No-Holds Barred

The rumor is Madame Lagarde
Who, through her incompetence, scarred
The ECB, now
Is set to, out, bow
To run for French Prez, no-holds barred
 
The fear that this move does display
Is Madame LePen’s making hay
So, globalists now
Will hardly allow
Their efforts to just go away

We continue to trade in recent ranges across most products in financial markets as investors and traders seek the next catalyst for secular movement.  Even precious metals, which have shown the most volatility of any sector, are now developing a new range as per the chart below.

Source: tradingeconomics.com

Now, I will grant the range in gold (+0.7%) is wider than many other products, but the chart clearly looks, at least to me, like an ongoing consolidation awaiting the next big thing.  As to other products, I have shown bonds, the dollar and even stocks doing the same thing lately, consolidating, and as of this morning, none of them are breaking out in either direction.  (As an aside, there is still a very loud group claiming the dollar is about to collapse, but thus far, their views have been unrequited). In fact, if we use the DXY as today’s dollar proxy, we appear to be heading back to the middle of the range rather than breaking lower.

Source: tradingeconomics.com

Net, there is not much to discuss in the markets which leads me to the most interesting topic, what will be the catalyst to break these ranges?  Historically, there are two types of things that act as a market catalyst, a change in the data trajectory or a geopolitical shift.  Right now, the former does not appear to be in the cards.  We know this because there are vocal proponents of both substantial economic strength and economic weakness in the future.  The lesson from this is that the data remains quite mixed, with some areas of the economy performing well, while others are struggling, but not enough on either side to expect a major trend.  

For instance, in the US, recent data showed relative employment market strength while inflation data continues to compress.  Now, you can quibble with the construction of both data sets, and there are many valid concerns, but for policymakers, especially those steeped in the view that strong growth necessarily drives inflation higher and vice versa, the current data set does not argue for any policy shift.  

Arguably the biggest geopolitical change of late was the dramatic Takaichi-san victory in Japan, which has enabled her to impose her will on the economy.  As such, we can expect more ‘run it hot’ actions there.  However, thus far, the JGB market has not rebelled against further unfunded government spending.  We are one month, and 20bps, removed from the recent peak in yields.  We shall see how long that lasts and if, a change in that view impacts bond markets elsewhere in the world, but as you can see below, it does not look that scary right now.

Source: tradingeconomics.com

But otherwise, Russia/Ukraine continues apace with negotiations going nowhere and the US/Iran talks, with articles this morning claim progress is being made there.  Arguably, some type of deal with Iran ought to be bearish oil as it would seemingly involve the lifting of sanctions on their oil sales, but who knows.

Which takes us to the most interesting headline this morning (see Bloomberg’s headline below), the story that Madame Lagarde is rumored to be stepping down as ECB president before her term expires next year.  While, naturally, she has denied the story, there is certainly enough palace intrigue to dig a little deeper.

Ask yourself why, a woman who has spent her career striving to reach the pinnacle of geopolitics, would willingly give up a role at the top.  While the initial punditry stories indicate she wants to allow President Macron to be involved in the discussions as to her replacement (if she serves out her term, he will be gone and they fear Marine LePen on the right will be able to influence the next decision), Occam’s Razor tells me it is far more likely she is going to prepare to run for president of France herself.  After all, did she not just see her erstwhile colleague, Mark Carney, be elected PM of Canada?  And as powerful as major central bank president is, it pales in comparison to national president.  Added to her impetus was the resounding Takaichi victory, demonstrating that a woman can be elected in the CEO role, and I must believe, this is her motivation.

If you are of a globalist mindset, Christine Lagarde is the perfect French president, completely beholden to your ideals, and yet, as a woman, believed to be able to work effectively with others (notably President Trump) in order to prevent further damage to your goals.  Mark my words, she will step down and announce her candidacy before the summer. Funnily enough, I expect if she leaves, it will be a benefit for the euro!

