Thoughts from Galicia, Spain: 24.1.18

Spanish life is not always likeable but it is compellingly loveable.

- Christopher Howse: A Pilgrim in Spain. 

If you've arrived here because of an interest in Galicia or Pontevedra, see my web page here.

Spain

• A Spanish judge had rejected Madrid's application for an arrest warrant against Sr P, on the grounds that this would help his presidential aspirations. I can't pretend to know the legal niceties in this case but this rather seems to me like a judge taking decisions on political - not legal – grounds. Exactly what the Spanish judiciary is accused of.
• Here's news of Madrid's fears, rational or otherwise.
• On a lighter note . . . Here's The Local's latest list – on cracking the Spanish language. I know we've seen this before.

The UK

• If I ever knew, I'd forgotten that Spain's Pact of Oblivion – forgetting about Civil War crimes – had a British predecessor - The Indemnity and Oblivion Act of 1660 . This was a general pardon for everyone who had committed crimes during the Civil War and Interregnum with the exception of certain crimes such as murder (without a licence granted by King or Parliament), piracy, buggery, rape and witchcraft. But it didn't cover 10 men implicated in the regicide of Charles 1, who were executed. So far at least, no one has been executed – or even tried – for crimes committed here in Spain between 1936 and 1975. And probably never will be.

The USA.

• One of the great joys of the Fart era is the nightly satirical shows in the USA available on Youtube. Last night I laughed out loud at a couple of them on the weekend women's march. See minute 4.50 here for some of the wonderful placards across the country. One missing there is the brilliant We Shall Overcomb. And then try minute minute 5.30 for Fart at his most unfathomable. Or stupid. You decide.
• And click here for an hilarious take on his unprecedented mendacity.
• As for that astonishing medical report . . .
• And as for his taking credit for current US growth . . . Here's something on that.

The World

• Here's something for the Davros folk to think – and just possibly – worry about
• And here's something for everyone to worry about.
• If that's not enough for you, read Articles 1 and 2 below.
• As an example of current madness, see this article on the valuation of a company with a truly ludicrous P/E ratio. And then this uncritical Guardian report.

Spanish/Spanglish

• My neighbour's14 year old daughter rang my bell last night and, rather to my surprise, asked me if I wanted to buy a reefer. This turned out to be something as innocuous as a ticket for her school raffle. Or una rifa. Defined by the Royal Academy as:- 1. Juego que consiste en sortear algo entre varias personas, or 2. Contienda; Pendencia; Enemistad. It's suggesed rifa is Spanglish – presumably from 'raffle' - but I'm not sure. Anyway, I'm now in line for a fantastic mountain bike. Just what I need.

Social Media

• Developers of platforms such as Facebook have admitted that they were designed to be addictive. . . Should we be following the executives’ example and going cold turkey – and is it even possible for mere mortals? FB's founder, Mark Zuckerberg admits he doesn't get high on his own supply. He's not alone; none of the company’s key executives has a “normal” Facebook presence. More on the this evil here.

The Gender War

• That Channel 4 interview has thrown up Article 3 below on the difficulties faced by modern men. You know, the vast majority who aren't rapists and who never even opportune women. Manliness is a tricky business, says the author. It's possible that the majority of women will feel some sympathy for his views.
• The last paragraph – re emasculated and depressed men - reminded me that, for many years, I've been pondering why several highly intelligent, attractive female friends of my elder daughter haven't been able to find life partners and to have the children they want. But, truth to tell, I've yet to arrive at a conclusion. However, I'll now stick my neck out and aver that – however strong and independent they are – women still demand that their men be 'masculine'. The core problem is that, these days, both men and women are utterly confused about what this comprises. A lost generation, it seems to me. Very sad.

The Culture Wars

• Here's the famous early feminist – Germaine Greer – on the subjcct. Not fond of the 'whingeing' metoo movement,

Finally

• As we all know, beyond a certain point, tourism is destructive. Nowhere more so than in Venice. Having been fleeced there a couple of times 20 years ago, I wasn't too surprised to read that some Japanese students - after a simple dinner of 3 steaks and 1 fish dish, washed down with nothing more potent than mineral water - were presented with a bill for €1,100. Understandably, they called the police. Possibly having been forced to pay not just the bill but an extra 10% on top of the 15% included in it.

