Frozen Policy

Hear the Salvation Army band
Down by the riverside
Bound to be a better ride
Than what you've got planned
--The Bangles

Europe seems headed toward a self-imposed depression. Sanctions against Russia, combined with previous 'green' policies, have exploded in the face of euro bureaucrats, leaving the EU facing a winter with insufficient heat, electricity, and gasoline.

Some gas and electric bills are already printing 5-10x year ago levels.

Policymakers appear to be doubling down by developing plans for rationing, price capping, and money printing.

Absent a quick policy about-face, it is difficult to see how the EU survives the next few months.

Undercover Hero?

My beacon's been moved
Under moon and star
Where am I to go
Now that I've gone too far?
--Golden Earring

I enjoy reading Tom Luongo's work. Thought provoking--even when his general premise is wrongheaded. 

In this recent piece, for example, Luongo gives the Fed entirely too much credit, arguing that the central bank is essentially the 'good guy'--battling inflation wrought by irresponsible fiscal policies that sent money to people in boxes during CV19. 

He fails to mention the Fed's long history of bailing out markets (and policymakers) when markets break, or of the central bank's $9 trillion of balance sheet assets purchased with money created at the click of a mouse. Because, as Friedman observed, inflation is always a creature of monetary policy, arguing that the Fed is somehow not the Dr Frankenstein that created our present monster seems a bit naive.

However, Luongo does make an interesting point toward the end of his article. He notes (correctly) that the Davos/World Economic Forum crowd would like to put an end to commercial banking, and put all monetary power in the hands of central banks--perhaps even in a one world central bank with digital currency-producing capacity.

He then suggests that, in the United States (and perhaps elsewhere), the Fed represents the interests of those commercial banks. As such, the Fed is motivated to break the EU-centric Davos/WEF threat to US commercial banks by raising rates, pounding the euro, and perhaps even driving the EU toward dissolution.

There's lots of holes in that argument--including the Fed's 'institutional obligations' both domestic and abroad--but interesting to ponder the 'undercover hero' thesis nonetheless.

Zero Coherence

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Earlier today the European Central Bank (ECB) raised its deposit rate 50 basis point to...zero. The ECB's deposit rate had been in negative territory since 2014, meaning that depositors essentially paid to keep their money in the central bank's vault.

This is also the first interest rate increase by the ECB since 2011.

Needless to say, monetary policy in Europe has been off the rails for quite some time.

To demonstrate that it hasn't suddenly been transformed into an institution with coherence, the ECB unleashed a blizzard of acronym-heavy programs, such as Transmissions Protection Mechanisms (TPI), designed to selectively buy bonds of struggling EU countries (e.g., Italy) to keep sovereign debt from imploding.

Thus, we have a central bank raising interest rates while continuing easy money policy using a quantitative easing (QE) transmission mechanism.

The ECB truly makes the Fed look smart.

Status Quo Changing

"The status quo has changed, son."
--Patrick Gates (National Treasure)

Interesting piece by Louis Gave on the possible impact of the Ukraine conflict and associated sanctions on the USD's reserve currency status. He suggests that, in an age of fiat currencies, military superiority strengthens a nation's currency and has gone a long way toward solidifying the dollar's reserve currency status.

However, cheap military technologies such as the drones that have been deployed en force in Ukraine are changing the game of warfare--to the extent that they might substantially reduce the impact of conventional weaponry that the US holds a lock on. Should this come to pass, then Big Defense loses value alongside the US dollar's status.

In addition to the impact of the war on the ground, Gave suggests that the weaponization of finance as reflected by the blitzkrieg of war-related sanctions is tutoring the world about the risks of depending on the USD. Developed country bonds have been getting pounded while developing country bonds have been strong--quite the turn from the lessons of the Asian Contagion in the late 1990s. Lesson: Why hold US/EU bonds in this environment?

Moreover, sanctions have demonstrated that the US and its allies can run roughshod over property rights at their discretion. If the wealth of Russian oligarchs can be confiscated so abruptly, then why not the assets of any entity deemed to be an adversary of the US? Lesson: Why depend so highly on a financial system controlled by the US?

The status quo may indeed be changing.

Diplomatic Immunity

Arjen Rudd: Diplomatic immunity..!
Roger Murtaugh: Has just been revoked!
--Lethal Weapon 2

EU leaders are increasingly calling for diplomatic solutions to end the Ukraine conflict. The leaders of France, Germany, and Italy have all spoken directly with Putin.

Meanwhile the US continues to be MIA on the diplomatic front. Biden has not spoken with Putin since the war began. The secretary of state has not spoken with his Russian counterpart either.

Instead, the US has been subsidizing Ukraine's military.