Ok, the briefest of turns around markets shows that Asian equities followed yesterday’s US market rally higher, at least those that were open, with New Zealand (+1.5%) leading the way after the RBNZ left rates on hold, as expected, but came across as more dovish than expected.  Otherwise, Tokyo (+1.0%) and Australia (+0.5%) were the next best gainers with the former responding to the news that the first major Japanese investment into the US was announced, a $36 billion set of deals including a massive NatGas power project in Ohio.

European bourses (DAX +0.85%, CAC +0.55%, IBEX +1.25%) are also higher, rising on hopes that the announced increases in defense spending will be spent at home and boost European companies across the continent.  As to the UK (+1.0%), softer inflation readings this morning have raised hopes that the BOE will be more aggressive easing policy soon.  US futures are higher by about 0.5% this morning as it seems many of the fears about overinvestment in AI have suddenly waned.

Bond yields, which have fallen steadily over the past several weeks have all backed up 1bp, in the US, Europe and Japan.  Overall, nothing really to mention here.

In the commodity markets, oil (+2.9%) just jumped after the Russia/Ukraine peace talks broke up abruptly after just 2 hours.  Fears of more strikes on Russian infrastructure have risen.

Source: tradingeconomics.com

As to the metals, after yesterday’s declines, this morning they are all bouncing (Au +0.9%, Ag +2.8%, Cu +1.2%, Pt +1.6%) as they continue to consolidate.

Finally, the FX markets are showing very modest net USD strength with NZD (-0.7%) the laggard after the RBNZ while NOK (+0.7%) is the leader, jumping right after the oil news.  Otherwise, +/- 0.15% is the order of the day.

On the data front, we get some second-tier information as follows: Durable Goods (exp -2.0%, +0.3% ex transport), Housing Starts (1.33M), Building Permits (1.40M), IP (0.4%) and Capacity Utilization (76.5%).  (An interesting tidbit regarding Capacity is that I read China’s Capacity Utilization is just 74.3%.  Based on their trade balance, I would have expected a much higher number.  It tells me that over (mal?) investment there is even greater than I thought.). 

Too, we hear from Fed Governor Michelle Bowman and get the FOMC Minutes at 2:00.  Yesterday, Governor Barr said there was no reason to adjust policy for the reasons I stated above, nothing is clear, and I suspect Ms Bowman will be similarly inclined.

It is hard to get excited in today’s market, that’s for sure.  In fact, I expect we will need to see something pretty dramatic to drive a break of these ranges, and I have no idea what that will be.  Play it close to the vest for now.

Good luck

Adf

Constitutional Repercussions

This is a story I wrote sometime in 2005 or 2006, i’m not sure exactly, but was inspired by the excitement over Arnold Schwarzenegger’s recent election as California governor. While there is no poetry, I hope you enjoy it. And let’s face it, it could be an awfully good way for the world to move forward!

Constitutional Repercussions 

 Foreigners Can Be President!  So screamed the headlines following the news that the 28th Amendment had been ratified.  The punditry was immediate in naming it the Arnold Amendment, enacted so as to allow persons born on foreign soil, who have been citizens of the US for at least 20 years, to become President of the United States.  The debate centered on the rationale of the founding fathers to include, in the constitution, the clause that only native-born citizens could be president.   

On one side were the strict traditionalists, decrying the change in the law, and declaring that if it was good enough for Washington and Jefferson, it should be good enough for us.  They conveniently forgot the fact that the clause was designed to prevent what was then perceived as the threat of an Englishman becoming president and trying to convert the great experiment known as the United States of America back to a British colony.  Their mantra was “As it is written, so it must be.”  In many ways, they resembled the creationists, who see the Bible as literally true, and believe the earth was created 6000 years ago.  In fact, many of them were the same people. 

On the other side were the more liberal modernists.  Their argument was that being born in the US didn’t necessarily make you a good person or uniquely qualify you for the job.  In fact, most naturalized citizens are far more patriotic. They are familiar with other countries and the lack of freedoms and opportunities that exist elsewhere.  

They revere rights that most native-born Americans take for granted. 

In the end, the liberals won the war.  The battle took place so that the erstwhile governor of California, Arnold Schwarzenegger, former movie star and real estate mogul, could run for the White House.  Of course, things are never that simple.  What was so intriguing was the reaction of other nations around the world.  Strange things were about to take place on the third planet from the sun. 

