the Italians should be getting something from their government other than its slavish devotion to the corrupt oligarchy of the banks and corporations that rule the country.

There is a strong Bernie Sanders and Jill Stein component in the Five-Star Movement, as well as an admiration for the challenge that Hugo Chávez threw down to the multinationals in Venezuela. Grillo also has praised Ecuador’s Rafael Correa for his opposition to the International Monetary Fund, an institution that the Italian leader reviles as a battering ram of noxious austerity policies. Since the recent presidential election in the United States, Grillo has praised Trump as a much-needed change-of-air in world politics. Change of any kind, a powerful sentiment in the United States last fall, exerts the same kind of force in Italy now.

Even if a guaranteed citizen income initiative were to prevail and become law, the main problem underscored by Michele’s death would still remain. An allowance conjures up the image of juvenile dependence. A national welfare program for all citizens certainly is preferable to leaving ever rising numbers of them in want, but it would not solve in a socially edifying way the anterior problem of work. Michele was not asking for an allowance. He wanted work to do. This is a human need that societies deserving of survival are obliged to supply, a point raised by Thorstein Veblen in the book of his he valued most, The Instinct of Workmanship (1914). Human beings, he wrote, are called by nature to useful effort. It is not only the deprivations and frustrations associated with sex that undermine and subvert the human personality. He judged the men who live by moving money around to be the greatest peril of all to those who live by work.

The problem of work in Italy today belongs to the class of social consequences identified by Pier Paolo Pasolini in a famous Corriere della Sera article in 1974. “The Italians are no longer what they once were,” he observed. By this statement, Friuli’s greatest poet, filmmaker, and social critic meant that Italy’s traditional values had undergone an anthropological mutation. The country had abandoned its traditional way of life, which in its peasant culture had achieved a kind of poetic synthesis in the saying of Padron ‘Ntoni, novelist Giovanni Verga’s lead character in I Malavoglia (1881): “He is richest who has the fewest wants.” Pasolini feared that the new values of a hedonistic consumer society would be a poor substitute for Italy’s Christian and socialist ideals. What a debased fate for Italy, to come through the civilization-defining vicissitudes of its millennial history, only to end up ignobly aping American-style conspicuous consumption.

Pasolini had in mind a particular phase of the globalized economy, which since the 1970s has sped forward on the principle that money must be completely liberated to maximize profits for those who have it. It is immediately evident why this golden rule for today’s economy, though achieving its purpose of profit-maximization, has been a poor proposition for most of the working people of the Western world.

While rates of extreme poverty worldwide have declined in recent decades, the means to produce such a result have required an outsourcing of the West’s manufacturing base. The coincidental surge in profits made possible by the relocation of manufacturing jobs to countries unencumbered by high wages, labor unions, and environmental laws has with perfect justice sparked a political firestorm.

Nobel Prize-winning economist Joseph Stiglitz explained in Globalization and Its Discontents (2004) that the basic problem with the world’s current financial arrangement concerned the institutions and organizations commanding it. The International Monetary Fund, the World Bank, the World Trade Organization, the U.S. Treasury, and the European Monetary Union protect special interests, Wall Street most of all. Despite their lip-service in democratic argot, the very last thing seriously on the minds of the top financial policy makers is the well-being of ordinary people.

As a result of the methods used to promote globalization, the consequences for the West have been tragic. Work is becoming increasingly uncertain and insecure, or it is in the process of disappearing altogether. It would take Veblen’s talents for social satire, which are unsurpassed in all of American literature, to depict with the essential exactitude of artistic synthesis how far the United States has fallen away from democratic grace, the country’s dramatically widening gap between the haves and the have-nots being what it is. Clearly, we are on the wrong course. What the robotics revolution, now at an incipient stage, will do to further diminish opportunities for Western peoples to work can be easily imagined, if the economic imperative of corporate capitalism is the rule to go by.

The same desolating trends can be seen in Europe, where people increasingly regard the European Union as a Trojan horse. The economic elites and their political front-men responsible for this image-challenged contraption lose public support with each new poll. The people by and large blame the European Union and the other accessories of globalization for their worsening standard of living. When informed by the establishment media that thanks to globalization Europe has never been more prosperous and peaceful, Europeans in historic numbers are reacting with disbelief. Their deepening sense of betrayal propels the surge of populism that defines the politics of Europe today.

Arguments long-settled in favor of deregulation, liberalization, open borders, and other globalization watchwords have been reopened. The constituency is growing for a politics that puts the well-being of Europeans first. Political measures calling for the protection of European jobs and cultures have gained a following unforeseen prior to 2008.

In Italy, for example, 77 percent of the people questioned in a recent poll could see no advantage to them at all from the country’s membership in the European Union. Sixty-four percent of them expressed hostility toward it. Eight Italian businesses out of 10 can find nothing positive to say about the European Union. It is seen to be a creature of the banks and the big financial houses. As public relations disasters go, this one has unfolded on an epic scale as the underlying populations, long left out of consideration by the economic elites, have begun to sense the fate their masters have in store for them.