The message behind this behavior is obvious. This administration is declaring diplomatic immunity. It favors war over peace.

Embargo Better

"You know how I'm always trying to save the planet? Here's my chance."
--David Levinson (Independence Day)

Intuitive thesis about the real reason behind the EU/NATO drive to embargo Russian oil. Build Back Better zealots will stop at nothing to reduce fossil fuel production and (especially) consumption. Regulation has morphed into more extreme measures such as pandemic lockdowns and even war--perhaps of the nuclear variety.

The Russian oil embargo fits right in. Heck, if these folks could enact a law that banned all fossil fuel tomorrow, they would surely do it.

It doesn't matter how many people are destroyed in the process. In the eyes of the BBB crowd, it's all in the interest of the greater good.

Patterned Silence

"Fools," said I, "You do not know
Silence like a cancer grows"
--Simon & Garfunkel

Glenn Greenwald discusses the near universal censorship of 'skeptical' info w.r.t. the Ukraine situation. Anything that does not jibe with the party line--the parties being the United States, EU, NATO, or Ukraine--is being silenced. 

The question is why. Why must any view that counters the mainstream about a remote skirmish in Eastern Europe be buried? After all, there were plenty of skirmishes in this region prior to Russia's recent campaign--many of them inside Ukraine.

Greenwald suggests that it's primarily because it is to the military industrial complex's benefit. 

That's part of it, sure. But there's likely more--probably much more. 

Broad censoring programs were in force, and seemingly growing, prior to the Ukraine conflict. They included the silencing of dissent and 'disinformation' related to:

Clinton campaign corruption

Trump/Russia

Black Lives Matter protests

CV19 policy

2020 election corruption

Who is on the silencing side of all of these campaigns? Who is getting silenced?

The patterns point to why.

War Over Peace

Guy de Lusignan: Give me a war.
Reynald de Chatillon: That is what I do.
--Kingdom of Heaven

Evidence continues to suggest that the West condones war in Ukraine. This weekend an EU diplomat stated that, "This war will be one on the battlefield."

To which Russian foreign minister Sergey Lavrov responded that this hardly sounded like a diplomatic position.

He's right.

Add to that further news about NATO beefing arms up and down its eastern front and continued efforts to ship military resources to Ukraine--along with no leadership (especially US) to convene diplomatic talks and it is difficult not to conclude that the West supports war over peace in Ukraine.

Europe Graphics

"How am I ever going to get along in Paris without someone like you? Who'll be there to help me with my French? To turn down the brim of my hat?
--Linus Larabee (Sabrina)

Some nice graphics related to the Europe cribbed from this article. An overview of the member states:

List of EU members:

Timeline of NATO expansion:

Note that there two other important European associations. The Eurozone comprises those countries that use the Euro as their national currency. Currently, there are 19 Eurozone members. The United Kingdom, Switzerland, Sweden, and, given current events, Ukraine are noteworthy non-members.

The Schengen Area consists of European countries that support free movement across borders, permitting visa-free travel for up to 90 days. Twenty-six nations belong to Schengen. Noteworthy abstainers are the United Kingdom--and Ukraine.

Financial System Warfare

"Dude, we're on the grid!"
--Riley Poole (National Treasure)

Over the past month we've witnessed countries using the financial system to suppress behavior that they don't like. First it was the Canadian government freezing bank accounts and funding sources of citizen CV19 protestors and their allies. 

Then there has been the international response to the Ukraine situation. The US, EU, and other state entities have levied an array of financially-oriented sanctions on Russia to the point where it seems nearly impossible for people inside Russia to engage in external economic transactions. Even inside Russia, those sanctions have wrought chaos--sovereign debt downgrades, plunging stock markets, a cratering Ruble among them.

What should be clear is that modern financial systems, whose digital configurations are far easier to manipulate than in the past, are being used as geopolitical tools of warfare. Armed with these tools, governments can target either their own citizens (e.g., Canada) or remote citizenry (e.g., Russia).

This lesson is unlikely to be lost on at least two groups. One group involves countries with, shall we say, invasive aspirations. In anticipation of where escalating geopolitical tensions might head, Russia began decoupling its monetary and financial system from the international grid several years ago. For example, it substantially cut its US dollar reserves and increased its gold holdings. Consequently, the present barrage of financial system sanctions, while difficult to handle, has not completely incapacitated a more independent Russian financial system.

Given its aspirations to take control of neighboring Taiwan, China will undoubtedly prepare for a similar barrage before physically moving across a border (if/when). Any belligerent, for that matter, will need to decouple its financial system to the point where it will be able to survive the monetary salvos.

The second group involves citizens at large. The issue is captured in a question: Knowing that a government can, at its discretion, freeze or confiscate digital bank accounts as well as block digital financial transactions of any citizen, do you really want to have all of your financial resources on the grid?