Many of us remember the schoolyard taunt, “my dad can beat up your dad.”  In college some even expounded on the idea that, rather than nations going to war, countries should have their leaders fight for what they believe is right.  This would save lives and solve problems far more quickly and in a far less costly manner.  Of course, nobody ever believed that anything like that would happen.  Leaders of countries are serious men and women, with a vision for the future and political skills to persuade their countrymen to follow that vision.  Why put someone in that role whose qualifications are merely strength of body, not mind?  Well, let me tell you the story of what went on after Ah-nold was elected president of the United States in 2012. 

 After a landslide victory, the Austrian bodybuilder turned American success story, started to use the bully pulpit more effectively than any president since Teddy Roosevelt.  Arnold was a man who had a finely tuned ear for the public’s feelings.  He was a man who preached common sense rather than political ideology.  In short, he was a man who could look you in the eye, describe his beliefs and persuade you of their merit because of the sincerity in his story.  He was born to lead, and now he was in the role of a lifetime. 

At a staff meeting in the early days of his presidency, Arnold realized that the budget situation was getting out of hand.  His advisors, to a man, focused only on the non-defense aspects of the budget, but he realized that defense spending represented nearly 20% of the total, and that a major reduction there could solve many great problems in a single act.  This was exactly the sort of thing Arnold had become famous for during his governorship of California. 

 And so he floated the suggestion… “What if I offered to fight the leader of a foreign country when we had a fundamental disagreement?  No guns, no knives, no armies, just me and him in the ring until there was just one of us left standing!” 

 His aides were shocked at the idea, but Arnold was on a roll.  “Think of what we could accomplish.  We could end war as we know it, disband the armed forces around the world and address grievances quickly.  Think of the ratings on TV!!  It would be the biggest draw in history.”  Arnold was starting to get excited now.  “What a spectacle this could be.  I would take on Rafarrin, or the Ayatollah in Iran, or anybody.” 

 His staff was adamantly opposed to the whole thing, but once again it was Arnold who had his finger on the pulse of the nation, and really of the whole world.  He recognized that ordinary citizens everywhere were tired of the state of war that had existed around the world for the past decade or more.  He was the first to truly understand that the vast majority of the Earth’s population was far more concerned with their individual security and ability to lead a productive life rather than the geopolitical issues that were constantly in the news.  Most Americans couldn’t care less about what was going on in Russia or Saudi Arabia or the Ivory Coast.  And most Russians and Saudis couldn’t care less about what went on in the United States.  All they heard was partisan bickering on TV and in the newspapers, and an increasing stream of bad news from some far corner of the globe.  American soldiers dying, a health epidemic or revolution or civil war beginning.  These seemed to be the only thing on the news recently.  Arnold, it turned out, had hit upon the key to move the global political situation to the next level.  Two months later, June 15, 2013, to be exact, Arnold Schwarzenegger stood in front of a special joint session of Congress and on global TV made the following announcement: 

 “My fellow Americans and good citizens of the world.  I come to you this evening with an idea.  It’s a simple idea, yet one so profound as to change the way the United States will handle conflict in the future.  I believe it can change the way that mankind handles all conflicts in the future. 

 I think we can all agree that given our choice, the vast majority of us would seek a peaceful life, and that if I presented an idea that was able to solve two seemingly intractable problems simultaneously, that you would give it serious thought.  In fact, the idea that I will present can do just that, I believe.  If, after hearing this, you agree, I want you all to contact your local representation and urge them to join in and embrace this idea.  For those of you watching who are not American, it will apply equally to each one of your nations and I believe you, too, will see its beauty and effectiveness. 