ARTICLE 1

World finance now more dangerous than in 2008, warns central bank guru: Ambrose Evans Pritchard

The world financial system is as dangerously stretched today as it was at the peak of the last bubble but this time the authorities are caught in a ‘policy trap’ with few defences left, a veteran central banker has warned.

Nine years of emergency money has had a string of perverse effects and lured emerging markets into debt dependency, without addressing the structural causes of the global disorder.

“All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” said William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements.

Prof White said disturbing evidence of credit degradation is emerging almost daily. The latest horror is the revelation that distressed UK construction group Carilion quietly raised £112m through German Schuldschein bonds. South African retailer Steinhoff also tapped this obscure market, borrowing €730m.

Schuldschein loans were once a feature of rock-solid lending to family Mittelstand companies in Germany. The transformation of this corner of the market into a form of high-risk shadow banking, apparently to evade scrutiny, shows how badly the lending system has been distorted by quantitative easing (QE) and negative interest rates.

Prof White said there is an intoxicating optimism at the top of every unstable boom when people latch on to good news and convince themselves that risk is fading, but that is precisely when the worst mistakes are made. Stress indicators were equally depressed in 2007 just before the storm broke.

This time central banks are holding a particularly ferocious tiger by the tail. Global debt ratios have surged by a further 51 percentage points of GDP since the Lehman crisis, reaching a record 327pc (IIF data). Every part of the world economy is exhibiting some deformed pathology.

This is a new phenomenon in economic history and can be tracked to QE liquidity leakage from the West, which flooded East Asia, Latin America, and other emerging markets, with a huge extra push from China pursuing its own torrid venture. “Central banks have been pouring more fuel on the fire,” he told the Daily Telegraph, speaking before the World Economic Forum in Davos.  

“Should regulators really be congratulating themselves that the system is now safer? Nobody knows what is going to happen when they unwind QE. The markets had better be very careful because there are a lot of fracture points out there,” he said.

“Pharmaceutical companies are subject to laws forcing them to test for unintended consequences before they launch a drug, but central banks launched the huge social experiment of QE with carelessly little thought about the side-effects,” he said.

The US Federal Reserve is already reversing bond purchases - ignoring warnings by former Fed chair Ben Bernanke - and will ratchet up the pace to $50bn a month this year. It will lead to a surge in supply of US Treasury bonds just as the Trump Administration’s tax and spending blitz pushes the US budget deficit toward $1 trillion, and just as China and Japan trim Treasury holdings.

It has the makings of a perfect storm. At best, the implication is that yields on 10-year US Treasuries - the world’s benchmark price of money - will  spike enough to send tremors through credit markets. We are not close to the danger point but the yield crept up to a three-year high of 2.66pc last week. It has broken out of its 36-year downtrend, prompting loud warnings of a secular bond rout.

The edifice of inflated equity and asset markets is built on the premise that interest rates will remain pinned to the floor. The latest stability report by the US Treasury’s Office of Financial Research (OFR) warned that  a 100 basis point rate rise would slash $1.2 trillion of value from the Barclays US Aggregate Bond Index, with further losses once junk bonds, fixed-rate mortgages, and derivatives are included. It said losses could dwarf the “bond massacre” that bankrupted Orange County California in 1994 - and detonated Mexico’s Tequila Crisis.

The global fall-out from such a shock could be violent. Credit in dollars beyond US jurisdiction has risen fivefold in 15 years to over $10 trillion. “This is a very big number. As soon as the world gets into trouble, a lot of people are going to have trouble servicing that dollar debt,” said Prof White. The offshore dollar funding markets would dry up, triggering a liquidity squeeze. Borrowers would suffer the double shock of a rising dollar, and rising rates.

The OFR report makes unsettling reading. “The cyclically adjusted price-to-earnings ratio of the S&P 500 is at its 97th percentile relative to the last 130 years,” it said. Margin debt on Wall Street has risen to an all-time high, as has the share of risky bonds with minimal protection. So-called ‘covenant-lite’ contracts are now running at 51pc of all issuance. The top decile of macro hedge funds has raised leverage to 15 times, accounting for $800bn in gross assets.

