Why Its Plain To See The Geopolitical Writing On The Wall

Not only does China have state-run newspaper called the "Global Times" but their phenomenal surge economically to the position of second economic power in the world threatens the status quo of the current hegemonic power. Note "power" said not in the plural but singular.

Hence why trade-war onslaught started this month of March 2018 with steel and aluminium tariffs imposed under order of demagogue leader  of the so called "free world"  President Donald; and yesterday he further announced tariffs on $60 billion value of Chinese imports - its official its war! China retaliated with tit-for-tat action of imposing tariffs on only $3 billion on American imports, as reported by CNBC in the link provided above.


While officially an economic war, at the same said President of the United States of America  or USA, announced the biggest ever increase to its military spending. Up US$80 billion to approximately US$700 billion on military spending; or expressed as a proportion of the total spending approved in the Senate in the early hours of Friday, 54% of the total US$1,300 billion expenditure in 2018/19 will be on the industrial military complex.

Of the US$1.3 trillion spending bill passed exigently early Friday, there are some reading between the lines, other than the obvious. 

First of all this bill is also the raising of the "budget ceiling" i.e. how much spending the USA government fiscal deficit will sustain in a given year. As things stand the budget ceiling has today been raised 4 times int total in recent years (as WolfStreet.Com explains here), to avert what has been dramatically described as "government shutdown". So this current raising of the deficit "legislation would fund the government through the end of September". As for thereafter in this unique American legislation designed to ensure fiscal-budget prudence, anyones guess, or great uncertainty.

Remember that earlier this year the national debt of the USA passed the US$21 trillion mark (also described in the WolfStreet article referenced above, and shown in the chart below). This is less significant as a absolute number, with the Dollar as the reserve token currency allowing unprecedented increase in "money printing" (to make historical Weimar Republic period of hyperinflation look restrained),  but reflected as percent of GDP or what America produces, the debt is very unsustainable.
Also as a  consequence of the unsustainable ballooning debt-bubble of government, Trump is perhaps leading us to that one major dire and disastrous outcome - debt default. The caveat is, only if his "America First" protectionism does not lead to sustained growth. But as we have seen over the last 10 years of kicking the debt-calamity into the long-grass, since the credit bubble in financial services, there are other remedies than debt default and debt-destroying inflation; namely near-zero or zero interest rate policy - Z.I.R.P and debt restructuring (the bad debts racked-up by financial services are now American taxpayers debt burden through T.A.R.P and Q.E etc). Who should continue to revolt or cause civil disorder with rage, after sucessive US administrations and policies delivered austerity instead of prosperity for the masses.

 
 This is why China is THE concerning crucial factor in the economic globalisation that we have seen accelerated since the 1980s or last 40 years. Trend of globalisation stopping now is evident, for fear that China grabs the economic growth that is needed in the current G7 countries, to pay-off their debt.

Yet the economic growth solution is hampered in the face climate change concerns. Yes climate change is only too REAL and beginning to be evident as an imminent threat to humanity and the planet. As are economic-growth threat from disruptive technologies that are burgeoning through to destroy traditional trading activities (e.g. shop-front buying and selling versus Internet online markets). Another example of the titans at
 trade war: China's scale of production has massively reduced the price of solar panels as an alternative to expensive fossil-fuel based oil and gas. 

What of the disruption (which is a euphemistic term) to traditional oil and gas exploration extracting refining and distribution industries, from climate-change concerns? The write-down or destruction of these industries' assets, whose stock market values reflect status quo international free-trade policies, will not be merely disruptive! We have seen this month the stock market valuations impact on global steel and aluminium companies.
See the latest research from the CarbonTracker.Org initiative (which investment bank research will not show!): Mind The Gap: $1.6 trillion energy transition risk.

Finally, in the context of what we have discussed above there will begin as covert of subterfuge psychological operations towards a cultural revolution. "America First", mentioned earlier is only the same socio-economic political stance as once great empire hegemony of United Kingdom, who exited the regional union of group known as European Union (which had as it early phase / guise the E.E.C - the European Economic Cooperation), on June 23rd 2016. Now this great tear-away from globalisation via regionalisation, project is named simply "Brexit". Abbreviation for for Britain Exits the European Union.

The cultural revolution in countries will also be "twitching" by the masses of people away from traditional government by politicians, viz. billionaire Trump as President of the USA and Andrej Babis in Czech Republic. Political machinery, which after 40 years of liberal capitalism, a period better known as "neoliberalism", has produced the rise and decline of the middle class, while creating and enriching plutocrats and oligarchs. As represented by billionaire wealth status of the top 1% of global population. Those politicians are dubbed by Fund Portfolio Management's own reputation thesis, NoSmokeWithoutFire, hastag #politiciansRcriminals.

