The Sweet, Sickly Stench of Success

Corbyn & Trump

Six years ago, hardly anybody outside financial circles had any idea what Quantitative Easing was - hell, many within financial circles had no idea what QE entailed.

The Fed, and the BoE did the heavy lifting in explaining it to Western audiences (Japan had been doing it so long that its citizens were bored of it and paid little attention when iterations 16, 17 and 18 were rolled out in recent years) with then-Chairman of the Federal Reserve, Ben Bernanke, leading the way as only he could:

(Jackson Hole Speech, 2010): The channels through which the Fed’s purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short- term interest rates have reached zero, the Federal Reserve’s purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public.

Specifically, the Fed’s strategy relies on the presumption that different financial as-sets are not perfect substitutes in investors’ portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

Yeah, I know.

Others took a swing at explaining QE in terms more accessible to the layman (and woman):

(The Economist): To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence "quantitative" easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment.

But the general narrative that the general public was beaten over the head with by central bankers and politicians was, essentially this:

We are going to pull a few levers and create money which is going to solve all the problems we face. Don't worry, there will be no negative effects as a result of this policy. We will be able to maintain full control of everything and, when the time comes, we will gracefully exit the program and go back to the way things used to be just as soon as everything is fixed. In the meantime, carry on with your lives, go out, spend money, borrow more and leave the worrying to us.

The campaign to take a complicated concept and dumb it down sufficiently for a public that really didn't want to have to do the mental gymnastics required to understand its implications had one significant tailwind - complicity on the part of the public. They wanted to be told it was all going to be OK and they were positively inclined towards the idea of 'free' money being printed which would, in turn, lessen their own chances of being directly impacted by the economic downturn which had come so perilously close in 2008.

Those in charge of designing and implementing QE programs knew that it was all too hard for the public to understand and they played that knowledge brilliantly.

Unfortunately for them, they were wildly successful.

The public neither knows nor cares what QE actually is. All they know is that, optically at least, it has worked because a) they are being told it has and b) the stock market is going up.

That's essentially been the extent of the burden of proof.


They don't understand this:

BOE Balance Sheet copy

Or this:

But here's where the success in creating the narrative that free money does no harm and has no unintended consequences turns into a potential disaster.

In the UK, left-winger Jeremy Corbyn was a last-minute addition to the leadership ballot for the Labour Party (US readers can think in terms of the Democratic Party nomination) - thrown into the mix to supposedly 'broaden the debate'.

Well he's broadened it alright:

(UK Daily Telegraph): the joke has backfired. Mr Corbyn is now the clear front-runner, and on Thursday the bookies installed him as the favourite.


Corbyn's own understanding of economics is on par with that of the average British citizen - which is perfectly fine - however, it's what he's doing with that knowledge that makes him far more dangerous.

Ladies and gentlemen, I give you; People's QE:

(UK Independent): Jeremy Corbyn said that future rounds of the monetary stimulus should be redirected from the financial sector to brick-and-mortar projects.

“I am calling for a people's quantitative easing - and asking my fellow candidates to join me in that call,” he wrote in an article for Huffington Post UK.

“The Bank of England must be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects.

Jeremy Corbyn, MP for Islington North“This would give our economy a huge boost: upgrading our outdated infrastructure and creating over a million skilled jobs and genuine apprenticeships.”

Corbyn has been convinced that QE is a free ride, just like the majority of the electorate and so, of course, he will promise them more of what he knows appeals to them.

And, if they get the chance, they will vote for him. Of course.

(Jeremy Warner): ...It sounds a bit like The X Factor – perhaps we could get Simon Cowell to chair the MPC live on TV and we could all text in to say how much cash we want the Bank of England to print this month. It turns out, however, that the idea is for the Bank to “be given a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects”. 

Mark Carney might well feel he has enough to do already, what with controlling interest rates, inflation and regulating the City. But, heck, in a few spare hours on a Friday afternoon, he could just print a couple of hundred extra billion, and use the money to start building publicly-owned housing estates. Yet a few hundred years of history suggest that central banks financing governments directly creates inflation, and another few hundred suggest that state-owned companies don’t usually work well.