While banks now have high capital buffers, the risk has migrated elsewhere: to investment funds concentrated in crowded trades. The share of equities traded in “dark pools” outside the exchanges has mushroomed to 33pc. “A lack of market liquidity may lead to fire-sale risk, a downward price spiral,” it said.

One worry is what will happen to ‘risk parity’ funds when the inflation cycle turns. RBI Capital warned in its investor letter that these funds could lead to a “liquidity crash”. Deutsche Bank has advised clients to take out June 2018 ‘put’ options on the S&P 500 - a hedge against a market slide - arguing that the rally looks stretched and that risk parity funds will amplify any correction.

These funds manage risk by matching bonds and equities through dynamic weighting. The strategy worked marvelously during the ‘Goldilocks’ phase of low inflation and rising stock markets. Both wings of the trade did well. The danger is that both could go wrong at the same, setting off a vicious cycle in the opposite direction.

Funds have doubled-down on the trade with leveraged bets on Treasuries to boost returns. “A breakdown of this strategy poses the greatest threat to the overall market,” says Peter Tchir from Brean Capital. In a sense, risk parity funds may be today’s equivalent of the ‘portfolio insurance’ that accelerated the crash in October 1987.

Whether the inflation cycle is really turning, and how fast, is the elemental question of this bull market. What is clear is that the US has closed the output gap and is hitting capacity constraints. The New York Fed’s underlying inflation gauge rose to a 12-year high near 3pc in December.

The great disinflation of the last three decades was essentially a global ‘supply shock’. The opening-up of China and the fall of the Berlin Wall added 800 million workers to the traded economy and labour pool, depressing wages and unleashing a tsunami of cheap goods. The ‘Amazon effect’ of digital technology capped price rises. The demographics of the baby boom era played its part by boosting the global savings glut.

But there was another feature that is often neglected. Central banks intervened “asymmetrically” with each cycle, letting booms run but stepping in with stimulus to cushion busts. The BIS says one result was to keep insolvent ‘zombie’ companies alive and block the Schumpeterian process of creative destruction that leads to rising productivity. This artificially stopped supply returning to balance. It has been a cause of the deflationary malaise.     

“Everything could now go into reverse: the baby boomers are gone; China’s working age population is falling; and zombie companies are going to be forced out of business at last as borrowing costs rise,” White said.

While higher inflation is needed in one sense to right the global ship - since it lifts nominal GDP faster, and whittles down the debt stock - the obvious danger is that the shock of higher rates will hit first. Debt dynamics could spin out of control. Japan and Italy are in the firing line. The US has more margin but is being cavalier with fiscal expansion a l’outrance and no reform of its entitlement programmes.

“This raises the danger of ‘fiscal dominance’. The moment that markets start to fear this happening, it becomes totally self-fulfilling. They won’t lend to governments and the whole thing basically implodes,” he said.

Central banks are now caught in a ‘debt trap’. They cannot keep holding rates near zero as global inflation pressures build because that will lead to an even more perilous financial bubble, but they cannot easily raise rates either because it risks blowing up the system. “It is franky scary,” he said.

The BIS critique is that ever-lower rates and more radical stimulus at the bottom of each successive cycle has itself had the complex effect of lowering the ‘Wicksellian’ natural rate of interest. Prosperity has been drawn from the future and led to a corrosive ‘intertemporal’ imbalance. In the end this catches up with you.

The authorities may not yet have reached the end of the road but this strategy is clearly pregnant with danger. Global finance has become so sensitive to monetary policy that central banks risk triggering a downturn long before they have built up the safety buffer of 400 to 500 basis points in interest rate cuts needed to fight recessions. Fiscal buffers are not exhausted but they are ever thinner.

“We are running out of ammunition. I am afraid that at some point this is going to be resolved with a lot of debt defaults. And what did we do with the demographic dividend? We wasted it,” he said.

ARTICLE 2

For how much longer can the sweet spot in the world economy last?

Politics and economics tend to be regarded as inextricably linked, such that we even have a term for the way the one orders the other – the “political economy”. Sometimes, however, we assume government to be more central to the macro-economy than it really is. One of the most striking features of economic conditions today is that they seem almost entirely unaffected by the hopelessness of our politics.

