The New Mayhem: Low Interest Rates & Rigged Soaring Capital Markets

The exit of England from the European Union will take months if not years to complete, however, any look of indices reveals a staggering confidence born from Central Bank accommodative policy, not consumer spending.  This has all the markings of a confidence trick and it may well end badly.

When the decision to leave was accomplished, U.S. Treasury yields dropped, even German and Japanese yields sought negative territory.  All this ramped up with recent smashing gains on Wall Street.  Something is amiss here. . . with have negligible growth sustained at zero inflation, massive carry trades and arbitrage wrecking most portfolio’s, so where’s the origin of recent gains in capital markets.

Well, its really about the Central Bank managing expectations.  

Interest rates remains a center piece in western capital markets, it remains the sine qua non of the entire edifice.  It is the last stronghold Central Bankers have in a world of digital fiat money.  However, as every trader knows, the driver of profits is the shape of the yield curve, the chart of interest rates covering specific durations.  The smaller the gap between short/long rates, the flatter the yield curve, the harder it is for banks to seek profit.  This turns deadly when interest rates turn negative, hence the crisis enveloping Deutsche Bank.  But the problem is really twofold, for even as banks admit to declines in assets, it becomes impossible for banks to reduce the cost of their liabilities.  This is perhaps the largest structural problem sustaining banking crisis’ throughout the world.

Nevertheless, short-term interest rates and government bond yields remain the only risk free rates forming the basis of financial returns.  A terrible irony has engulfed central bankers throughout the world:  extremely low-to-negative-rates were imposed as a distinct policy to save the financial sector.  The expectation was that banks would use their lending mechanism to fund sector growth.  It never happened.

All we’re left now is an all powerful hollowed out institution seeking to manage psychological gain by ginning up the balance sheets of highly leveraged companies willing to run out on a dangerous risk curve.

George Steiner was right, when the King is dying, the charlatans cash in.

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Kashmir, Islamabad & New Delhi

I’ve spent a lifetime in pursuit of understanding the intricate geopolitical wiles of the Subcontinent, especially Pakistan.  In short, its not a democracy and it just may well be the perfect challenge for any sitting President, to undertake dealings with Islamabad’s extraordinary civil-military opacity, a bulwark against modernity if there ever was one.  I write this to underline a strident point:  the encirclement of Pakistan has begun, I’m not sure it will end well.

The recent killing of a Kashmiri terrorist named Burhan Wani by India’s special operation rangers was a longtime coming.  The valley’s nearly 7 million muslim inhabitants are a devoted proxy between the rival ambitions of India & Pakistan.  The LoC (line of control) is the most heavily nuclearized place on the planet.  India devotes over 600,000 (you read that right) troops to the LoC.  Pakistan’s vision has turned inward and it has sharply curbed the export of guns to its Islamic proxies.  The only location that resembles the satanic political manipulation and repression of Kashmir is Northern Ireland.  Given the Good Friday Agreement of 1998, Kashmir reigns as no-mans-land, it remains a playground for Pakistani sponsored terrorism (read Kabul).

As it currently stands, the current state of governance of Jammu and Kashmir is an aggrieved coalition polity between Narendra Modi’s BJP (Hindu-Nationalist Bharatiya Janata Party) and a representative of Kashmir.  The locals look upon this arrangement as permanently favorable to New Delhi, however, in truth, the arrangement only works if Pakistan’s jihadi interests recede.

As of this writing, the number of armed militants has shrunk to less than 200 armed Kashmiri’s, most from well respected southern families taken in by the romanticism of jihad.  Wani exemplified this trend prior to his killing.  New Delhi views the issue through a bilateral lens and often seeks redress through unofficial channels.  The current calm resembles a quiet insight that Islamabad is playing for time.  The Punjabi’s throughout this dangerous frontier have yet to grapple with their history of jihadi proxies.  They won’t until they drop the pretensions of seeking out larger client states to finance their jihadi ambitions.