Leaving underlying populations out of consideration was a special feature of the planning that went into globalization. They have been voiceless. In America, Trump gave them a voice, and they responded to him with their political support. It did not matter that he came before them without a plan for their deliverance. That he came to them at all mattered. He understood the depth of the anger and alienation in America against a status quo personified by his opponent, Hillary Clinton, whose repeated and munificently rewarded speeches before the captains of finance on Wall Street effectively branded her as the safe candidate for all who wanted to leave existing economic arrangements fundamentally undisturbed.

Trump may go down in history as a president who was hopelessly out of his depth on all vital matters, but his presidential campaign will be studied for as long as historians have an interest in American politics. It was a masterpiece of intuition based on an uncannily correct judgment about the spirit of the times. Bernie Sanders had the same insight, but the Democratic Party turned out to be much more corrupt and vulnerable to manipulation than the Republicans, an astonishing feat. In possibly an even more flagrant instance of interference in the American democratic process than anything yet proven against Vladimir Putin, internal machinations weighted the primary process against Sanders. The Republicans tried to head off Trump, too, but a fiercely loyal base and a dearth of plausible opponents gave him an easy victory in the primaries.

At an academic conference in New York in May a year ago, I participated in a conversation among scholars, journalists, and government officials who generally thought that Trump would not even win 20 percent of the national vote. His ridiculous campaign surely would fall of its own dead weight. Professional pollsters, though not so far wrong as my conference colleagues in New York, also missed what appears to be the main story of the campaign: a loss of faith, unprecedented in its severity, by the American people in the rules of the game. There is no other way to explain the stunningly bizarre choice that they made for the man to lead them.

That Trump has rapt admirers and self-confessed imitators in Europe should come as no surprise because the mood he represents is an international phenomenon. Virtually every European country has a Trump candidate saying basically the same things that he did in his campaign against immigrants, globalization trade agreements, and the establishment media. Italy has two such candidates: Grillo and the leader of the xenophobic League Party, Matteo Salvini. They are riding a wave of anti-establishment outrage and in tandem are outpolling the two major mainstream parties, the center-left Democratic Party, now in internal disarray from schism, and the center-right Go Italy Party.

As Europe since the end of World War II has slipped ever more securely into the orbit of American military and economic power, it is only to be expected that the Atlantic Community will be increasingly homogeneous. The Italian case is most instructive about the fundamental meaning of America for Europe. Italy’s greatest postwar novelist, Cesare Pavese, explained in The Moon and the Bonfires (1950), “America is here already. We have our millionaires and people are dying of hunger.” Contemporary Italy, in keeping with Europe as a whole, is best understood as an example of America’s role as the prime mover in international affairs and economics, or of how the world works per necessità, in Machiavelli’s phrase, according to the dictates of those who hold irresistible power.

By outsourcing its manufacturing base in search of portfolio enhancement, the United States exercised a freedom for which liberty-loving European businessmen, bankers, and politicians hungered as well. Unable to compete with 50-cent per hour labor, the working classes in America and Europe would have to go to the wall, but while adjusting their blindfolds they could rest assured that in the fullness of time the wonder-working ways of the free market would redeem the world.

Such a promise held no meaning for Michele, and he left this world slamming the door. “I feel betrayed,” he wrote in his suicide note. Who can say which other factors drove him in those last desperate hours before he took his life? We do know what his stated reason was for doing it. Work was the final thought that he had. How else could a Friulano give a good account of himself in this life?

"The Euro Crisis Is Not Over" Former ECB Chief Economist Urges "Greek Sabbatical From EU"

Otmar Issing, former Chief Economist and Member of the Board of the European Central Bank and the German Bundesbank, brings back the specter of Grexit scenarios, demanding a Euro-sabbatical for Greece.

KeepTalkingGreece.com reports that, uin an interview with business news magazine Wirtschaftswoche, Issing warned of a new flare-up of the euro crisis.

“The euro crisis is not over yet,” said the economist, one of the architects of the Euro.

Issing called on a policy that would include EU treaties allowing the possibility of temporary withdrawal from the monetary union.

“States like Greece would do well with a Sabbatical outside the monetary union. However, it should be accompanied by massive aid from other countries and a growth-oriented economic policy. And one would have to make re-entry into the euro zone dependent on fundamental reforms, ” Issing said.

Issing no longer relies on the Stability and Growth Pact, a core element of the economic and monetary union. “I would not have considered the dimension of its dismantling by the governments”.

Otmar Issing lashed out at the Greek government saying “the government is still in an anti-growth policy.”

He also criticized Italy saying

“It also did not seize the opportunity. The country has saved tens of billions of interest without using the leeway. ”

The Wirtschaftswhoche article has the title “Economist demands Euro-sabbatical for Greece.”

I don’t know exactly what institutional role 81-year-old Otmar Issing currently has other than sitting at a dusty desk as president of the Center for Financial Studies (CFS) at the Goethe University in Frankfurt am Main since 2006. He is also Goldman Sachs adviser etc etc etc.

He has been calling for Grexit since 2010 saying Euro exit would be good for Greece at least once a year… Leaving the euro might help struggling Greece, German chief economist, euro architect and former European Central Bank (ECB) board member Otmar Issing told CNBC on Tuesday.