Globally, the economy has returned to a period of relative health, with all three major economic regions – America, Europe and Asia – in synchronised growth, the first time this has happened since the financial crisis nearly ten years ago.

Yet politically, the situation looks dire. Among the G7 group of major advanced economies, only Canada and Japan have remotely stable or effective government. In America, we have a petulant and dysfunctional presidency whose daily outbursts and absurdities are a source of almost universal international derision, and more worryingly, continues to pose a serious threat to the global trading system.

In France, a self-styled Napoleon rules at the Élysée, yet his reform agenda is already effectively dead in the water. Lest it be forgotten amid all the guff about how Macron has turned the tide against populism, nearly half of French voters opted for eurosceptic alternatives in the last election. France’s newly acquired reputation for responsible, centrist government is a mirage that disguises still deep seated political discontents.

In Italy, the anti-establishment Five Star Movement has emerged as the country’s most popular party; opinion polls ahead of March’s general election point to the formation of a government with strongly eurosceptic views. Any such coalition would in practice be most unlikely to pull Italy out of the euro, despite the threats. Even so, the election threatens a previously untested degree of political turmoil.

As for Germany, there is no government at all, with Angela Merkel still struggling to cement a workable coalition after an election that gave the far-Right a significant presence in the Bundestag. Britain is meanwhile mired in the constraints of minority government and the obsessions of Brexit, paralysing virtually all other gainful activity. Labour sits there in the wings, threatening the imposition of the most hard-Left, populist government in decades. 

Political crisis is for the European Union as a whole a more or less permanent state of affairs, but with British withdrawal, things could get much worse, punching a big hole in the bloc’s budget. In the scale of things, the sums involved are trivial. They none the less have the potential to create major problems. Only reluctantly will other big net contributors cough up more. The conditionality attached to these payments will drive a further wedge between the EU and its Visegrád members, several of which are already in open rebellion against the EU’s obligations and requirements.

Turning now to the economy, it is as if none of this is of any consequence. It was said that both Brexit and the election of Donald Trump would plunge the world economy into chaos; so far, they have not. The American recovery has strengthened further since Trump’s victory, Europe has turned the corner, and beyond the impact on real wages of a devalued pound, even the UK economy seems to have been largely unaffected by the vote for Brexit.

None of this is any thanks to the politicians. If anyone can claim the credit, it is the central bankers, who, riding above the political circus, have kept their foot flat down on the monetary accelerator ever since the financial crisis, and even now, with the economy in many respects back to normal, continue to provide it with extreme levels of support.

The truth is that when it comes to the economy, even the president of the United States will much of the time have only marginal influence. Far more important are the natural ups and downs of the business cycle and the actions of the Federal Reserve.

Most economists think the Trump tax cuts will have some positive impact, all other things being equal, but few believe it will be huge. If on the other hand they generate a boom, then the Fed will act to dampen it down. In his conceit, the president likes to think that both an accelerating economy and the soar-away stock market are the result of his own genius; possibly at the margin, his various business friendly initiatives have indeed helped unleash pent up animal spirits. At root, however, continued economic expansion is merely cyclical. Trump is neither positive nor negative.

Much the same is true of Europe. The rebound has nothing to do with the structural reforms forced through at great political and social cost during the eurozone debt crisis, and virtually everything to do with Mario Draghi’s ultra-accommodative money printing.

None of this is to argue that the politics are irrelevant. In the long run, and sometimes even in the short run if policy is reckless enough, bad government will destroy an economy just as effectively as irresponsible bankers. American hegemony also vests the US presidency with the power to invoke geo-political crisis, the economic consequences of which can be devastating.

Even so, we shouldn’t be so surprised that the world economy is motoring again, despite the failings of our political leaders and systems. If demand is growing, supply will respond regardless.

What we also know is that at some stage the cycle will turn. The present US expansion is already only months away from being the second longest in US history. What is more, it is sustained only by the persistence of ultra-low interest rates,which have in turn crimped productivity growth and supported a debt fuelled bubble in asset prices. There is a sense in which the true adjustment to the financial crisis has yet to happen.

Dysfunctional government may not matter very much when the economy is growing, but it will matter a lot come the next big shock. It is hard to believe, for instance, that today’s ragbag of cowed, inward-looking political leaders would be capable of the co-ordinated and relatively effective international response that was mounted to the financial crisis. The complexities of today’s world frequently require a multilateral response; yet we seem fast to be retreating into the pinched, national solutions of the past.