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Nigeria: Famine & Falling Currency

Its really an unprecedented series of geopolitical and domestic challenges for AFRICOM, the U.S. senior combatant commanders charged with monitoring and shaping indigenous counter-terror reform throughout Africa.  Although housed in Stuttgart Germany, they currently reside throughout littoral West Africa striding both sides of the equator.  Its a thankless task, but only the indispensable county can muster resources sustaining favorable traction against both the Islamic State and famine.

Northeastern Nigeria is currently suffering from famine.  This is chiefly a man-made problem brought about by Boko Haram.  Nigerian farmers throughout their interior have abandoned farming to the wiles of a Saudi proxy.  This will eventually hit Lagos and numerous other cites southwest of the Nigerian interior.  Already there are terrible signs of a dangerously flailing economy evidenced in wild currency fluctuations.  Beginning on June 20th, Central Bank authorities unpegged the naira to the dollar, only to watch a 30% plunge making Nigeria’s currency the worst performing currency regime of the entire African continent.  Only Venezuela and Suriname surpass Nigeria’s fallen naira.

To be fair, the attempt by Nigeria’s central bank to float its currency lasted only a day, it now flatlines against the U.S. dollar managing a 282 parity rate.  Why is this odd? Its strangeness stems from Godwin Emefiele’s attempted restriction of the money supply in a bid to maintain parity at 199.  Stability has only very recently emerged, but only after the central bank sold dollars and moved toward a managed peg.  What explains the gyrations from peg, to float, to managed peg?  The answer is found by witnessing the political intervention Nigeria’s new president hoisted upon central bank leadership.  President Muhammad Buhari has always feared a weak currency, but he acknowledged fleeing investors and dropping FDI to acquiesce toward a currency regime of a managed peg.  Financing Nigeria’s ever widening trade deficit is commanding all the resources of governing leadership.  They’re not out of this yet. . .

Currently, Nigerian political leadership is learning on the job, something the America regime and media cohorts brilliantly obscure.  This intervention has created massive distortions evidenced in food, product shortages, bringing factories to a standstill.  As of this writing, Lagos has an economic contraction of 0.4% and stabilizing, however, massive unemployment and inflation raging at 16.5% means this man-made policy disaster will grow unless leadership redresses monetary mismanagement.

How else to say it:  liberalism works here, but anywhere else, it immediately fails.

Yes, institutions matter.  But so does sound governance.

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India’s Fragile Democracy: Indebted Tycoons & Trumps

Teachers unions throughout the United States and indebted unions with enormous unfunded liabilities tried using Conservative arguments favoring States Rights to avoid having to recognize the supremacy of federal law regarding bankruptcy proceedings.  The Constitution spoke of the supremacy of federal law leaving both Detroit and Sacramento having to arrogate union contracts.  India’s democracy is currently trying to impose identical proceedings regarding bankruptcy, much to the consternation of its indigenous Trumps, local tycoons who for decades (if not longer) evaded taxation.

Ever since capitalism arrived on the heels of vacant socialism, India’s own class of tycoons have used India’s lame bankruptcy regime to fend off having to pay off debts or sell prized assets.  All that is now changing.

The departing Central Banker Raghuram Rajan championed a regime of legal transparency forcing India’s Trumps to face realities they permanently evaded.  This means banks have had to admit and write off failing loans, foreclose on insolvent firms while stiffening regulatory regimes in New Delhi to move against India’s own investment class.  As of now, India’s one percent no longer has access to Narendra Modi’s office.

This new regime of transparency still meets official cultural opacity; we’re a long way from western procedure whereby over-indebted firms are swallowed by their lenders and then broken up and sold to new owners.  Why?  For one thing, India lacks buyers, it also lacks private equity firms that could smooth over transitions.  Unmentioned is the tangled pathology of intermarriage running though India’s plutocracy.