Jeremy Warner's warning was stark - its implications terrifying:

(Jeremy Warner): Everything about “Corbyn-omics” is delusional. Unfortunately, that does not mean it does not have an audience. By September, Mr Corbyn might well be leading the Opposition – or at least be shadow chancellor under Mr Burnham.

The success of the narrative created around QE; that it is the mythical 'free lunch' that we all intuitively know can't exist but secretly hope does, has played perfectly to the public and now, having endured for two electoral cycles, the next wave of politicians also believe it will have no consequences and are actually using it when planning the message they feel will endear them to the electorate.

What plays better than free money?

The same phenomenon will be front and center again tonight when the first GOP debate takes place with billionaire reality TV star, Donald Trump front and centre.

Nobody is better equipped to pander to a public who desire impressive promises of handouts which bear little or no scrutiny, as this remarkable excerpt from The Guardian demonstrates:

(UK Guardian): "Asked recently what he would replace Obama’s signature healthcare law with, [Trump] replied: “Something terrific.”

Who wouldn't vote for something terrific?

Here Beginneth The Lesson

There is a salutary lesson being given right now to anybody who invests in Western markets but few are paying attention. If the penny drops, things could get very ugly indeed.

Overnight, the Shanghai Composite Index fell another 8.5% - with the real damage being done in the last hour as sellers, spooked by a Bloomberg story which suggested intervention in Chinese markets may be curtailed at the behest of the IMF (who, somewhat hilariously, feel that the level of intervention from the Chinese government is a little over the top).

Shangai Collapse 2

Was the IMF story the cause of the meltdown? Well, it's hard to see why anybody would think for a second that the Chinese would listen to the IMF about such matters (not even in the face of their desire to be admitted to the SDR), and anyway, it doesn't matter. There doesn't have to be a reason for falls like this one.

This is exactly what I wrote about in my most recent Things That Make You Go Hmmm... 'The Sum of Both Fears' (

Whatever the reason, the selling overwhelmed the bids of both natural buyers AND the massive interventionist forces of the PBoC and the seemingly myriad regulatory bodies.

75 stocks fell for each one that rose and those hit hardest were the stocks (such as PetroChina) which had been the recipients of state largesse in the form of direct intervention in recent weeks.

Adding to the woes was the release on Friday of Chinese Industrial Profits, which fell 0.3% YoY.

Again, nobody really believes the numbers emanating from the Chinese National Bureau of Statistics, but when markets are rising, cognitive dissonance reigns supreme.

This time, however sentiment being tilted towards fear was all it took to generate the second-largest fall in the history of the Shanghai Composite.

The lesson? Well, Chinese investors' confidence was buoyed by the explicit promises (and actions) of the Chinese State machine who directly bought stocks and, seemingly, put a cast iron bid under the market but when investors' level of nervousness reached a certain point (a point that nobody could have pinpointed in advance), everything changed and even bans on not only those 'evil short sellers' we continually hear about in the West, but selling, period, were not enough to stem the tide.

Nor were threats of arrest for short sellers.

Nor were hundreds of billions of dollars (equivalent) in direct market support.

When Fear took over, the Central Bank was powerless to react.

In the West, there are no explicit official sector stock buying programs in place. There are no threats of arrest against short sellers and there are no bans on outright selling.

Everything..... EVERYTHING..... rests on one ephemeral thing - the market's confidence in the power of Central Banks to ensure a good outcome no mater what.

Anybody paying attention to the lesson should not just be thinking about what might happen when that fragile confidence evaporates, but taking steps to ensure they don't get caught out when it does.

The problem comes in leaving such precautions a day too long...

Ask anybody who was considering selling their Chinese equities last Friday but didn't...

Download Problems – July 23, 2015

Dear subscribers,

Unfortunately, the download links to the PDF files for Things That Make You Go Hmmm... are non-functioning today. I have notified the developers who are working to fix the issue as quickly as possible. In the meantime, letters can still be read inside your browser.

My sincere apologies for this inconvenience. The Gremlins clearly have it in for me.

I will notify you as soon as the issue is fixed.