ARTICLE 3

Manliness is a tricky business - but talking about it is not an insult to womankind: Tim Stanley

Men: we can’t win. If we don’t want to talk about being men, we’re called dinosaurs. If we do, we’re called sexist.

That’s why the Jordan Peterson saga hurt so much. Peterson is a Canadian clinical psychologist who has become famous, in part, for writing about the struggle to be a man in an age that frowns on manliness. A few days ago, he recorded an interview with Cathy Newman on Channel 4, during which she accused him of being anti-feminist and antediluvian.

This was disingenuous and annoying. It’s also something I’ve heard a lot: the suggestion that when men try to talk directly to men about being men, and in terms that men can actually relate to, they are purposefully distracting us from the far more important problems faced by women.

Well, men do have issues and, yes, they are specifically male. We increasingly suffer from depression, anxiety, anger and uncertainty about who we are or what we’re for. Men are three times more likely than women to show signs of alcohol dependence or be frequent users of drugs. Our biggest killer under 50 isn’t cancer or heart disease. It’s suicide.

A lot of men do blame this on feminists, and that’s unfair. Suicide rates can correlate to areas of high unemployment and low pay: feminists were not responsible for the deindustrialisation of Britain, for destroying blue-collar jobs, killing trades unions or closing down the pubs. On the contrary, feminism usually aims to help men by sharing responsibilities and liberating us 
from stone age machismo.

But the very fact that some men instinctively look for a woman to blame points to an eternal tension between the sexes, to conflicts rooted in the realities of biology and psychology. The sexes experience life differently. When feminism, or just a feminine-dominant perspective, attempts to reshape public policy and culture, it is inevitable that men will feel they are losing out: everything from portraying dads in adverts as drooling morons to over-prescribing Ritalin to boys who show all the symptoms of being boys.

If you want to know what men really want, look at the mistakes we make. Research suggests that up to one million Britons are using steroids to change the way they look, many in a bid to resemble those ripped buffoons you see in films and on television programmes such as Love Island. That’s about sex and body image.

Meanwhile, human folly also encompasses the suicide bomber who kills out of wounded masculine pride. I’m being deadly serious. Two common themes in the lives of terrorists are misogyny and the yearning to be a hero. The misogyny is inexcusable. But that universal, masculine need for honour is something society can negotiate with, so long as we do it intelligently and with the right language.

One of the many reasons I distrust Theresa May’s idea of a Minister for Lonelinessis that, again, you just know the solutions will be feminine: ie “Let’s talk about it”. Talk works for some. But a lot of men, if pressured to emote (even by their friends), will feel greater stress, withdraw from interaction and, if anything, grow sicker than before. Good male friends are experts in judging when not to “go there”: sometimes, when a chap’s got a problem, what he wants is to talk more about anything else. 

Other times, he wants to talk too much and over-indulging him undoes the last few threads holding his psyche together. Treat some men with pity and they become pitiful.

What’s refreshing about Peterson is his brutal common sense. Far from encouraging the kind of self-indulgence you find among the women-haters, he challenges men to take responsibility. As he puts it: “Clean up your room”. That means start with the small things, get them in order, set your goals and make changes. This is hardly brain surgery; it’s certainly not new. Last year, Admiral William McRaven, a former Navy Seal, wrote a book called Make Your Bed. But it’s a style of self-help that men can relate to, because it’s rational, logical and practical.

Of course, by writing that, critics will infer that I’m saying women can’t relate to those adjectives too – which is tiresome. If we insist that masculinity is a conservative construct that’s anti-women and therefore can never be engaged with, all we do is deny men the right to talk about themselves in their own language. What is Peterson accused of? That he acknowledges the reality of the male taste for sex and violence? That his lectures are attended overwhelmingly by men? That he tells them to pull themselves together? Good! After all, he’s not trying to speak to successful, brilliant women. His audience is the failed male.

Peterson made one other point in his interview with Newman that struck a nerve: women, you really don’t want to live in a world populated by emasculated and depressed men. The sexes have their differences, but we’re in this together. And we need each other to be the 
best that we can be.