To be fair, India’s unsustainable debt load is tied to cyclical industries like mining or steel, making it far easier to for India to recover.  The U.S. has no such exit, our debt is tied to an entrenched political class beholden to rent-seeking, meaning even with Reaganite 9% GDP growth, Amerika begins to look a lot like Indira Gandhi’s political economy.

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Theresa May’s Home Run @Dispatch Box

This week saw the resurgence of two significant components of political life on display when England’s new Prime Minister approached the Dispatch Box for question time:  rhetoric and applied effort.

Although our founders knew the fragility of Parliaments, having chosen a regime of Republicanism, they sought to secure its ideological comport through renumeration, hence the Bill of Rights distinctly frames both our Declaration and Constitution.

What was remarkable, was how quickly and competently P.M. May sought to emasculate labor’s embattled leader Jeremy Corbyn.  Politics is a blood sport and English politics has its history of sever recrimination of ministers who badly miscalculate foreign or fiscal policy; yet still, May’s command of issues was formidable.  Margaret Thatcher is back!!

Given how media scrutiny revealed how woefully unprepared her competitor was, Andrea Leadsom abandoned her political ambitions leaving Theresa May that last women standing. Note the irony with her predecessor Cameron :  she publicly campaigned for Remain.

England will now take on the most difficult challenge yet, an amicable divorce from the European Union.  Why is is significant?  With recession already registering, the social, political wrangling from prominent fiscal, monetary and political institutions is bound to be fierce.  Popular anger mixed with hyper-nationalist sentiment via immigration can destroy any gifted politician.  My eyes are on how she wades into and parries growing intractable challenges, for Torries have seized the center ground vacated by Labor.

Labor is currently suffering a civil war, its leader Jeremy Corbyn refuses to step down, needless to say, her ability demonstrated in her opening clashes with opposition labor reveals profound leadership skills.

The divorce proceedings will be characterized by two components:  when to invoke Article 50 of the Lisbon Treaty governing an exit, and the policy mix detailing immigration.

Watch for May to strongly navigate Tridents nuclear deterrent in Scotland, a prominent location that Putin uses to split the Atlantic alliance while demonstrating some flexibility regarding market based reforms.  As it now stands, May’s Torries resemble U.S. Democrats vocation for economic meddling.  But we should remember, Downing Street never made anyone a liberal.

YouTube British Prime Minister Therese May:  First Time Dispatch Box, Question Time

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Our Political Problems Are Moral

When Lev Davidovich Bronshtein (pen name Leon Trotsky) wrote about homo Soveiticus, the new breed of man born under the pall of terror; a subject of tyrannical social engineering by the State, he was referencing a utopian conviction that contemporary capitalist states now achieved; an easily ameliorated human person devoid of natural attachments.  He wrote:

What is man?  He is by no means a finished or harmonious being.  No, he is still a highly awkward creature.  Man, as animal, has not evolved by plan but spontaneously, and has accumulated many contradictions.  The question of how to educate and regulate, how to improve and complete the physical and spiritual construction of man, is a colossal problem which can only be conceived on the basis of State Socialism.  

We can construct a railway across the Sahara, we can build the Eiffel Tower and talk directly with New York, but we surely cannot improve man.  No, we can!!  To produce a new, “improved version” of man, that is the future task of Socialism.

The task given the next U.S. President is no less challenging than the task put before Reagan or Truman:  it calls for the dismantling of the body of precedents undergirding the modern administrative state.

We begin with policy.  Why?  Because politics is applied ethics. 1b

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Turkey @The-Crossroads

Last weekends failed coup is testimony to a dire freneticism that splits entire social classes throughout Islamic civilization, for even Republics are beholden to ideals easily exploited. This is now on display throughout Turkey in its coup recovery.  How Erdogan’s political class divides to unite will outline Turkish geopolitical trajectory for years to come.  Fault lines are growing because of Turkey’s ability to stride west Asia’s entry into Europe.  It shares a border with Iran in its eastern corridor, but its southern border with Syria remains fluid, while Kurdish ambitions grow.