Many thanks for your patience


Varoufak off

Greek finance minister Varoufakis in Germany

So, the EU finally got the 'yes' they wanted, only this time it was from Yanis Varoufakis, who resigned yesterday morning after posting the following on his blog (this is how politicians and central bankers communicate with the world these days - immediately - which is perhaps why many of their problems arise):

"Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.
"I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum.
"And I shall wear the creditors’ loathing with pride."

You could take that as a sign that a deal is likely going to be done in very short order. The Eurocrats needed SOMETHING to save face and Varoufakis' head was the prize.

However, the reality is that, with the 'Oxi' vote ringing across Europe, the balance of power has shifted enormously towards the Greeks (and not just them, but the Portuguese, the Spaniards and the Italians too). Meanwhile, in Brussels, the Eurocrats' overwhelming desire to punish the Greeks for their temerity in defying them is evident in the tightening of ELA provisions by the ECB overnight.

How dare the Greeks 'act up' like this!

Somewhat fittingly, this blind refusal to accept the shortcomings of the euro project will be its undoing and the foolhardiness of those who seek to protect it at all costs will be the architects of its demise.

In any ordinarily-functioning financial system, Greece's creditors would do the deal which made most sense financially - in this case, a debt restructuring and a BIG haircut on the amount owed to Greece's creditors - BUT, this is the EU.

Instead of being fiscally prudent and saving well over a hundred billion euros of taxpayer money, the Eurocrats are still looking to make an example of Greece (after all, money does grow on trees these days so a hundred billion here or there is no big deal). It makes no difference that the Eurocrats themselves lent Greece money they knew could never be paid back - the EU had to be saved regardless of the future cost.

Europe's leaders' own stupidity has led them into a prison cell of their own construction. Their blind insistence on preserving their precious idea of what 'Europe' was supposed to be was, in fact, nothing more than the protection of a series of legacies and the staunch refusal to consider the possibility that they may just have got a few things wrong when they put the EU together in the first place.

A monetary union without a fiscal union was always going to work until it didn't and the time when it didn't was always going to be the first 'crisis'.

There are a series of very good reasons why Italians, Spaniards and Greeks have historically been charged more to borrow money and a series of equally good reasons why German credit has always been worthy of a far lower risk premium. In these politically correct times, such words can be twisted into carrying all kinds of intention that didn't exist at the time they were said - such is the way of the world - but twisting the words doesn't alter the facts that they represent.

Greece got into the EU by cooking the books to ensure their entry. That is not speculation, but a fact confirmed by Greek officials. THAT was the time when action needed to be taken, but throwing hundreds of billions of euros at the problem instead of facing up to a stark reality which would have meant tough choices about EU membership was symptomatic of the 'extend and pretend' culture that pervades the 'leaders' of the world everywhere you look.

Now the Eurocrats face a stark choice of their own creation:

Make good on their implicit threats and kick Greece out of the euro which means waving auf wiedersehn/adieu/au revoir to a couple of hundred billion euros of taxpayer money OR, buckle, do a deal on something far closer to Greece's terms (and along the guidelines of the IMF's recent 'shock' recommendation - see this week's TTMYGH 'IMF'ed') which will involve huge debt relief but will cost a lot less, knowing full well that the leaders of Podemos in Spain and Five Star in Italy will be licking their lips at the prospect of speaking to their own austerity-ravaged electorates.

The man taking Variufakis' seat is Euclid Tsakalatos the Oxford-educated academic economist who has been described as 'the brains behind Milli Vanilli's talent' 'the brains behind Syria's economic policy'.

Prior to Sunday's referendum, he had this to say about Greece's plight:

"Even if they forgave all the debt and gave us €300bn we would still be in deep trouble"

One way or another, the Eurocrats are eventually going to get everything they deserve.


Remember when we were sitting at 1 having fallen from 2 in what seemed like a few days?

The idea of ever being at 3 in our lifetimes seemed utterly ridiculous.

Hell... suggesting we might make it back to 2 was enough to get anybody branded an idiot.

And yet here we are.


With a bullet.

Actually, not with a bullet, but with an arsenal of central bank ammunition that, had the level of it been suggested when we were wallowing at 1, we'd have, once again, called for the straightjackets.