“The euro is irreversible – but if it is irreversible for every country has become an open question,” Issing told CNBC.

Then, Issing told CNBC in September 2015...

“For Greece, there are very good arguments that it would do well outside the euro area for some time to come, but it all depends on the Greek government’s reactions”

What he does not say it that the “massive aid from other countries” that will accompanie the Euro-Sabbatical or Grexit would be one more bailout.

If I remember well, Finance Minister Wolfgang Schaeuble had estimated a total of at least 50 billion euros for a 5-year- euro sabbatical. Schaebule offered Varoufakis & Co a temporary Grexit plan in March 2015, as part of the European lenders blackmail towards Greece.

*  *  *

What we learned from Issing’s interview is that we now have a political correct term Euro-Sabbatical that sounds not so scary as Grexit.

The Economist: "Get Ready For A World Currency By 2018"

Via Climateer Investing blog,

Get Ready for the Phoenix

January 9, 1988, Vol. 306, pp 9-10

THIRTY years from now, Americans, Japanese, Europeans, and people in many other rich countries, and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let’s say, the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today’s national currencies, which by then will seem a quaint cause of much disruption to economic life in the last twentieth century.

-

At the beginning of 1988 this appears an outlandish prediction. Proposals for eventual monetary union proliferated five and ten years ago, but they hardly envisaged the setbacks of 1987. The governments of the big economies tried to move an inch or two towards a more managed system of exchange rates – a logical preliminary, it might seem, to radical monetary reform. For lack of co-operation in their underlying economic policies they bungled it horribly, and provoked the rise in interest rates that brought on the stock market crash of October. These events have chastened exchange-rate reformers. The market crash taught them that the pretence of policy co-operation can be worse than nothing, and that until real co-operation is feasible (i.e., until governments surrender some economic sovereignty) further attempts to peg currencies will flounder.

…

The new world economy

The biggest change in the world economy since the early 1970’s is that flows of money have replaced trade in goods as the force that drives exchange rates. as a result of the relentless integration of the world’s financial markets, differences in national economic policies can disturb interest rates (or expectations of future interest rates) only slightly, yet still call forth huge transfers of financial assets from one country to another. These transfers swamp the flow of trade revenues in their effect on the demand and supply for different currencies, and hence in their effect on exchange rates. As telecommunications technology continues to advance, these transactions will be cheaper and faster still. With unco-ordinated economic policies, currencies can get only more volatile.

…

In all these ways national economic boundaries are slowly dissolving. As the trend continues, the appeal of a currency union across at least the main industrial countries will seem irresistible to everybody except foreign-exchange traders and governments. In the phoenix zone, economic adjustment to shifts in relative prices would happen smoothly and automatically, rather as it does today between different regions within large economies (a brief on pages 74-75 explains how.) The absence of all currency risk would spur trade, investment and employment.

–

The phoenix zone would impose tight constraints on national governments. There would be no such thing, for instance, as a national monetary policy. The world phoenix supply would be fixed by a new central bank, descended perhaps from the IMF. The world inflation rate – and hence, within narrow margins, each national inflation rate- would be in its charge. Each country could use taxes and public spending to offset temporary falls in demand, but it would have to borrow rather than print money to finance its budget deficit. With no recourse to the inflation tax, governments and their creditors would be forced to judge their borrowing and lending plans more carefully than they do today. This means a big loss of economic sovereignty, but the trends that make the phoenix so appealing are taking that sovereignty away in any case. Even in a world of more-or-less floating exchange rates, individual governments have seen their policy independence checked by an unfriendly outside world.

–

As the next century approaches, the natural forces that are pushing the world towards economic integration will offer governments a broad choice. They can go with the flow, or they can build barricades. Preparing the way for the phoenix will mean fewer pretended agreements on policy and more real ones. It will mean allowing and then actively promoting the private-sector use of an international money alongside existing national monies. That would let people vote with their wallets for the eventual move to full currency union. The phoenix would probably start as a cocktail of national currencies, just as the Special Drawing Right is today. In time, though, its value against national currencies would cease to matter, because people would choose it for its convenience and the stability of its purchasing power.

…

The alternative – to preserve policymaking autonomy- would involve a new proliferation of truly draconian controls on trade and capital flows. This course offers governments a splendid time. They could manage exchange-rate movements, deploy monetary and fiscal policy without inhibition, and tackle the resulting bursts of inflation with prices and incomes polices. It is a growth-crippling prospect. Pencil in the phoenix for around 2018, and welcome it when it comes.

Just to be clear: This is NOT f?ke™ news.

It is an article from The Economist published 29 years and six months ago, today.

We are counting down the minutes.

The Three Hidden Subplots Of The G20 Hamburg Summit

Authored by James Rickards via The Daily Reckoning,

The Group of Twenty, known as G20, is an unaccountable and powerful organization that is the closest thing on earth to a true world government. German Chancellor Angela Merkel, the rotating President of the G20, will host the next G20 meeting in the city of Hamburg, on the mouth of the Elbe River near the North Sea Coast.

