By Christian Takushi MA UZH on 25 Sep 2015 – Switzerland.
Pope Francis (of the Holy Sea) in a historical address to the U.S. Congress on 24 September 2015 sent a strong yet gently worded warning to the most powerful institutions of the USA: The Congress, the Obama Administration and the Federal Reserve System. Within hours of this speech the FED chairperson, Mrs. Yellen, makes a policy U-turn and the Speaker of the House of Representatives decides to step down from the US Congress after 25 years. Washington is in shock. We don’t think the Pope’s visit is capable of singlehandedly changing course of US policy, but it is likely that it is proving instrumental in accelerating moves long overdue.
Many in the financial and corporate world may be prone to overlook what Pope Francis said yesterday by focusing on the headlines. But, those who took the time to listen to him over the past few days on the American continent have been moved, touched or angered by the rare combination of a gentle voice and stern warning, yet in a unique way that has been building since he spoke in Cuba. Thus, those lîstening only to an individual speech will miss the momentum he is building around certain topics. Should we care? I think we should. The message he delivered at the US Congress moved Vice President Joe Biden and brought the powerful Speaker of the House of Representatives, John Boehner, to tears, emotionally overwhelmed. And has added to the pressure the FED faces. Many would say, those emotional reactions come and go, so nothing will change. I disagree. Those who have followed such addresses over the years know that when a speaker gives the audience what they want to hear, momentum builds up to the point of producing well-meant but emotional statements that over time lose substance. But the Pope did not come to please his audience; conservatives and liberals alike were afraid and irritated by the fact that the Pope was coming to o speak out his mind. Something rare in Washington. Few world leaders dare or can afford to simply speak out their mind in a joint session of the United States Congress. The last leader who did this and got away with unparalleled ovation was Israel’s President Netanyahu. Most others have bowed to the weight of Washington’s political power and cloud. The Pope doesn’t have to fear US retaliation nor a vote backlash.
From all analysis we’ve been able to gather, we infer that the weight of his message in combination with Wall Street’s loss of patience with the FED may have been the last drop in an almost full glass of pressure for the FED chairperson, Mrs. Yellen, to turn around on her own words of last week to announce that the long awaited start of Rate Normalization is due this year. Soon after announcing her U-turn though Mrs Yellen was about to break down physically. She struggled to finish her speech, but managed to leave the podium on her own strength. It is possible, she forgot to drink water and hydrate herself properly in recent days, but it is more likely that difficult and lengthy deliberations preceded her speech yesterday.
Pope Francis came to Cuba and Washington to encourage, but also to build on his criticism of liberals and conservatives. Here in a nutshell the three main addressees
- US Congress: for being itself polarized and allowing with its laws the impoverishment of hard-working people, growing inequality and for doing too little for immigrants and climate change
- Obama Administration: for removing the state’s support from marriage, family, the unborn life of babies and freedom of religion – in favor of ever more liberal and popular lifestyles.
- The FED: for accelerating income inequality in the USA and around the globe by its overextended policies (Zero Rates and QE) enduring now almost 7 years.
Thanks to his style of speaking the truth in love and his wise commendation of America for her greatness as the “Land of the Free and Home of Brave” and the “Land of Dreams”, his uncomfortable message was hard to be rejected and dismissed. Just like Mrs. Merkel was overcome by what she heard first hand from Syrian refugees a few months ago, leading her to take action despite of the costs and risks, this message yesterday could lead to action in Washington.
The brilliant coup was the way he confronted both liberal and conservative forces in the USA with two opposite sides of the same coin. When he first spoke against the death penalty, liberals began to cheer aloud, but soon after that he said, the way the USA is promoting abortion is as wrong as the death penalty, to the dismay of liberals and elation of conservatives. That allowed the climate change warning and the call to show compassion to immigrants and refugees to be received with bipartisan humility. This made it very hard to senators and representatives on Capitol Hill to simply dismiss the Pope. Recapping his smartly worded but gentle bipartisan criticism:
To conservatives the painful message was: (paraphrased) On the American continent, most of us were once foreigners. Let those migrating from the South have a chance in the USA. The death penalty is as wrong as the state-promoted abortion of unborn lives. Climate change needs to be addressed
To liberals the painful message was: (paraphrased) For the sake of popularity the government has reduced its protection of the unborn life, marriage. the family as core of society and freedom of religion. State-promoted abortion is as wrong as the death penalty. Climate change needs to be addressed.