The more people wake up to the specter of government-waged financial warfare, the more likely they will begin re-positioning for greater financial sovereignty. 

This re-positioning to combat geopolitical financial warfare seems likely to include gold.

position in gold

Boosters Shot?

Hardy Jenns: Look, I'm perfectly willing to forget this. Okay? I see no reason in carrying this on any longer. It was a joke. It's gone too far. It's over. Okay?

Keith Nelson: You want the truth? You want the plain truth? You're over."
--Some Kind of Wonderful

Alex Berenson shares emerging data points suggesting that enthusiasm for CV19 vaccines and associated boosters is quickly waning. Pfizer's (PFE) CEO appears to be walking back his push for boosters. 

EU regulators are now warning of potential immune system problems that could arise from ongoing boosters.

In a statement about CV19 vaccines yesterday, the WHO warned that "a vaccination strategy based on repeated booster doses of the original vaccine is unlikely to be appropriate or sustainable.

After what has transpired over the past two years, it is hard to believe that policymakers and vax makers are suddenly waving the white flag of defeat. On the other hand, the evidence continues to pour in on a) the ineffectiveness of the vaccine, particularly in booster form, to prevent CV19 infection, and b) side effects.

Prepare, therefore, for a concerted program of denial to spring forth from vax enthusiasts of all stripes.

no position

Lockdown Stringency Analysis

Neal Page: He says we're going the wrong way.
Del Griffith: Oh, he's drunk. How would he know where we're going?
--Planes, Trains & Automobiles

Although Twitter can devolve into a cesspool of negativity and ad hominem back biting, the CV19 situation has revealed that Twitter provide a platform for an army of analytical talent to share exceptional work. Here's another example, this one studying the relationship between lockdown stringency among EU nations and CV19 morbidity. I've pulled some of the graphics from the thread for viewing here.

First, the cumulative stringency index estimated for various EU countries. There are several stringency indexes floating around. All of them involve scales aim at rating the intensity of authoritarian measures implemented. This particular scale sums daily stringency ratings to get a cumulative total that can be applied against measures of dependent variables summed over the same time period.

Next, CV19 deaths/million population for each country. If lockdowns were 'working,' then one would expect a negative relationship between lockdowns and virus deaths. Here, not only is the relationship not negative, it is weakly positive, suggesting that more intense lockdowns result in more deaths. R-squared clocks in at 0.138, which not all that bad for a 'macro' study. This result echoes findings from other work discussed on these pages.

Finally, stringency vs change in GDP. Here we find a negative relationship as expected (i.e., the more stringent the lockdown, the larger the decline in GDP). Solid R2 of about 0.487.

Would be interesting to see this analysis applied to US states.

Government Scope

And baby I'll rule, 
I'll rule, I'll rule, I'll rule
Let me live that fantasy
--Lorde

The natural unit of government is the individual--i.e., self-government. God gifted us with the unalienable right to govern ourselves.

For various reasons, most of them nefarious, man has sought to expand the scope of government beyond himself. Stated differently, he seeks to govern others.

The possibilities range from reigning over a few nearby neighbors to dominion over multitudes spread far and wide. The categorical possibilities correspond to the geographic scopes associated with various units of expanded government:

local
state or provincial
national
regional
global

When the Constitution was in the process of being ratified, debate centered on whether government power should be tilted toward state or national authority--although many anti-federalists argued that only designs that brought more authority to the local level would be effective.

Ongoing disagreements in Europe center on power struggles between nations and regional government (i.e., the EU).

One-world socialists contend that all people on earth should be subject to a single governing body.

Man's persistent quest to expand the scope of government has quite literally put liberty under attack since the beginning of social time.

Interest Rate Arbitrage

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Perhaps the president won't have to wait for the Fed to lower rates some more. The bond market appears to be leading the way.

After the past week's events, Ten Year yields have broken to new lows for the move. They now sit at about 1.86%.

Interest rate arbitrage between those at zero or lower (e.g., EU, Japan) and those at greater than zero (US) is revving up.

Tariff Foolishness

One summer never ends
One summer never begins
It keeps me standing still
It takes all my will
--The Motels

President Trump has been tweeting that tariffs are a great way to enrich the country.

....Tariffs will make our country much richer than it is today. Only fools would disagree. We are using them to negotiate fair trade deals and, if countries are still unwilling to negotiate, they will pay us vast sums of money in the form of Tariffs. We win either way......

— Donald J. Trump (@realDonaldTrump) August 4, 2018

He is just plain wrong. Tariffs might enrich particular groups--i.e., those shielded from competition by protective tariffs--but overall people are worse off.