As of this writing, Turkey’s diplomatic class is ready to use its nominal NATO status as leverage against the U.S.  What should team Obama do?  Simple.  Get Ankara’s attention by moving our nuclear deterrent off Incirlik to Erbil, the capital of Kurdistan.  Demand that Erdogan start acting like a Republic.  Pursuing personal, social and political vendettas against media, political activists, judges and military personnel makes Turkey look small.

If anything, the unintended consequences of a failed coup will mean that Erdogan’s recent reversal of authoritarian power is permanently put on hold.  The deep-state is in overdrive.

Why?  Turkey is currently reeling from high inflation, very low FDI, a halting economy; all while witnessing accelerating attacks from the Islamic State.  The Turkish Army currently battles Kurdish guerrillas throughout its soft southern flank while pushing Syrian refugees northwest toward the Bosphorus.

Sadly, this failed coup will put off the bitter reckoning Erdogan’s failed policies have procured.  The shortsightedness of the coup planners has damaged much more than Turkey.

A wholesale political purge is underway, so is the beckoning that Muslim autocrats desperately love.

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Obama’s Tutorial on Russian Aggression

While team Obama resides in Poland fortifying NATO resolve, it would help if his executive team embraced realism.  It won’t happen, but we need a brief outline explaining Putin’s aggressive posture throughout the Mediterranean and Baltic region.  The Russian leaders is definitely hurt at home given downward pressure his commodity based export regime is under; but finding relief valves is only half the problem, the other half is the nature of authoritarian regimes, the lack of sound institutions and the need for security that animates all autocratic regimes.

Putin is engaged to fundamentally challenge Western political order.  This is his rationale in aiding Iran, splitting the Atlantic alliance in Glasgow, damaging any democratic ethos in Minsk and threatening Berlin.

To achieve these ends, Putin began Russian military modernization efforts to conceal his posture abroad.  His Gerasimov doctrine, known as deniable hybrid war is an attempt for him to achieve foreign policy goals cheaply, without interference.  Putin simply claims grandiose international legalese, providing cover for covert action.  His framework is to challenge American aim of stability through coercive, active propaganda.  He’s winning, but his industrial base and currency is dwindling.

Geopolitically, what does Russia seek?

Russia wants the West to acquiesce to Putin’s world view that Russia should have a sphere of influence.  To achieve this aim, Putin uses agreements to demoralize the U.S.  If you ask Istanbul, Beijing, Brazil, Israel and even London, they all admit a quiet dangerous refrain, team Obama’s unwillingness to punish Russia permits Putin a mantle of power broker.

As Truman, Kennedy, Nixon and Reagan all knew; there’s only one way to finish off this growing antagonism:  meet the challenge head on and punish him severely for all to see.

 

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A Keynesian Trips A Monetarist. . .

The single most disturbing component of our non-recovery throughout every first world economy is the stagnation of broad money.  Its only real historical corollary is Arthur Burns and stagflation, but even then its a tenuous example.  Talk to any professional economist and they all admit that the key to growth depends on driving higher loads of debt.  You read that right.  To a monetarist, something is badly wrong here and its found in acknowledging that contemporary trained econometricians ignore micro foundations. But like all positivists or Statists’ they are taught an ideology that stands at odds to reality.

What are Keynesians to do when countercyclical measures fail?

I have an idea, lets allow working people to get to equity, capital formation.  Let’s honor what was known prior to Keynes, even before we had central banks.  I’m not speaking of fixed exchange rates, I’m talking of the astonishing growth that occurred before the birth of the Fed and its corollary under Reagan.

Here’s a fascinating question that speaks to our divide.  Does an increase in the deficit increase aggregate demand?  If you said ‘no’ you’re in the camp of Hayek, von Mises and hosts of others.  I’d note profound social, political, even geopolitical differences do underwrite policy regimes throughout the first world, even still the above noted question is perennial, for it speaks to the issue at hand, namely the relative informed relation Keynesian thought has on economic reality.