The FED under pressure
Pope Francis never mentioned explicitly the FED, but one of the heaviest messages he has been building this past week on the American continent were aimed at Policy Makers, whose policies have contributed to the gigantic piling up of profits at large corporations and shareholders, while savers and normal working people (tax-payers) have had to bear the brunt of the pain. Those who listened carefully did ascertain that he implied practically only the middle class and working poor are paying their taxes, while big businesses get away legally. In that sense the criticism is not only aimed at the Zero Rate and QE policies of the FED, but the tax laws issued by the U.S. Congress under heavy lobbying by Big Businesses (particular interests). Pope Francis is a man of simple words, but he understands to build a case for or against something over days and weeks, without openly naming the targeted institution. Still, officials at the State Department, the Planned Parenthood Federation and the FED had a hard time this week with a Pope that doesn’t play by their rules nor political correctness.
Now back to Financial Markets – What we’ve seen since the FOMC meeting on September 17th (last week) has been extraordinary. Seldom have we seen the trust financial markets have in the FED evaporate or being put into serious question as much as in the days following her latest extremely dovish “no rate change” announcement. Sure, markets had become extremely dependent on FED guidance to the point that leading economists and financial experts wondered if that type of excessive micro-management of expectations by the FED was healthy or not. As we have said before, financial markets have over the past 20 years developed an unhealthy relationship with the FED. Markets have come to follow every word and whisper of the FED as if the FED was their infallible god that controls everything: Bond prices, equity valuations, the risk-free rate, the Yield Curve, Liquidity, investors’ growth & inflation expectations and last but not least Volatility. Now, can we blame the FED squarely? No, because it takes two to dance. The growing uncritical blind faith of investors in the FED is a “comfort” investors enjoyed. Just in the same way Swiss exporters and financial institutions enjoyed the comfort of transferring their biggest macro risk (currency risk) to the Swiss National Bank in recent years. It took two to dance to a well-meant but unhealthy melody, the melody of “economic agents surrendering their self-responsibility to Policy Makers”, a melody that stopped abruptly in January 2015.
Mrs Yellen has lost a lot of credibility among economists and many seasoned investors over the past seven days
Last week the FED stunned the world economy saying although the US economy is doing well and we are on course to reach our CPI targets (2%) over the medium term, global risks (mainly China and emerging markets) make it necessary to postpone any Rate Normalization until the situation is stabilized. Just seven days later, the FED says, because the US economy is on target and not far away from full employment there is nothing in the way of Rate Normalization starting in a couple of weeks. All of a sudden the turmoil in the Global Economy and Emerging Markets are no longer a concern. The troubling fact is that Global Risks and Crises in Emerging Markets have only gotten worse over the past week, contagion has taken place from China to Brazil, Taiwan to Mexico. Even the Norwegian currency saw selling pressure. Furthermore G-20 coordination is giving way to desperate uncoordinated action by policy makers; some hiking rates, some cutting rates, some devaluing, others trying to contain the free fall of their currencies.
Even domestically the US economy and employment is as healthy or as weak as it was last week. This confusion is raising question marks on whether the FED is really “confidently in control” as much as it portrays to be. Goldman Sachs and some independent economists argue Mrs Yellen might be in a “trap”, she overextended QE and Zero Rates and cannot easily raise rates. She led firms and investors to a risk behavior that is not conducive to healthy economic growth, inflation and monetary stimulus.