The cultural revolution will also take the form of behavioural changes, as led from not only disruptive industries (whether people like or accept the phenomena that we are put-through for corporations, who define and rule via Pavalov's dogs impulses, most of our lifestyles behaviours), but from controls about freedom of movement of people, and indeed movement of goods. Which in context of free-trade developments THIS month, is supportive of Fund Portfolio management's geopolitical-tension scenario in the near- to medium-term. 

In short any activities which all add to greater carbon emission, and destruction of the planet will be curtailed. As evidence look at the slow economic growth of the last 10 years imposing mass austerity on the many under neoliberalism. That was not by accident, it was by design, in the face of the most important chart to mankind (by kind permission of Nasa below citing all the evidence. Don't take FPM's word for it.





 

A Social Economic & Ecolological Paradigm

FPM principals have been expecting a rise in interest rates for some time since 2011: with hindsight of time-told evidence and our longstanding10-year deleveraging economy paradigm (as foretold by economists Reinhart and Rogoff), FPM revise its forecast to a low-rate global environment into the medium future. The reader will understand that this is a bold revision at a time when financial services are not only vying for higher rates but indeed anticipated from Federal Reserve between 4Q14 and 1Q15. Remember that the economic recovery in terms of positive GDP growth started in 2Q09, therefore now beyond the halfway stage of the mooted 10-year economic stagnation paradigm, FPM would not be surprised to see no more than an overall 25 bps hike between 4Q14-1Q15. 

Make no mistake, any small rate-hike would not be a signal for policy shift in interest rates. Rather yet another in a long line of smoke-and-mirror tricks to timely bolster waning economic confidence. A show of stable economic growth would be the intended effect. That greatly acknowledged behavioural science characteristic of market participants called "confidence" is at junctures seemingly crucial to a world of rational investment decision makers! The recent Wall Street Journal op-ed promoted this as "private animal spirits" - more criticism of this stale brand newspaper in our next YAALA series.

Based on traditional economic understanding FPM forecast in earlier blogs that a first interest rate hike would happen by 1Q14 this year - Doh! In fact in Europe earlier this month the central bank there imposed unprecedented negative interest rate policy on banks depositing money at the European Central Bank, citing flagging economic recovery. It is the same situation in the United States of America, as reflected in mentioned WSJ article trumpeting for policy shift:

“The Federal Reserve's Open Market Committee on Wednesday stuck to its path of reducing its bond purchases by $10 billion a month… [it also] Fed slashed its growth prediction to 2.2% for 2014, which is down sharply from the nearly 3% forecast that it made in March… The move reflects the minus-1% growth in the first quarter, which could turn out to be even worse with revisions… Predicting future growth is notoriously hard, but this is the fifth consecutive year that the Fed has been too optimistic…” WSJ June 19, 2014

 FPM perceives developed countries’ economic weakness as structural and cyclical in the long-term. The developed countries being at structural saturation levels in terms of economic activity will not necessarily be expected be characterized by excess spending-power, which would certainly contribute to inflation increases. Yet unofficial economic growth policies of these anaemic growth economies are through population expansion via immigration which is helping to minutely tick-up GDP growth, lest the statistics reflect the real structural economic downturn. We validate this unpopular growth policy through the discontented nationalist voting patterns in the recent European Union elections. Using a corporate finance comparison, the population expansion economic policy could be said to be growth through acquisition rather than organic expansion. In the UK, the Office of National Statistics, confirmed a population of "64.1m in mid-2013 – up 400,600 on mid-2012". This is not a Y-O-Y rise in new births (from "Bonking Britain"!) or newly registered population but net inward migration.  Below are some 'stats' for the number-crunchers about  US jobs growth versus population:

Increasing Population and Real Unemployment (Source: EPI.ORG)

The proponents of interest rate rise suggest that a benign policy environment induces more borrowing and creating asset bubbles. Indeed only those afflicted with foolhardy short-termism imprudence would lead to detrimental debt addiction. A rational approach to bearing debt is also logical.  Debt accumulation is a choice prudently assessed on the ability to service one's debt i.e. pay the interest and coupons on expectations based on interest rates. Therefore, in a world of job insecurity and excess spare capacity of long-term skilled unemployed workers, the low-rates are helping debt-ridden suicide jumpers away from the precipice! That debt-indulgence is an insidious and malign threat to an entity’s well being only tells half the story. Indeed, have we forgotten or are we distracted and detracted from the debt crisis of many developed countries. Remember the US “fiscal cliff” wrangle over raising the debt ceiling (as related aside, the war in Iraq alone has cost taxpayers US$ 4 trillion), European Union debt crisis, and the downgrading of national credit ratings (including US and UK losing its top triple-A ratings). We believe these were real and impending threats in an already feeble pretentious global economic recovery - we don't know from certitude of analysis that these were not PR-contrived media diversions.