G20 refers to its twenty member countries. They are a mixture of what were once the world’s seven largest economies, known as the G7, consisting of the United States, Canada, France, Germany, the UK, Italy and Japan, and some fast-growing, newly emerging economies such as Brazil, China, South Korea, Mexico, India and Indonesia. Other countries such as Russia and Saudi Arabia are included because of their natural resources or for reasons of geopolitics.

The G20 operates at many levels. Several times each year their finance ministers and central bank heads meet to discuss technical issues and try to reach consensus on specific goals. The most important meetings, however, are the leaders’ summits, attended by presidents, prime ministers and kings, which meet periodically to discuss global financial issues.

It is at these leaders’ summits, both in the formal sessions and informally on the sidelines, that the actual deals shaping the global financial system are made.

In recent years, G20 summits have focused less on financial crises and more on the one world agenda of the global elite. This elite agenda includes world taxation, climate change, terrorism, anti-money laundering and other aspects of globalized governance.

Today, financial risk is once again coming to the fore as global growth continues to slow. Nationalist leaders such as Donald Trump, Vladimir Putin, and Theresa May have emerged to challenge the globalist agenda. This puts more stress on the cohesiveness of the G20 process.

Above is the “class picture” of global leaders from the G20 summit in Hangzhou, China, September 4-5, 2016. Xi and Merkel appear front row, center in this photograph. Christine Lagarde, Managing Director of the IMF appears in the back row.

Financial risk, anti-globalism, immigration, and threats from terrorism will be on full display at this next G20 leaders’ summit. There will also be three key sub-plots happening off the main stage to watch closely.

The most important of these private meetings involve Trump and Putin, Macron and Merkel, and the BRICS.

The United States and Russia

By far, the most important encounter at the Hamburg G20 Summit will be the first face-to-face meeting between Donald Trump and Vladimir Putin.

Despite the avalanche of allegations of “collusion” between Trump and Putin to rig the 2016 U.S. presidential election (an allegation for which there is zero evidence), and the presumed sympathies between the two leaders on policies involving ISIS and terrorism, they have never met and have had only limited telephonic contact.

The bilateral agenda of the two leaders could not be more urgent.

Despite allegations of Russian interference in the 2016 U.S. election, and the Russian scandals surrounding Trump, the two leaders have an important shared agenda including Syria, North Korea, Ukraine, trade sanctions, and energy policy.

Trump wants to build bridges to Russia in order to prepare for a coming confrontation with China. Russia, China and the U.S. are the only three superpowers in the world.

Classic balance-of-power politics dictates that if you are going to confront one power in a three-power game, it is essential to have an alliance with the other power, or at least keep it neutral. The U.S. needs a neutral or friendly Russia before it confronts China on trade, currency manipulation, North Korea and the South China Sea.

Unfortunately, Trump’s efforts at opening dialogue with Russia were handled in an amateurish way by Kushner and Flynn. Both lied about their contacts with the Russians, which fed the collusion narrative. This led to investigations, and Trump’s clumsy efforts to head off those investigations have now led to allegations of obstruction of justice.

Despite the dysfunction in the Trump White House and the media circus in Washington DC, the reasons for normalizing relations with Russia are no less urgent than when they were first pursued by Trump.

The G20 summit will be a chance for Trump to reinvigorate the U.S.-Russia dialogue outside the context of the Beltway feeding frenzy. Putin understands this and he will be an eager interlocutor.

Trump’s defense, diplomatic and national security team of James Mattis, Rex Tillerson, and H. R. McMaster are far more capable than Kushner and Flynn, and will assist in Trump’s preparation for the Putin dialogue.

The Trump-Putin dialogue in Hamburg will be the most important diplomatic event of 2017. Watch closely for both public statements and leaks about the substance of the dialogue.

This information will contain important clues about the prospects for war with North Korea, relief from economic sanctions in Europe, and the endgame for ISIS.

The BRICS

Another important highlight of recent G20 summits is the informal meeting of the BRICS on the sidelines. Hamburg will continue this tradition.

BRICS is an acronym for its member nations: Brazil, Russia, India, China, and South Africa. These nations include the four largest emerging markets economies, the two most populous nations on earth (China and India), and four of the six largest nations by landmass (Russia, China, Brazil, and India). The BRICS are the main counterpoint to the G7 inside the G20.

The BRICS have their own summit meetings and institutions, including a well-funded development bank. Yet, the G20 summit is a convenient time for the BRICS leaders to meet in person given the difficult logistics of coordinating so many leaders’ schedules.

The BRICS agenda will be lighter at this G20 summit than in years past. This is partly because the currency wars are temporarily quiet, and the BRICS development agenda has been eclipsed to some extent by China’s “One Belt, One Road” multi-trillion dollar infrastructure initiative in central and south Asia.

Still, the BRICS as a group continue to be interested in ways to bypass the U.S. dollar in global payments systems. By strengthening and expanding non-dollar payments systems, the BRICS make themselves less vulnerable to U.S. economic sanctions, which mainly operate through bank channels and dollar accounts.