Much to the consternation of Keynes, Martin Wolf, Paul Krugman and his legions, the U.S. deficit has shrunk under our ‘recovery’.  Nevertheless, the challenge embodied above in the interrogative still stands.

What the Keynesian cohorts recite is circular logic, but nonetheless exemplary of keen insight, namely that output growth remains weak because of stagnating labor productivity. Notice the slight of hand, this isn’t a resolution to the problem at hand, namely the formal relation that Keynesian thought says exists between fiscal policy and aggregate demand.

Let me put it another way:  does an increase in the budget deficit increase output?

It should, but it hasn’t.  Which brings me to how Krugman and his Keynesian cohorts remain casually wedded to evidence, even historically favorable evidence.  Since 2008, none of it has worked.  If anything, King Krugman et al remain divided over the size of the multipliers.  We’re now in a position to admire the slight of hand more adroitly, for the truth that all positivist sciences’ possess is established by evidence evaluated as data, not by mere assertion. 

To conclude:  getting exchange rate policy is just as important as getting fiscal and monetary strategy right, however, in application of a policy mix, the politicos must acknowledge what’s held in the balance, namely volatile relations between taxation, expenditure balanced between interest rates and the money supply.

The clowns in D.C. are learning on the job.

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A Racket Called Central Banking

Marx and Keynes weren’t the first to recognize the relationship between money and labor, although they remain the most prominent faces among macro-literati to note the changing value of money relative to time.  Even Ibn Khaldun’s work in the early 14th century mysteriously referenced Islamic jurists puzzling over the social impact of the time value of money (inflation). It was Khaludn’s insight that provided the Laffer curve, a social insight that new regimes procure higher rates of revenue that permanently decline over time.  Nevertheless, bean counters and gnomes throughout the distinguished world of econometrics need to note something:  they’re failing miserably and domestic regime change is badly needed if the U.S. is to emerge from permanent decline.

For some, a lost decade is permissible.  This cynical attitude reigns throughout D.C. and the halls of bureaucratic power throughout our nation.  What’s missing is any real measure of how far gone our governing institutions are.  Its isn’t a social contract that’s constitutive here, for if politics is applied ethics we’re in far deeper territory.  The founders hued our Constitutional Republic from the social impact of Christian revelation.  Any brief reading of the Federalist Papers demonstrates profound insight to governance, namely the moral foundations of liberty.  The founders wrote of the constitutive role virtue had in Republics, even regarding the coinage of money.

Today’s effort is more prosaic in that our governing institutions are dependent, influenced by the balance of institutions and personalities.  Given the gravity of our moral (political) challenges, I’m not so sure the Republic believes in those that govern anymore.  What I mean is this:  the exaggerated role governing officials have placed on central bankers to conjure growth has failed.  Central banks determine nominal exchange rates, nominal interest rates and inflation targets.  Viewed synchronically, previous successful central bank policy was determined not so much by positive, favorable environmental factors, but engaged effective adults deeply involved in applied effort.  The spheres of institutional autonomy that underwrote our Republic worked!  Today they don’t.  We’re free falling.

We should remember that even Keynes himself knew that interest rates were extraordinarily limited, he believed in activist fiscal policy working in tandem with monetary policy, Keynes knew of using variations in the budget to secure growth.  Reagan and his team had a term for this kind of institutional comity.  Its called a policy mix.

Given the profound failure global central bankers have had in conjuring growth (the infamous multiplier), all that’s left for them to do is tinker with exchange rates.  Arbitrage is all we got!  This partially explains the rage animating much of our Republic.  Gone is the value of exertion that characterized manliness and the honor of earning a living.  Gone is the perennial insight of a Judeo-Christian ethos that secured Western Civilization since Patristic times; the requisite embodied need prudence had in the application of resolution. The rail splitting prairie lawyer and Shakespeare knew it; the inevitable comes to pass through effort.  

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