World Political Change, International Economies & Markets
By Fulton Sheen
January 31, 2017
Speaking of Russia, it was supposed to give back Crimea and be forced into submission by EU and US economic sanctions, but that didn’t happen. The Russian Central Bank bucked the trend of the other central banks of the world by raising their interest rates to 15% and took the hit to bring back their economy. In fact, Russia’s stock market had one of its best years ever, the Ruble was the best preforming currency against the USD in 2016, and Russia accomplished all of this without doing business with the EU or US.
Negative interest rates started in 2014, but negative yielding sovereign bonds and debt have never existed before until last year. Until 2016 governments and their central banks have only bought government bonds(sovereign debt), but Japan and the EU bought so many that they ran out of government issued bonds and started buying corporate bonds, and Japan has been buying ETFs as well. In fact, Japan and the EU governments are bordering on becoming controlling owners of public companies because of this, which has also never happened before. The problem with things that have never happened before is that no one has any idea what the ramifications will be. In other words, we have no idea what will happen next.
Massive Political Change & EU Shakings
It won’t be politics or business as usual in 2017. The current ruling elite, political leaders, parties and establishment structures are being rejected across the globe at breath taking speeds and proportions. France is going to be more pro France and less pro EU no matter which candidate wins, Fillon or La Penn, however if La Penn wins, a referendum and a potential French-exit is almost guaranteed. Italy’s prime minister just resigned in December and they have been in a banking crisis for the last nine months. Italy is very frustrated with EU regulations which prevent them from bailing out their banks and have been vehemently arguing with Germany over the last year. This, along with the immigration issue, could be enough to cause Italy to exit the EU; no doubt they, along with other EU nations, are closely watching the UK exit process and taking notes.
The Netherlandsreferendum & elections are coming up and both the anti-EU candidates and the EU exit referendum and are favored to win. Germany has been trying to keep the EU together, but is now having its own banking problems with its largest bank, Deutche Bank teetering on the edge of insolvency and having trouble recapitalizing. Germany has also been opposed to the ECB QE program from day one. To make matters worse German Chancellor Angela Merkel, the most prominent EU leader is running behind in the poles as well, due to her relentless support of open borders, and all the terrorist incidents resulting from her polices.
The UK and EU have been facing off aggressively, but can’t get off square one, which is immigration. The UK said immigration and full control of its borders is not negotiable and the EU says the UK must accept EU immigration rules and free movement with no borders to have free trade with the EU. Prime Minster May has decided to proceed with a hard Brexit which has driven the pound down, but it won’t stay there long, as May has already begun to negotiate deals with the US, China, Japan and others. A hard Brexit means the UK is going to exit the European Union single market and not take two years to negotiate an exit. In other words, the UK will focus its attention on trading with the rest of the world, even if the EU completely shuts them out of the European market. This is highly unlikely, because the EU stands to lose more than the UK and most of its members want to trade with the UK. Even more threatening to the EU is if the UK does not negotiate a gradual exit and continues to prosper, basically ignores the European Union, it would virtually guarantee more member nations leaving, ultimately resulting in the eventual disintegration of the EU.
European solidarity erupted in a full scale Ideological Civil War at the Davos Conference in Switzerland this month. Dutch Prime Minister Mark Rutte said, “The whole idea of an ever-closer Europe has gone, it’s buried,” and dismissing calls for full political union as a dangerous romantic fantasy. “The fastest way to dismantle the EU is to continue talking about a step-by-step move towards some sort of super state,” – (Mishtalk.com) Most of the current EU leaders are up for election and if the current polls hold, few will be re-elected. Bloomberg reported, Leaders in Spain and Germany voiced concern that the Europe Union faces collapse as a result of anti-establishment forces campaigning to tear down the bloc, singling out their common neighbor France as the potential trigger. The London Telegraph reported, “the eurozone must break up if its members are to thrive again,” according to a former European Central Bank official Jürgen Stark, who served on the ECB’s executive board during the financial crisis. “As long as the ECB gives a signal in its operations to governments that 'we are the backstop’ and 'we will prevent country 'a’ or country 'b’ from becoming insolvent’ - there will be no structural reforms,” he said. Many of the leading candidates are advocating leaving the EU, which will create more referendums. It looks very likely that the EU will have more nations exit in 2017, which will drive down the value of the euro, weaken its influence and lead to its eventual disintegration.
Eurozone Destruction Necessary if Countries Are To Thrive Again, Warns Former ECB Hawk (1-29-17)
Things are not starting off well for the European Central Bank (ECB) in 2017. They have a growing shortage of short dated bonds, which can be used as collateral in repurchase agreements, however, their repo market is becoming more and more dysfunctional. Because the ECB has been buying so many bonds with its QE program, there are not enough bonds to go around. Bloomberg wrote:
“Demand for Core European Debt Intensifies ECB's QE and repo policies have pushed yields down even further Source: (Bloomberg) Toward the end of December it became all but impossible to find offers to lend out core European government paper. Cash-rich foreign investors shifting into securities with higher yields and longer maturities, and investment funds' usual year-end rotation out of equities and into fixed income, sapped supply for repo participants - neither of these buyers tend to lend their holdings.… Other regions, such as the U.K., have none of these issues, and their markets function smoothly. But they don't have a clutch of bickering nations to contend with, and for euro-area money markets, that's never going to change.” This is another reason for member nations to exit the EU. Bloomberg reported, annual price increases exceeding 2 percent in some states – and that German dissatisfaction with the ECB has morphed into frustration. Germany wants interest rates to go up now, but Spanish Prime Minister Mariano Rajoy expressed concern last week over a premature tightening, given that his nation still has about a fifth of its workforce standing idle, as EU disunity increases.
CNBC reported, the top 50 central banks around the world have seen a total of 690 interest rate cuts since the collapse of Lehman Brothers in September 2008, and may start to run out of ammunition soon. Alex Dryden, global market strategist at JP Morgan Asset Management, warned CNBC that central banks are running out of room to maneuver: "The Bank of Japan, now owns over 45 percent of the government bond market, over 65 percent of the domestic ETF market and are a top 10 shareholder in 90 percent of listed firms. They have also cut rates into negative territory. There isn't much more they can do."
Jim Rickards former CIA financial analyst, author and commentator, believes the Federal Reserve will raise interest rates as fast as it can, not because the US economy is improving, but because it needs interest rates to be up at least 3% or better, or they will be powerless to do anything for the recession they know is coming.
The incoming Trump administration is broadly supportive of congressional-led efforts to restrict the Federal Reserve’s ability to conduct monetary policy, a key lawmaker said: "We share many of the same goals," House Financial Services Committee Chairman Jeb Hensarling said in a brief interview Wednesday. With two slots vacant on the Fed’s seven-seat board, Trump will have an opportunity to nominate monetary policy makers more to his liking. He’ll also have a chance to pick a new chairman and vice chairman in 2018, when Yellen’s term and that of her deputy, Stanley Fischer, expire.
Anti-ECB Sentiment Gaining Rapidly In Germany Due To Rising Inflation (1-29-17)