Gold is also an important topic among the BRICS. Russia, China and South Africa are three of the world’s largest gold producers, while Russia, China, and India are among the world’s largest consumers of gold.

Watching the BRICS “sideline summit” at G20 for can provide information about gold, non-dollar payments, and broader efforts to diminish the international role of the U.S. dollar.

Merkel, Macron, and “More Europe”

This year, Germany will use the G20 summit to announce its support for a European “destiny” (as described by Angela Merkel) independent of U.S. preferences or fear of Russia.

In effect, a reunified Germany has finally emerged from the long shadows of World War II and the Cold War. It will take its place on the world stage as an economic superpower with its own agenda. Of course, Merkel will not announce an explicitly German agenda, only a European agenda, but Germany is the undoubted leader of the new Europe.

On the sidelines of the G20 meeting, it will be important to watch the ever closer relationship between France and Germany, in particular the growing cordiality between the new French President Emmanuel Macron and longstanding German Chancellor Angela Merkel.

Of course, there’s nothing new about Franco-German cooperation in post-World War II Europe. France and Germany were among the original six members of the European Economic Community, or “Common Market,” created by the Treaty of Rome in 1957. The Common Market was the direct predecessor to today’s European Union.

However, the degree of cooperation between these two major economic powers has waxed and waned over the years.

From 2012 to 2016, the Socialist French President Hollande was at odds with Merkel on issues such as Greek bailouts and budget austerity. Macron is much more in sync with Merkel on these and other issues.

One of the persistent criticisms of the EU from U.S. and UK economists was that the EU had created a monetary union through the Eurozone and ECB, but had failed to create a fiscal union with a unified budget and bond issuing authority.

The criticism is valid, but the typical U.S. or UK remedy was to break up the Eurozone. That was never the intention of EU leaders. Instead their solution was “More Europe,” which means unified banking regulation, a central fiscal authority and a Eurozone parliament to debate fiscal and monetary issues with a view to unified solutions.

Macron and Merkel (known to wags as “Mackerel”) are in accord on the More Europe approach and are already taking steps to implement that vision. G20 will be their first joint appearance on a world stage.

President Trump has picked fights with Europe about their financial contributions to NATO and their liberal immigration policies in the face of terrorism.

President Putin is isolated from Europe because of continuing sanctions related to his actions in Ukraine.

Merkel recognizes that Europe is increasingly on its own and needs to purse a destiny independent of the U.S. and Russia. Macron has publicly voiced the same view.

Macron appears to be the strongest French leader since Charles de Gaulle. Merkel is undoubtedly the strongest German leader since Konrad Adenauer. Together, their like-mindedness will deepen European integration and make the Eurozone and the euro stronger than ever.

The G20 meeting will be an ideal opportunity to put the new Franco-German alliance on display. This will signal to the U.S., China and Russia that EU policies will reflect EU priorities and not be mere accommodations to the preferences of the U.S.

The likely beneficiary of this new European outlook will be China. With Russia still subject to sanctions, and the U.S. in a more confrontational mode, China will be met with open arms by the new Europe.

China is looking to diversify its reserve position away from dollars towards euros. China is inherently cautious and was reluctant to invest heavily in euros while the European sovereign debt crisis rolled on from 2010 to 2015.

Now, the European crisis has passed, the economies of the periphery states of Spain, Portugal, Greece, and Ireland have stabilized, and Franco-German cooperation is growing. China is ready to take the plunge with portfolio investment in European debt and direct foreign investment in ports, airports, highway systems and other critical infrastructure as well as large stakes in key European companies.

Even China’s “One Belt, One Road” initiative envisions continuous transportation links from Shanghai to Rotterdam, and will need European participation.

While Trump and Putin are meeting privately, expect to see “Mackerel” and China’s President Xi engaged in their own trilateral diplomacy. This will be another one of the G20 sub-plots to watch closely for clues about the best investment opportunities.

This will be one of the most important G20 meetings ever. It will facilitate a Trump-Putin pro-nationalist channel of communication, and will be a platform for the emergence of the new Europe under the joint leadership of Macron and Merkel.

Mapping Europe's Secessionist Movements

Despite the elites" desperate hope that recent "losses" in Holland France "prove" the anti-establishment movement is fading (although they all saw soaring popularity), with Europeans ready to protest, there are still numerous regions urging secession...

There have been 486 military conlicts in Europe in the last 2000 years and while the last decade or two has been "peaceful", we suspect that will not last.

As BofAML"s Transforming World Atlas details, many areas in Europe have strong secessionist movements (e.g. Scotland, Catalonia, Basque, Flanders, Veneto) or have political parties agitating for greater ruling autonomy.

European political union remains elusive, so does fiscal union, and monetary union is tarred by the fact that nine EU countries - soon to be eight - (Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and The UK) do not use the Euro.

"Zumutungen!" Buyer's Remorse In France, Impossible Situation For Germany

Authored by Mike Shedlock via MishTalk.com,

Now that the cheering over the French election has died down, reality will strike France and Germany like a cold bucket of water thrown in one’s face on a Winter’s day.