 The modern world has become a place where individuals all seek what’s best for themselves, without regard to what’s best for the nation as a whole.  In fact, this attitude has mutated into ‘I want what’s best for me and if I don’t get it, it must be somebody else’s fault.’  What has been the result of this attitude?  We have reached a time in society where entitlements have become the driving force behind many people’s lives.  There seems to be a belief that merely being born an American, or Englishman or Frenchman or any nationality, means that you are automatically deserving of a certain, cushy lifestyle.  And if something happens so that you do not get everything you want, you sue, or cause trouble.  This has led to several serious consequences.  First, government spending is out of control, and not just in America, but all around the world.  Taxes are rising, spending is rising special interests are happy because they are getting more money, but the average citizen is being worn down with nothing to show for it.  Demands for energy and commodities has resulted in a transfer of power to nations that have little or no experience in working effectively within the global nation-state system.  This leads to the second consequence…war.  It’s been more than 10 years since there was a semblance of peace in the world.  It’s been more than 10 years since a full month has passed without American soldiers dying in some far-off land; Iraq, Afghanistan, Korea, Zimbabwe, or some other place.  You name it and we’ve lost our brave young men and women there.  And for what? I ask.  So that the complainers in this country get their way?  More oil, cheap imports, export markets?  It seems that if you complain long enough and loud enough, that in this country we will send in a brigade on your behalf! 

 Well, no more!!  That stops right now if you listen to my idea, and we make it the law of the land. 

 I propose that disagreements between nations be settled in a manner that requires no armies, no navies, no air forces, nothing but this.  It requires merely that the leader of the aggrieved nations meet in an arena and join in combat until one concedes the issue.  These matches would be televised globally and would have no referees.  The only rule would be no weapons of any kind, just man against man.  Each issue would be decided in a single match and the outcome would be final and binding for at least 10 years.  But the key is that the leaders of nations must fight.  There would be no nomination of a champion in his or her stead. 

 Think about this.  Armed forces currently utilize upwards of 40% of some nations’ budgets.  How much better off would we all be if we spent that money on other, more peaceful things?  How much better off would we all be if we allowed you, the citizens of the world, to keep a larger proportion of earnings to save or spend as you saw fit as an individual?  This would not only save money and lives, but it would promote that other key for successful society, responsibility.  No more would people be rewarded for complaining loudly, for complaining often or both.   

You, the citizens of all nations, would need to learn to handle adversity.  You, the citizens of all nations, would learn that there is no birthright to material items, merely to the opportunity to obtain those things by lawful means.  I will not fight the King of Saudi Arabia just so that you can drive a bigger car.  It is not worth it.  You must learn to accept that gasoline could cost more or change your driving habits accordingly.   

But here is what I will do.  I will defend the right of this nation and its people to continue to practice business in accordance with the current laws.  I will defend the right of this nation to allow its citizens to worship any god of their choosing.  In short, I will defend the Constitutional rights of all citizens as deemed necessary in the global order.” 

It was truly a once in a lifetime experience.  Arnold was proposing to change the very fabric of international diplomacy, through this simple yet compelling idea.  Sides were quickly taken with the old school dismissing this concept as mere claptrap, something to be expected from an uneducated man like Arnold.  But the citizens of the world had a different idea.  They grabbed hold of the idea tightly, and within months there were referendums held in every remotely democratic country on the planet.  Of the 146 referendums held, every one passed on the first vote, most by a landslide. There was no ambiguity, the global population had spoken, and it had done so with a single clear voice.  Arnold became a hero to not only his fans in the United States, but to the subsistence farmers in Zambia and Eritrea as well.  And life, as we know it, changed forever. 

The first situation addressed by President Schwarzenegger under the new code of defense was the war on terror.  The firebrands of the Middle East, those Imams who preached not just Islam but death to the Infidels, found themselves on the wrong side of world opinion.  Even the French, who resisted American power at every turn could think of no excuse to prevent Arnold from facing off against the current head of Iran, Ayatollah ShahyAr Farshid, who for the past several years had done nothing but encourage violence against all things Western.  But the people of Iran, tired of isolation from the community of nations, and wanting the opportunity to partake in the fruits of their own labor, rose up and forced ShahyAr to take on Arnold.  The Iranian stakes were the end of terrorist support, to be proven by the dismantling, under UN supervision by UN personnel, of the weapons systems that Iran had either built or obtained.  The US risked the dismantling of the CIA, and the surveillance that went with clandestine operations.  The stage was the coliseum in Rome, with a worldwide audience.   