As Ron Paul explains, tariffs on imports to the US are a tax--a tax paid by American consumers. Taxes never create wealth, nor do they raise standards of living.

Tariffs are a tax paid by the American consumer.

You -- Your money -- goes down the drain into Uncle Sam's pocket.

Tariffs are not paid by China -- not paid by the EU.

They are paid by YOU...the American citizen. Trump raises taxes on YOU!

More here: https://t.co/PAa7e9v8t6 pic.twitter.com/JOK9a3ceZi

— Ron Paul (@RonPaul) August 4, 2018

The president is foolishly offsetting gains from income tax cuts with tax increases in the form of tariffs on purchased goods.

Germans Hoarding Cash

"Don't look now, but there's something funny going on over there at the bank, George. I've never really seen one, but that's got all the earmarks of being a run."
--Ernie Bishop (It's a Wonderful Life)

Interesting article on the increased tendency of German citizens to hoard cash. Particularly as banks begin charging fees on deposits, Germans are yanking cash out of banks and keeping it at home or in deposit boxes. Sales of safes are soaring.

This is a predictable consequence of NIRP.

Also some interesting tidbits on German tendencies related to cash. Roughly 80% of German retail transactions are in cash, nearly double the US rate. Cash is preferred to plastic. "Only cash is real" goes the saying.

Germans keep more cash in their wallets and visit ATMs more often. They withdraw about $250/visit compared to about $100 here in the US.

Cash is favored for its anonymity. Because Nazi and Cold War regimes featured secret police and government snooping, today's Germans have inherited a healthy mistrust of EU proposals to ban cash transactions in favor of digital (and more traceable) monetary transactions.

Activists are demanding that the existence of cash is guaranteed by the German constitution.

Coming soon to a shore near you...

Yes for Brexit

V: Would you...dance with me?
Evie Hammond: Now? On the eve of your revolution?
V: A revolution without dancing is a revolution not worth having.
--V for Vendetta

In a dramatic vote that took many pollsters and experts by surprise, the British people voted yesterday by substantial margin to leave the EU. While what Britain does with its increased sovereignty remains to be seen, this is clearly a blow to statism worldwide and calls future solidarity of other EU members into question.

The news has roiled financial markets worldwide, as interventionary policies designed to hold the EU ponzi together suddenly appear less likely to work in the eyes of investors. Domestically, equity markets opened down 2%+. Banks in particular have been splattered, with many domestic names down 6% or more. British bank Barclays is off a cool 23%.

We'll see what happens after the bulls attempt to bounce 'em, which appears to be in process now. If they can't, then...

As my friend Toddo tweeted this am, markets rarely mark significant bottoms on Fridays. One reason: margin calls go out over the weekend.

Should also note that gold was up about $80 at one point but has since pulled back some. Still, it remains above the $1300 resistance level that has turned the metal back several times recently.

position in SPX, gold

Brexit

"Think they know something we don't?"
--Major General Urquhart (A Bridge Too Far)

On Thursday, the British people will vote on whether the United Kingdom should remain a member of the European Union (EU) or whether to exit. A 'Brexit' result would signify a no confidence vote for the viability of the EU and would roil financial markets as the house of cards propping up Greece and other failing EU members depends on complete solidarity.

Stated differently, Brexit would severely weaken the viability of the EU.

Why is Britain tempted to withdraw? Because, like other big players such as Germany, it paying more into the collective than it is getting out. Moreover, its sovereignty is being restricted by EU rules and regs.

Britain would have an easier go at it than others because it never surrendered its currency to become an EU member. It kept the British Pound while countries like Germany ditched the Deutsche Mark.

Nonetheless, if Brexit happens, expect Germany to commence dialogue on Gerexit.

EU Desperation

"Remember this day, boys. Remember this day."
--Sam Rogers (Margin Call)

This morning the ECB announced an eyebrow raising array of moves aimed at stimulating the economy. The moves include further movement toward negative interest rates, a 33% increase in asset purchases (a.k.a. 'quantitative easing'), a series of four new long term refinancing programs (LTROs), and the eligibility of investment grade euro-denominated corporate bonds issued for QE purchase.

This is what desperation looks like in central banking land.

Greek Oxi-dent

Forty seven deadbeats
Living on the backstreets
North, east, west, south
All in the same house
Sitting in a back room
Waiting for the big boom
--Escape Club

The latest act of Greek theater finds Prime Minister Alexis Tsipras submitting an 'austerity' proposal similar to one that Greek people voted against last Sunday at the PM's urging. Hard to imagine this will sit well with the citizenry as it looks pretty much like a blatant sell out of revered democratic process.

Of course, as with past proposals that would bail out EU risk, world markets are greeting the news with open arms.

Are market participants factoring in prospects of wholesale riots in Athens?