TARP's $787 billion was deemed such an outrageous amount of money that Congress actually voted it down because they couldn't believe such a sum was either needed or warranted. At least the reaction to that decision was predictable:

Thus was the relationship between the denial of stimulus dollars to markets and the possible (terrifying) adverse reaction to it cemented.

Now, just a mere 6 years after the world was languishing at 1, watching all the wealth that had been created in the surge to 2 evaporate and truly believing that we would never again reach 2, we find ourselves at 3.

The trouble with 3 is that it's an inconceivably long way down to 1 again from there. Hell, I get vertigo just looking at 3 on that chart.

Stepping back and looking at this chart makes you realise (or should do) just how stretched we have become.

Valuations? Stretched

Margin debt levels? S-T-R-E-T-C-H-E-D

Length of time without any major correction? S--T--R--E--T--C--H--E--D...

But most importantly of all, Central Bank credibility? O-V-E-R-S-T-R-E-T-C-H-E-D

There is no recovery (at least not the kind of recovery that the world believed you could buy for $4 TRILLION as it lay at 1), there is no growth (certainly not the kind we believed we saw at 2 - even if it did turn out to be an illusion fuelled largely by credit expansion) and there is no good reason why we should find ourselves at 3.

But there are reasons.

Central bank stimulus, a corporate debt binge, monumental levels of share buybacks, multiple expansion, the intentional removal of coupon interest as a viable means of saving and faith in the omnipotence of central banks just about covers it.

However, that omnipotence is not what it seems (it never is) and in his book, Stress Test, the person who held the office of Treasury Secretary before Jack What's-his-name, Timothy Geithner, laid the reality of central bank omnipotence bare for the world to see. Unfortunately, nobody seems to have been listening:

(via Zerohedge): T]hings deteriorated again dramatically in the summer which ultimately led to him saying in August, these things I would never write, but he off-the-cuff – he was in London at a meeting with a bunch of hedge funds and bankers. He was troubled by how direct they were in Europe, because at that point all the hedge fund community thought that Europe was coming to an end. I remember him telling me [about] this afterwards, he was just, he was alarmed by that and decided to add to his remarks, and off-the-cuff basically made a bunch of statements like ‘we’ll do whatever it takes’. Ridiculous.

Interviewer: This was just impromptu?

Geithner: Totally impromptu…. I went to see Draghi and Draghi at that point, he had no plan. He had made this sort of naked statement of this stuff. But they stumbled into it.

That's how 'calculated' the ECB's actions were (and, doubtless, are) and, based on the statements of recent departees from inside the Federal Reserve, there is a similar level of competence at play there too. The BoJ? Well if they have ANY plan beyond "print it and they will come" then they've yet to articulate it and Mark Carney is (quite rightly) in hiding.

At 1 we longed for 2 and daren't even dream about 3.

At 3, 2 seems like a world away and we barely remember 1.

But, as I wrote in my most recent Things That Make You Go Hmmm..., 'Mercury Rising', the warning cries are coming thick and fast and from an ever-more impressive array of voices. To that list, in the last week alone, we can now add Felix Zulauf and Julian Robertson.

The countdown has begun.


Plus Ça Change…


On May 6, 2012, Françoise Hollande won a landslide victory in the French Presidential elections. Here's how that victory was reported in the (left-leaning) UK Guardian:

(UK GUARDIAN, MAY 6, 2012): François Hollande has won power in France, turning the tide on a rightwards and xenophobic lurch in European politics and vowing to transform Europe's handling of the economic crisis by fighting back against German-led austerity measures.

The 57-year-old rural MP and self-styled Mr Normal, a moderate social democrat from the centre of the Socialist party, is France's first leftwing president in almost 20 years. Projections from early counts, released by French TV, put his score at 51.9%.

His emphatic victory is a boost to the left in a continent that has gradually swung rightwards since the economic crisis broke four years ago.

The man Hollande defeated was Nicholas Sarkozy, leader of the right wing UMP party who had been in office for just one term (though that term - unfortunately for Sarkozy - just happened to coincide with the 2008 Global Financial Crisis).