1) FPM regard moderately rising actual inflation as necessary and good in context; despite that age-old phenomenon being manipulatively managed down in the recent decade at 2%-5% levels in most developed and to a lesser extent in developing economies. Inflation is necessary at least as a sign that economy is over-heating i.e. too much money chasing too fewer good in context of increasing economic growth. Yet the reality is that the 'real money' is not chasing those goods and service. Instead printed money or credit expansion by multiple governments towards propping-up the global credit markets is misallocating taxpayer resources, ever since the Great Recession of 2007-08, and also well before from pump-and-prime stimulus policies. Inflation also indicates firms have growth expectations through pricing power – which would suggest future corporate health. Corporate war-chest spending on share-buybacks is indicative of low potential economic growth, and done for stimulating share-price performance and enhancing the wealth effect. Whereas the obfuscated reality is that input-factor costs and raw materials are being driven-up through commodity and other asset speculation stemming from unprecedented massive credit expansion; or the now tapered “Quantitative Easing” programmes. These higher input-costs are passed to consumers in clandestine ways that does not show up in measurement of actual inflation levels. So without letting the cat out of the bag i.e. inflationary worries, interest rate rise is not a threat. Economic fundamentals still appear weighted towards deflation tendencies so is a rate increase is not possible in that context. Introducing the next reason why interest rates won't rise rapidly is that actual and expected inflation diminishes the value of debt i.e. debt destruction.

2) With North American aggregate debt alone estimated at some US$ 60 trillion, any fast or sharp rise will utterly destabilise governments, corporations and individual debtors, sinking the economies into further cycle of recessions and recoveries; a cycle which when reflected upon over time we like to describe as a "new equilibrium restorative pause" (at least in the non-BRICS countries). Rapid economic growth is not good for economies - doing things right takes time! Sustainable future requires long-term planning NOT mammon-orientated short-termism: 'make a buck out of whatever good and hell breaks out'. FPM aim to reinforce that by hijacking a logo from the Climate Revolution activists "What's Good For The Planet Is Good For The Economy".

Source: Vivienne Westwood Ltd, FPM

While investment strategists are tuned to economic fundamentals like strong employment and rising inflation to connect the timing and actuality of eventual interest rate rises, FPM thinking holistically  believe there are socio-economic ecological political factors that maybe underpinning a low rate environment for many years to come. The much needed multi-billion dollar reallocation of capital towards lowering fossil-fuel dependency requires long-term massive global investments at lower costs of financing. More below.

3) US Government policy of tapering or turning-off its monetary stimulus is not the same as the US Fed or other central banks being ready to raise interest rates. In fact the ideas are at opposite ends by degrees! The occasional lip service and rhetoric of talking-up the possibility of climbing interest rates is not a real threat for the over-riding reasons economic fundamentals given in point 1 and 2 above. FPM’s interpretation for the Federal Reserves’ neutral stance on interest rates is not only that economic fundamentals warrant it, but also politically speaking that there would be back-lash short of a people’s revolution if the political classes again seemed to be helping unscrupulous banks and other sizeable asset owners. Simply put, banks are in the business of lending money / capital and creating wealth. Yet if returns on lending / investment activities are low i.e. small interest receipts and other capital asset returns, then banking activities are not as profitable. This somewhat appeases and satisfies the struggling masses of the ‘ragged trousered philanthropists’ i.e. you and me. Witness the estimated 50,000 people protesting against austerity cuts in London UK on Saturday 21^st June.

Another political impetus for a low growth economic environment despite forecasts and sugar-coated propaganda, stems from global climate concerns. For real! There is finally a real recognition that global climate change induced by man’s activity is a real threat to the sustainability of planet Earth. On the basis of resulting increase in air travel, carbon emission and 'carbon footprint' concerns, FPM's does NOT support the clandestine government policies of population expansion by immigration. The exigency of proactive action is now! If the biggest markets for man’s productivity and economic activity can be stalled then carbon dioxide CO² emission is also reduced. Without delving too deeply into the science of climate change, we are on the cliff’s edge towards increasing the average global temperature and setting of a sequence of ecological consequences with disastrous effects for humanity. We recommend web-searching Bill McKibben or simply go to website 350.org where he explains the urgent maths of climate change. FPM’s projects in funds and investments is oversight of emerging trends and assessing their value. And indeed we see global warming and solutions as a game changer with great enterprise value. Don’t take our word for it visit Risky Business.