Back to Politics and Geopolitics: Berlin defies pressure from Washington, Washington threatens to bring down VW
This is an unprecedented month: First Russia builds her troop presence in Syria, supporting President Assad. Leaders in France, Britain and the USA reiterate there is no future in Syria for Mr. Assad. To their dismay the German Chancellor did not join in to make a similar announcement. Mrs. Merkel has been under growing pressure to follow suit since last week. As she delayed, it became apparent to Washington and London Mrs Merkel was preparing to announce a different approach. Against this tense geopolitical backdrop, and all of a sudden the US unveiled serious charges against VOLKSWAGEN. I personally believe those facts were known long ago in the USA, but were kept quiet until a useful time to put serious pressure on Mrs Merkel and the German economy. This week was the ideal time. But Mrs Merkel kept her course once again. Just as she defied the USA in 2011 refusing to join in the military strikes against Sunni-Arab regimes, she defied Washington’s policies in Syria. The timing of that serious allegation against VW was a very clear geopolitical salvo at Berlin to fall in line and follow the Western policy to finish off or to remove Mr. Assad. But to the shock of Washington, London and Paris, Berlin decided not to bow to the pressure (political and economic) and announced it is time to talk to Mr. Assad to end the terrible civil war in Syria. The most irritating fact for President Obama is that Germany and Russia are again trying to develop pragmatic bilateral relations, something he has tried to avert with all means to his disposition. Many independent analysts have seen the conflict in Ukraine as one of them.
Realpolitik for Syria
I personally believe Mrs Merkel is right. What right do we have in the West to decide which dictator or regime in the Middle East survives and which doesn’t. After all probably the only true democracy in the Middle East we can find is Israel, but are we going to bring down all other rulers and regimes? In most other nations of the region any person or journalist openly criticizing the government risks his life or ends up in jail. That doesn’t happen only in Damascus, that happens in Teheran, Ryad and Ankara too. What right do we have to say the regime in Libia and Syria have to be removed, but the regime in Iran can stay in power? A growing number of independent analysts believe it is time for us to respect the traditions, religions and cultures of Middle Eastern nations. Germany’s warning to the US-led coalition in 2011 has proved tragically right. We were not really helping the peoples in the Middle East, we wanted to actively shape the political process. We meant it well, but we failed, because of lack of wisdom, knowledge and respect for the people in the Middle East.
France and specially Britain bear a special responsibility, because these two powers drew border lines to advance their interests between WW1 and WW2 in that region. Mr. Churchill singlehandedly creating nations that did not exit as such before, often to win the favor of oil-rich nations. For good or bad the former Sunni-Arab regimes respected the borders we imposed on them. But now that those power structures are gone, centuries-old feuds and conflicts are back and why should peoples in the region respect those borders we imposed on them? I believe Western leaders should get a briefing of their nations’ past (failed) interventions in the region before intervening more. The way things are going, the borders the West imposed will be questioned, and Kurdistan could demand a national territory or Israel could ask to get back Trans-Jordan as the League of Nations conceived it. We decided to help remove the dictatorial regimes in the Middle East (Mr. Hussain, Mr. Gaddafi, Mr. Mubarak etc) to introduce Western democracy, but what we did was to thrust the region into utter chaos, civil war and a proxy war between Iran and Saudi Arabia – fought in Syria and Iraq. That is why the West has a moral and political responsibility to protect these war refugees. Seeing how IS is violently filling the power vacuums, more and more independent analysts see Russia’s and Germany’s initiatives to talk to Mr. Assad as the most pragmatic current alternative to contain the advance of IS and alleviate the suffering of civilians. After all the damage we’ve done in the Middle East over the past 5 years, it is probably humbling but wise to listen to Mr. Putin on this issue and together with Russia find a pragmatic solution. Realpolitik for Syria could work, also because Germany is respected by both Shia and Sunni Arabs as a power that did not join the military interventions that ushered in the power vacuums.
The USA has opened a risky chapter though, large US firms’ practices – long tolerated – could face serious backlashes in Europe and elsewhere. Other nations (even beyond the EU) hold evidence against US firms that is kept in check to avoid threatening those firms and unleashing a trade war or cooling down of multilateral relations. The timing of these events is everything!
We maintain our very cautious view for this and next month. Global risk assets and the USD are still very vulnerable as global trends converge.
For those of you who are new to our research: I have been expecting a Super Crisis during 2015-2018 since mid 2010. Since April 2013 we have been convinced this period of overlapping crises will be initiated by a major market correction during Aug-Oct 2015. All we see seems to confirm our outlook. The key word is not crisis, but CHANGE and CONVERGENCE. Sweeping changes are ahead of us as diverse trends and events converge.
Christian Takushi, Macro Economist, 25 September 2015, Switzerland
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