However, Sarkozy's unseating was conclusive:

Nicolas Sarkozy, defeated after one term in office, became the 11th European leader to lose power since the economic crisis in 2008.

He conceded defeat at a gathering of his party activists at the Mutualité in central Paris, urging them from the stage to stop booing Hollande. "I carry all the responsibility for this defeat," he said.

In the wake of his defeat, Sarkozy, now no longer in office, couldn't help but make one more pledge to the French people (old habits die hard, it seems):

[Sarkozy] said that after 35 years in politics and 10 years at the top of government, he would now become a simple "Frenchman among the French".

Hollande swept into power on a wave of euphoria, promising all kinds of handouts to the French people - handouts which France couldn't afford to actually hand out, frankly, but when did THAT little inconvenience ever stop a politician from making a promise?

Fast forward precisely ten months to March 2013 and I think it's fair to say that the bloom was off the rose:

(UK Daily Telegraph): Some 67 per cent of [French] people now disapprove of [Hollande's] attempts at running the country, less than a year into his five-year term, according to a new poll. The score is 10 per cent worse than last month, according to Opionionway polling institute. 

Only three in 10 now think the Socialist is doing a good job, down eight points, while two thirds believe “things are not changing” for the better...

"Ten months after an election in a first term, this (level of unpopularity) is a record for a French president," said Bruno Jeanbar of Opinionway.


At the time of his defeat in 2012, the standing in which Sarkozy was held by the French public was, like the man himself, diminutive:

(UK Guardian, May 6 2012): The defeat of the most unpopular French president ever to run for re-election was not simply the result of the global financial crisis or eurozone debt turmoil. It was also down to the intense public dislike of the man viewed by many as the "president of the rich" who had swept to victory in 2007 with a huge mandate to change France. The majority of French people felt he had failed to deliver on his promises, and he was criticised for his ostentatious display of wealth, favouring the rich and leaving behind over 2.8 million unemployed. Political analysts said anti-Sarkozy sentiment had become a cultural phenomenon in France.

Now, however, after three years of Hollande's disastrous reign as French President, the people have been given a chance to voice their displeasure at his poor performance at the helm of Europe's second-biggest economy and, who should they turn to, but that 'simple Frenchman amongst the French' himself, Nicholas Sarkozy who, of course, couldn't stay away from politics:

(UK Guardian): The resounding election success by the traditional right UMP and its centrist allies catapulted Sarkozy back into the limelight after what was seen as his lacklustre return to politics in September. His party has been beset by debt, allegations of financial scandals and bitter in-fighting in recent months, but its score turned its fortunes around. Sarkozy described his party’s high score as historic and a mark of France’s “massive rejection” of the politics of his successor, Hollande.

Sarkozy’s campaign speeches have been sharply rightwing and openly negative towards the Muslim community to win over votes from the far-right – for example in his argument that school canteens should not offer alternative pork-free menus to children, or that the Muslim headscarf, or hijab, should be banned from universities. 

This has irritated some in his own party. But Sarkozy is likely to hail the UMP’s electoral gains as a personal victory for himself and a vindication of his veer to the right. The decisive win for the UMP will comfort his personal ambitions to win the party’s primary contest next year and run for president again in 2017.

Sarkozy's UMP party was seen as an acceptable alternative (for now) to the extreme right-wing Front National, led by Marine Le Pen, who have moved from a protest vote into a viable contender for office thanks to the paucity of the two main parties' leadership.

The 'cultural phenomenon of anti-Sarkozy sentiment' had to be swallowed in pursuit of a protest vote against perhaps the worst President France has had in living memory (and probably beyond).

The situation in France demonstrates, once again, the problem with modern Western democracies where a complete lack of true leadership has led to unpopular incumbents and comebacks by once-vilified ex-presidents across the political landscape.

The tipping point arrives when electorates realise that a vote for either of the two main parties is simply a vote for a horse of a different colour as, no matter which party takes office, the debt dynamics remain constant.

Eventually, impatience and frustration leads to a vote for extremism and that is something simply Europe cannot afford - but also a growing reality it has to face.

Greece's dance back and forth between PASOK and New Democracy (each of which was more hopeless than the other in successive terms of office) eventually resulted in the election of The Coalition of the Radical Left (Syriza) and we all know how well THAT little exercise in freedom of expression is working out.