Germany was guaranteed to not like the result no matter who won. The final choice was between an anti-EU Marine Le Pen and a budget-comingling Emanuel Macron who needs EU treaty changes to get what he wants.

And in France, buyer’s remorse has set in. Unions are already protesting against Emmanuel Macron’s policies.

Zumutungen!

The word of the day is Zumutungen. Google translates that from German as “impositions” but the actual meaning is quite a bit stronger according to Eurointelligence.

The German political establishment clearly favored Emmanuel Macron over Marine Le Pen during the election campaign, but they are nervous about Macron’s eurozone agenda. As FAZ notes this morning, the relief over his victory still weighs heavier than the reality – which is that Macron and Angela Merkel have diametrically opposed views on the future of the eurozone. Merkel yesterday confirmed her readiness to engage in a dialogue with Macron, but said that eurozone bonds are a no-go. And without Eurobonds – or other forms of a eurozone-level fiscal backstop – none of the Macron agenda would work.

The FAZ article uses a word for which there is no straight translation – “Zumutungen” – which means an excessive and immoral demand that one can conceivably not fulfil. The paper makes the point that François Hollande also favoured the same kinds of reforms, but let go when he realized that there was no support from Berlin. The article notes that Macron’s ideas go way beyond those of Hollande. His eurozone agenda is not about crisis resolution, but economic shock absorption in general, as evidenced by his ideas for a pan-European unemployment insurance. FAZ is appalled by all of this, as well as by Macron’s idea of a Buy-European act. The paper noted that the eurozone finance ministers, at their meeting in Malta, criticised similar ideas by the European Commission.

On day one after Macron’s election, there is a first taste of resistance in the form of street protests against his labor law reforms. Labor reforms have been a particularly traumatic experience for the outgoing government. The radical trade unionists are taking to the streets, while the more cautious headquarters warn against implementing the whole agenda.

Volcanic Forces on Germany

Telegraph writer Ambrose-Evans-Pritchard accurately states Volcanic Macron Forces Germany to Come Clean on its Real EU Agenda.

Emmanuel Macron’s lightning conquest of France has put Germany in an awkward spot. French voters have picked an apostle of Europe and an arch-defender of the Franco-German axis. While this is welcomed with jubilation by some in Berlin, it raises thorny questions that others would prefer left unanswered.

He plans Nordic labor reforms, easier collective bargaining rules, and the sort of tax shake-up that German leaders have long demanded. The quid pro quo is that Berlin must agree to eurozone fiscal union, and cut its corrosive current account surplus – now 8.6 percent of GDP and in breach of EU rules.

“If France is not reformed, we will not be able to regain the confidence of the Germans,” Mr. Macron told Ouest-France. “After that, Germany must ask whether its own situation is tenable. It is accumulating surpluses which are neither good for its own economy nor for the eurozone.”

He wants a eurozone finance minister and budget, with joint debt, and a banking union with shared deposit insurance, all legitimized by a new parliament for the currency bloc. It implies a unitary eurozone superstate.

This calls Berlin’s bluff. The German elites often argue that they cannot accept such radical proposals as long as other eurozone states scoff at budget rules and fail to put their house in order.

The Handelsblatt accused Mr. Macron of “Teuton-bashing” over the trade surplus. The German Council of Economic Experts holds defiantly to the national view that trade surpluses are proof of virtue. It sees EMU debt-pooling as a slippery slope towards a “Transferunion”.

Mr. Macron’s plans would require a new EU Treaty, opening a can of worms that several states are determined to avoid. Berlin has no intention of sharing Italy’s debts, whatever France does.

Germany’s top court says EMU fiscal union and debt-pooling would require a change to country’s constitution. “Politically, that is absolutely impossible,” said Heiner Flassbeck, former economy minister and now at Hamburg University.

France is split on deep lines cleavage, Balkanized five ways. The scale of Mr. Macron’s 66:34 victory on Sunday is misleading. Blank protest votes – “Neither Plague nor Cholera” – jumped threefold to 11.5pc. The abstention rate jumped six points to 25.4pc.

The Front National’s Marine Le Pen botched the final weeks of her campaign with confused messages over pensions and the French franc, but she still won 34 percent of the vote. Five years ago this would have been deemed impossible. We now shrug off earthquakes a little too lightly.

German Elections

Angela Merkel has recently surged in the polls vs. SPD candidate Martin Schulz.

Is there a fundamental reason for the shift?

Yes, Schulz is far more open to Macron’s views than is Angela Merkel. Despite the fact a majority of German citizens do not want Merkel, voters may be stuck with her as a counterbalance to more radical ideas that SPD may be willing to try.

Germany a Loser

I discussed much of this setup long ago, before the French primaries, on January 15, in Germany a Loser No Matter Who Wins?

Germany a Loser No Matter Who Wins?

• Le Pen: Eurosceptic – Seeks better relations with Russia


• Macron: Pro Europe but seeks a common eurozone budget for investment and financial assistance in case of shocks.


• Mélenchon: A socialist who will not be in favor of reforms France desperately needs


• Valls: After the 2016 Nice attack, he was booed for saying that “France will have to live with terrorism.”