NSWF: Litany of Litigation and Proceedings

FPM have been urged by its financial and non-financial relationships to prescribe that the SAC-saga should not fizzle out but go with a bang! SAC Capital (or yesterday renamed Point72 Asset Management LP) and Steven A Cohen are the search-tags for those not familiar with this story. Towards an end with a BANG we are still inviting the integrity of the US legislative and political establishment concerning the financial sector to step forward. If the career professionals are not too entrenched in cynical plutocratic values and have adherence to integrity then the US establishment can step-up-to-the-plate by validating its bona fide seriousness in policing its capital markets via the Securities Exchange Commission fairly and effectively. With co-operation from the other Federal agencies in the widespread insider trading probe started at the time of the Great Recession financial crisis in 2007-08, we urge a climatic finish to SAC prosecutions and earnest persistent efforts to weed-out and stamp-out the rife insider trading.

In FPM’s enterprise programme entitled “No Smoke Without Fire: Of Reputation Risk”, we campaign for: a) making a warning example of Steven A. Cohen as a proper deterrent; and b) towards long-term solutions to a perennial loophole in securities law which rewards cheating. This and such other financial fraud perpetrators are not committing victimless crime – pay attention to changes in your savings portfolio valuation!

SAC Capital's Litany of Litigation & Proceedings

Mr Cohen aged 57, is at the helm of his eponymous firm’s ignominy through a litany of insider trading investigation and litigation, shown above.  Clearly he is not tenuously linked to that litany but responsibility-wise tethered, despite he himself being not held accountable and charged by US Government prosecutors - so far!

If today’s headline guilty plea and overall US$1.8 bn settlement for SAC Capital and its entities are separately approved by Judge Laura Taylor Swain of Federal District Court of Lower Manhattan, even then the SAC-saga is still not put to bed! Assuming the details, as extracted and shown below, of Department of Justice attorney Preet Bharra’s settlement is not merely for a show of justice then we can still hope of real justice. Hope that actual enforcement for ANY suspected and investigated systematic cheats will ensue, and that “Too-Big-To-Prosecute” is no longer a valid “get-out-of-jail” card.

 “…this agreement does not provide any protection against prosecution or other enforcement action against the SAC Entity Defendants, any owner, shareholder, or employee of the SAC Entity Defendants or any other person… the agreement provides no immunity from prosecution for any individual and does not restrict the Government from charging any individual for any criminal offense and seeking the maximum term of imprisonment applicable to any such violation of criminal law.” Source: Court Documents SEC Attorney, Preet Bharara

FPM principals believe that encouraging the US enforcement authorities and publically profiling the “high watermark” SAC insider trading case can practically be a useful protest. Though SAC-saga case study dilettantes are not organised and visibly demonstrating outside Mr Cohen’s head office at 72 Cummings Point Road in Stamford, Connecticut - yet!  The SEC Enforcement Division under the lead of the US DoJ and its haranguers has convicted and mostly plea bargained with 80 insider trading ‘big wigs’ and conspirators, since first arrests in October 2009. While principals at FPM believe in indignant public protests, our enterprise aim is to embark on filling and complementing the void and model left by the DoJ in monitoring suspicious trading patterns. SAC investigation and prosecution lead to total US$2 bn plus earned for the US taxpayer and current and potential class-action members. There must be many institutions ready to join class actions unless those executives fear drawing attention to their own illicit trading activities. which are on the losing trade-position side of the much vaunted 22-years old asset manager in the crooked SAC-mould. FPM respondents have asked how much of the multi-billion reported settlement will actually be set-aside for compensation of SAC-trading counterparty victims and how much towards filling holes in US government finances?

Stop Press! As if on cue to support the FPM campaign the cavalry trumpet can be heard in the distant, viz: SEC Lawyer on Goldman CDO Case Describes How the Agency Wimped Out! (Hat tip Yves, Naked Capitalism!) This is a MUST MUST READ article about the enforcement apparatus prevalent in US Justice regarding “too-big-prosecute” billionaires, by a senior attorney insider. In this most revealing article, a US securities regulator veteran with 28-years SEC-service James Kidney, has a parting snipe, describing the institutional culture there:

 “an agency that polices the broken windows on the street level and rarely goes to the penthouse floors… On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening…” Source: Naked Capitalism, James Kidney April 2014, an excerpt of his retirement speech.