Meanwhile, through it all, the cost to whoever inhabits the Élysée Palace of borrowing money from international bond markets is at a 700-year low (sorry, the chart 'only' goes back a couple of hundred years) and its yield curve is negative out to four years.

Despite appearances, France is a timebomb at the heart of Europe and, if reality were to reimpose itself upon markets, all hell would be let loose. However, for now, none of that matters.

Plus ça change...

France-government-bond-yield-Long-Term France Curve

Much Ado About Nothing

Today, in a Bloomberg video entitled "The Three Most Important Things Janet Yellen Said", this was #2:

"In December and January, the committee judged that it could be patient in beginning to normalise the stance of monetary policy. That meant that we considered it unlikely that economic conditions would warrant an increase in the target range for the Federal Funds rate for at least the next couple of FOMC meetings.

While it's still the case that we consider it unlikely that economic conditions will warrant an increase in the target range at the April meeting, such an increase could be warranted at any later meeting depending on how the economy evolves.

Lemme emphasise again, that today's modification of the forward guidance should not be read as indicating that the committee has decided on the timing of the initial increase in the target range for the Federal Funds rate. In particular, this change does not mean that an increase will occur in June - although we can't rule that out..."

These words? The entire financial world was hanging on THESE WORDS?

What she in effect said was this:

"Interest rates could increase from zero at some point in the future"

Then she said this:

"Rates won't necessarily go up in June. But they might."

Anybody who found themselves surprised by either of these statements should perhaps seek employment in an alternative industry.

So why the violent reaction in just about every asset class to a series of ridiculous statements which, again, "stated the bleeding obvious"?

Ah... well therein lies the rub.

Those violent moves in currencies, stocks, bonds and commodities are the first signs of the markets finally reacquainting themselves with reality and the reality is this:

The credibility of the Federal Reserve is hanging by the thinnest of threads and, unfortunately, that credibility is the ONLY thing holding back the tidal wave set to swamp the world once not just the Fed, but its cohort around the world are seen for what they really are and the complete hopelessness of their current situation understood is understood by markets lulled into a false sense of complacency by six years of QE-fueled gains.

One thing I can guarantee you is that the credibility and trust that took several years of concerted action by central banks to build up will disappear in a matter of days.


Painted Into A Corner

Surely Not?

“I am afraid this may not be a one-off episode... The timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets. The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility.”

These are the words of IMF head, Christine Lagarde and are taken from an article in the FT quoting a speech she gave yesterday in Mumbai in which she 'warned' of potential instability in Emerging Markets once interest rates begin to rise.

The article went on:

"...Ms Lagarde also warned that emerging economies faced a second risk from the recent strength of the US currency, with indebted companies that took advantage of low rates to borrow in dollars facing sudden and steep jumps in debt servicing costs."

There is a distinct lag in the delivery of messages such as these from the world's smartest investors and the world's smartest bureaucrats.

By the time the likes of Lagarde issue such warnings, it's likely too late to do anything about them.

For Lagarde to verbalise these ideas now, when the damage is already being done is of little use to anybody - other than to give the IMF the ability to say they foresaw the crisis.

Basil Fawlty called it "stating the bleeding obvious".

'Potential' instability in emerging markets, eh, Christine?

BRICS vs Dollar

See that chart? That would be the BRICS currency moves versus the dollar in the last 8 months.

Potential trouble spot? You think?...and these moves are essentially predicated upon the mere likelihood that the word 'patience' may be removed from a prepared statement issued later this afternoon.

Funnily enough, no sooner had Ms. Lagarde dazzled us all with her brilliant insight, than the other international home for financial geniuses, the OECD, wheeled out their chief economist, Catherine Mann, who offered the world this piece of cutting analysis:

"Excessive reliance on monetary policy alone is building-up financial risks, while not yet reviving business investment".

What would we do without them?

The serious point to understand about all this is that these are the same group of people who were certain subprime was contained, that the GFC was perfectly manageable, that QE1 would solve everything and that growth would have been back to 3% long ago.

The very fact that they are making these forecasts now tells us we are far nearer the denouement than many believe. If the IMF and the OECD think the world is in a degree of trouble, you can guarantee one thing; we're in WAY more trouble than that.

Target Practice

Amidst the hoopla over a possible Grexit lies the TARGET2 payments system and by far the largest claims on that system are those of the Bundesbank.

In January, as talk of a potential Grexit increased daily, a funny thing happened... claims on German banks in TARGET2 increased significantly suggesting that 'someone' has been moving a lot of money from 'somewhere' into the safety of German banks.

Of course, we have no idea who the 'someone' might be...

TARGET2 Bundesbank Claims


Thoughts From Athens…

Through my writing and traveling I am extremely fortunate to be in touch with a host of extremely smart, extremely well-connected people in all sorts of weird and wonderful places and one of those people happens to reside in Greece.

My 'source' (who I shall refer to as Socrates) sends me regular updates from the middle of the turmoil and those updates are always full of great insight. Today's note was particularly important ahead of the upcoming meeting with the EU and, I am delighted to say that Socrates has given me permission to post his thoughts so I'll hand over to him:

Just wanted to give you a brief update on Greece.

First of all let me start from the fact that we still have not elected a president. If you remember the reason we went to elections was that we did not agree on the who the next president would be.. Obviously not the real reason but that was the argument… As of Feb 12 we are in breach of our constitution because we were supposed have elect a president prior to that date. However we still do not know who the candidate will be.. Rumor has it that it will be Avramopoulos the current European commissioner for Migration (ex MP of New Democracy) but a few obstacles have come up.

The fist one is that Junker does not want him to leave and does not want a left wing guy from Syriza taking control of migration issues within Europe.. So Junker is against it. The second reason is that the hard left part of Syriza is going ballistic.. they obviously do not want a right wing guy taking the presidency.. So for once more we are in limbo… do not know what is going to happen.. Syriza is supposed to announce its candidate tomorrow. Nevertheless, they can pick anyone they like.. this time the votes go 180, 151 and on the 3rd round the candidate with the most votes gets elected president. So the president will be elected, the question is now who will it be.

The Greek president does not have much authority, its mostly an honorary position, but he holds one very important right. He can call for early elections anytime if he believes there is a national emergency. So his time it matters who the next president will be.

Coming to the rest of our problems.. I think its obvious now to everyone that the New government has no idea on how to handle things.. On the one side they go blaming Europe and on the other they ask for money and more time.. they believe that but arranging protests in Greece they will achieve something but its obvious they will not. My information tells me there is zero chance of getting a deal today and personally I find it very unlikely we will get a deal anytime soon. However, even if we do get a deal that’s when the real problems start for Syriza.

I am not sure the new government has realized how this would work. Even if they sign.. no money will flow into Greece unless Greece passes the relevant laws through the parliament… And as you can imagine.. the left wing of Syriza will not sign any of these agreements… So I am very afraid that Greece will be forced either to early elections again or to a referendum..

The new government is currently very popular in Greece and this has to do with the media propaganda going on.. If you read the Greek news you will think that this is the best government to ever govern Greece. That they care about Greeks, that they are the first to really negotiate on behalf of Greeks etc etc.. What no one is saying is that we are looking like fools and we are being ridiculed.. All the big media are being blackmailed by the government and they cannot say anything they want.. the first signs of communism are already here..

However I am not sure what would happen if a vote was called under strained conditions. Ie. Capital controls or if for one month pensions and salaries were not paid due to lack of cash.. Then i guess popularity would deteriorate.. Nevertheless, never forget how patriotic and stubborn Greeks are.. After this hideous propaganda Greeks might prefer due to national pride to leave the euro and blame it for once more on the Germans.

One more thing to note… money is flying out of Greek banks.. The ECB on Thursday raised the cap on ELA funds to 65 bn from 59.. I can tell you with great certainty that this amount has already left the banking system.. and the ECB will be forced to raise the ELA amount again.. If not expect capital controls to occur pretty soon…

I really hope I am wrong… but things are becoming very dangerous in Greece. The media propaganda is becoming worse and worse and people do not seem to understand the reality they are in…