• Fillon: Fillon aims to reduce the public sector and cut 500,000 civil-service jobs.  He wants the state healthcare program (securité sociale) to work better with fewer payments. Fillon is in favor of increasing the retirement age to 65. He seeks better relations with Russia.

Of the five, Germany could work best with Fillon. But his pro-Russia stance poses at least a minor problem.

O Come, O Come Emmanuel

I ask again, Is Macron the Anti-Trump, European Obama Savior?

Target2 & Secret Bailouts: Will Germany Be Forced Into Fiscal Union With Rest Of Eurozone?

Authored by Mike Shedlock via MishTalk.com,

Project Syndicate writer, Hans-Werner Sinn, explains why the ECB’s asset purchases and Target2 imbalances constitute “Europe’s Secret Bailout”.

Under the ECB’s QE program, which started in March 2015, eurozone members’ central banks buy private market securities for €1.74 trillion ($1.84 trillion), with more than €1.4 trillion to be used to purchase their own countries’ government debt.

The QE program seems to be symmetrical because each central bank repurchases its own government debt in proportion to the size of the country. But it does not have a symmetrical effect, because government debt from southern European countries, where the debt binges and current-account deficits of the past occurred, are mostly repurchased abroad.

For example, the Banco de España repurchases Spanish government bonds from all over the world, thereby deleveraging the country vis-à-vis private creditors. To this end, it asks other eurozone members’ central banks, particularly the German Bundesbank and, in some cases, the Dutch central bank, to credit the payment orders to the German and Dutch bond sellers. Frequently, if the sellers of Spanish government bonds are outside the eurozone, it will ask the ECB to credit the payment orders.

In the latter case, this often results in triangular transactions, with the sellers transferring the money to Germany or the Netherlands to invest it in fixed-interest securities, companies, or company shares. Thus, the German Bundesbank and the Dutch central bank must credit not only the direct payment orders from Spain but also the indirect orders resulting from the Banca de España’s repurchases in third countries.

The payment order credits granted by the Bundesbank and the Dutch central bank are recorded as Target claims against the euro system.

For the GIPS countries [Greece, Italy, Portugal, and Spain], these transactions are a splendid deal. They can exchange interest-bearing government debt with fixed maturities held by private investors for the (currently) non-interest-bearing and never-payable Target book debt of their central banks – institutions that the Maastricht Treaty defines as limited liability companies because member states do not have to recapitalize them when they are over-indebted.

If a crash occurs and those countries leave the euro, their national central banks are likely to go bankrupt because much of their debt is denominated in euro, whereas their claims against the respective states and the banks will be converted to the new depreciating currency. The Target claims of the remaining euro system will then vanish into thin air, and the Bundesbank and the Dutch central bank will only be able to hope that other surviving central banks participate in their losses. At that time, German and Dutch asset sellers who now hold central bank money will notice that their stocks are claims against their central banks that are no longer covered.

One should not assume that anyone is actively striving for a crash. But, in view of the negotiations – set to begin in 2018 – on a European fiscal union (implying systematic transfers from the EU’s north to its south), it wouldn’t hurt if Germany and the Netherlands knew what would happen if they did not sign a possible treaty. As it stands, they will presumably agree to a fiscal union, if only because it will enable them to hide the expected write-off losses in a European transfer union, rather than disclosing those losses now.

Target2 Answer

I had been struggling to understand the precise relationship between Target2 liabilities, including those within the ECB itself, and the ECB’s QE program. The above explanation appears to provide the answer.

Regardless, euro-denominated debts that cannot possibly be paid back keep piling up.

Target2 Liabilities

If Greece were to leave the Eurozone and pay back its debts in Drachmas, either the ECB would have to print €71.0 billion to cover the default, or the other eurozone nations would have to split the bill based on their percentage weight in the EMU.

If Italy left the eurozone, the shared liability would be €386.1 billion.

Responsibility Percentages

That table refers to ESM commitments. Percentage responsibilities apply should there be a default.

What If?

If Italy were to default, its 17.9% would have to be redistributed proportionally to the other countries or the ECB would have to violate its treaty and print the euros.

My conclusion is not the same as  Hans-Werner Sinn who concludes “As it stands, they [Germany and the Netherlands] will presumably agree to a fiscal union, if only because it will enable them to hide the expected write-off losses in a European transfer union, rather than disclosing those losses now.”

I strongly suspect the ECB would violate the treaty agreements and print euros to cover a default. Germany and the Netherlands would go along.

How The Euro Will React After The First French Results Come Out

With the French voting stations open until 7pm, and the first exit polls due just after 8pm although the French media is authorized to report preliminary results (these are not exit polls, but numbers based on processed ballots) historically an accurate indicator,  here is a simple matrix predicting how the Euro will respond once the results start trickling in, together with event probabilities, according Citi:

EURUSD (%) outcomes from French Election Round 1 (joint probability of outcome in parenthesis)

In addition to the broader Euro reaction, here are some further thoughts on the rest of the FX board from Citi"s Ran Ren, Josh O’Byrne, Todd Elmer, Richard Cochinos

Follow through on Extremes, EURUSD Expected Value (+0.67%)

There are six possible paths for two candidates to advance to the second round. Basically it’s a 4x4 grid with payoffs. Round 2 is a 2X2 grid. In other words the French elections it’s a two-step game with 18 possible payoffs, and a time lag of two weeks in-between node 1 & node 2.