It was just before midnight when Arnold entered the arena to a wildly enthusiastic crowd.  After all, here was the man who had single-handedly changed the political equation on the planet.  Here was the man who had initiated the first truly new idea for achieving world peace since Jesus.  He was dressed, as one would expect, in the garb of an ancient Roman gladiator, a simple white toga, a brown belt and sandals.  He radiated confidence.  Despite recently celebrating his 66th birthday, he didn’t look a day over 45.  His muscles were bulging, and his skin glistened with sweat.  Moments later, ShahyAr entered the arena from the opposite side.  Dressed in the traditional Bisht of the Arab street, he was a wiry man, just 42 years old, with a medium length beard and long hair beneath his Ghutra.  Sweat was visible on his brow and upper lip.  His eyes betrayed his fear.  As a leader of a militant mosque, he was used to having his underlings do his dirty work. ShahyAr had never been in a position where he had to fend for himself.  There had always been someone else to support him, and now he was scared.   

At the stroke of midnight, there was a loud chime and the two men started to circle warily.  Despite Arnold’s obvious physical advantage, he recognized that his opponent was a much younger man and may be concealing something beneath his robe.  The crowd began to chant, at least two-thirds screaming for Arnold and the balance chanting ShahyAr’s name.  The intensity increased as the two warriors edged closer and closer to one another.  As the screaming reached a fevered pitch, Arnold made his move.  He was deceptively quick for one his age, and before ShahyAr knew what happened, he was on his back with Schwarzenegger’s massive hand around his throat, and his arms pinned beneath Schwarzenegger’s knees.  ShahyAr struggled to reach the knife illegally concealed beneath his robes, but Arnold’s grip was akin to a vice.  There was no escape from this position, and ShahyAr knew it.  He was about to lose, in moments, what he had worked the past 20 years to achieve, a position of power and respect amongst his followers.  But there would be no respect after losing, and his life’s aims would be dashed.  Certainly, the people of Iran would opt for another in his stead, someone who could defend the country’s honor and way of life.   

ShahyAr was having difficulty concentrating as the airflow to his brain was restricted by Schwarzenegger’s death grip.  He was sure he would meet Allah now, especially as he will have died fighting the Infidel, and he would be a martyr for his people.  They would rise against this ridiculous idea of leaders fighting leaders, and things would return to normal, leaders sending armies to fight their battles.  As he lost consciousness, ShahyAr prepared to meet Allah. 

But Arnold was smarter than that.  He had no intention of creating a martyr during the first attempt at a new world order.  As ShahyAr passed out, Arnold released his grip and let him live.  In fact, this would be a much better solution.  ShahyAr was now disgraced by his loss but had no opportunity to achieve martyrdom.  He was merely a weak leader of a country about to get weaker through the loss of key weapons systems.   ShahyAr was the laughingstock of the Arab world, losing a battle to a much older man, and letting down his people. 

In fact, the impact was much greater than just that in Iran.  Leaders around the world took stock in the situation and had to weigh the possibility of having to literally fight for what they believed in, versus the very real risk of losing the fight and being killed, or worse, like ShahyAr, disgraced.  The change in attitude around the world was remarkably rapid.  Oppressed people everywhere were clamouring for someone to fight their oppressors.  Oppressors everywhere were looking for a place to hide from the global media’s spotlight.  The subjugation of ethnic groups became a very dangerous practice for erstwhile dictators.  Now they could get called on the carpet and must answer for their crimes directly.  Less power suddenly seemed a better option than total control.  

Total control was likely to be challenged.  Power sharing was not. 

And so it came to pass, that a man, born in Austria, emigrated to the United States with nothing but a dream and the determination to see it through, became the single most powerful force in the world.  He affected more lives positively than Christ, Muhammed and the Buddha combined.  He caused the creation of a new geopolitical order, and fostered peace on earth.  All because the 28th Amendment was passed into law. Stranger things may have happened, but I dare you to show me one.