For risk into Round 1, we think it makes most sense to bound the extreme outcomes (most market positive, most market negative), and treat the others as convex combinations.

Of those six paths, the ones that have the largest tail where we would expect further follow through is LePen/Melenchon (EUR-), or Macron/Fillon (EUR+). It’s only with these extreme outcomes would we recommend clients follow through on the initial price action. Outside of those outcomes, volatility should die down within a few hours.

We calculate the Expected Value for EURUSD on the day as +0.67%. We take the betting markets as indicative of the most likely outcome. The conditional probabilities are in parenthesis in the table above. This gives an expected value for EURUSD of +0.67% or EURUSD 1.08 over round 1 (based on a current spot of 1.073). 

What are the spillovers? How does G10 respond?

Broader ripples from the French vote are more likely to come from the impact on risk appetite and volatility than any channel of expected policy shifts. While a Le Pen victory might threaten EMU stability, there would remain a great deal of uncertainty on timing and shape of follow through on campaign promises. The same is true of a surprisingly good result for Melenchon, since there is uncertainty the degree to which his proposed market ‘unfriendly’ measures would come to fruition and get support after the legislative elections. As such, the short-term impact is how much political uncertainty (both ahead of and beyond the second round vote) serves to constrain risk appetite.

The dollar should benefit from any surge in risk aversion, so it looks likely to be most sensitive to either a result which puts Le Pen in surprisingly firm stead in the run-up to the second round or one which pits Le Pen vs. Melenchon. The fact that investors do not appear to be running much exposure into the election may be a mitigating force for moves since it means there is less vulnerability associated with position paring. Nevertheless, flight to safety should prove USD supportive in these scenarios, particularly if asset market performance worsens. We find the argument that the French vote will shift the Fed from autopilot on gradual tightening less convincing, even on one of these ‘adverse’ scenarios.

The Fed seems to have backed down from some of its earlier concern on international developments, so even on an uptick in volatility, there should be only a marginal impact on thinking. Coupled with the fact that investor expectations Trump administration policy have diminished over time, this means that the French vote may have surprisingly little impact on broader market calculus on medium-term direction from USD.  Conversely, with the pillars of USD support from the Fed and Trump policy having been weakened recently, there is little reason to believe that USD would not sell-off on an outcome which favors the centrists.

We also see JPY trading on risk aversion/appetite, but the moves might be more exaggerated than for the USD. Here, the question on longer-term impact is whether even relatively modest moves in JPY might more readily feed through to Japanese policy than is the case in the US. On a long-term basis, EURJPY is only towards the bottom of middle of recent ranges. However, a sharp move lower might provoke opposition from Japanese authorities which could mitigate downside. This ties in with last week’s Treasury Report, and intervention would be very carefully balanced.

The CHF response is the most complex. The SNB reaction function in particular is uncertain. There seems some scope for FX intervention to abate in the Le Pen/Melenchon case, and we suspect a new range is instated closer to 1.06. We find some inconsistency between priced rate cut risk and high implied correlation between EUR/CHF priced in options. A more material break higher before round 2 seems isolated to the scenario where Le Pen does not qualify. Among the more likely bullish EUR scenarios, we see EURCHF stopping short of 1.0750.

Markets price GBP correlation with EUR (via USD) between 40-50% over the French election. This looks about right to us. We doubt GBP can attract the safe haven flows JPY, USD or CHF might see. This means relative underperformance on more negative EUR scenarios (vs USD & JPY), and a lagging response to EUR rallies. We doubt particular outcomes have a significant effect on monetary policy in the first order, rather only marginally and indirectly through financial conditions.

SEK balancing risk beta and policy implications. There seems scope for SEK/EUR correlation to be even higher than GBP/EUR, with low liquidity punishing the currency during scenarios of heightened volatility. We still expect however EURSEK and EURUSD to be positively correlated and have more confidence in this being the case over the subsequent sessions. Investors should keep in mind that the Riksbank primarily view the implications of global risk through the lens of the currency. Subsequently, policymakers can be dampeners of volatility, adjusting guidance for given FX moves.

The key in gauging response from the commodity currencies is likely to be the degree to which positioning is square. Indications are that investors are running exceptionally light positions. This looks be contributing to a somewhat higher tendency among investors to trade underlying factors as opposed to using the commodity currencies as simple risk barometers. It means that downside on a ‘negative’ first round vote could be more constrained, and also skew risk-return in favor of a bigger response to a positive outcome since there seems to be little on the domestic horizon in Australia, Canada and NZ that looks likely to disrupt yield seeking. Indeed, if anything recent impact from global factors in weighing on rate expectations in these countries looks overstretched, so domestic conditions actually argue for stronger currencies.

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FInally, a comprehensive summary of every possible outcome, from Kepler: