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Beware the 15th March, as Trump makes America wait again & the Euro prepares to fall apart

By David Scott | Monday 6 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

The US President is expected to speak to the Greek prime minister in the coming days. The substance of the call, according to well-placed sources, will be Greece’s ongoing negotiations with creditors and the role the International Monetary Fund may or may not play in the country’s current rescue programme.  Donald Trump has publicly tweeted that he thinks the Greeks are “wasting their time” staying in the Eurozone. 

As the largest shareholder in the IMF, with a 17% share of the body’s voting power, Washington has effective veto power over many decisions. The IMF has yet to sign up to Greece’s third bailout programme, with Germany and the Netherlands saying its participation is vital if further emergency loans are to be disbursed to the debt-stricken country. “The government is attaching great significance to the conversation in its bid to get a clearer picture of Trump’s position on several issues, not least the Greek bailout program,” the Kathimerini newspaper wrote late last week.

With tensions also rising in the Aegean between regional rivals Greece and Turkey, Athens is also placing stock in Washington’s interventionist powers, diplomats say.  President Barack Obama, who chose to give his farewell speech abroad in the Greek capital, was aggressively supportive of Greece remaining in the single currency, stepping in when the country came closest yet to leaving the euro six months after Tsipras assumed power in mid-2015.  Trump’s Whitehouse chief of staff Reince Priebus, who is of Greek descent, told a visiting Greek delegation ahead of the president’s swearing-in that the new administration was determined to “fix Greece”, although he failed to make clear whether he meant in or out of the Eurozone.
Having warned that "everything will grind to a halt on March 5th" due to the under-appreciated debt-ceiling debacle that looms over Washington, and exclaiming that "what is going on today is complete insanity," former Reagan Budget Director David Stockman is rapidly losing faith that anything can be done saying in the week, "I've thrown in the towel because he’s not paying attention and he’s not learning anything and he’s making ridiculous statements." Reflecting on Trump's address to Congress, and what we know of The White House agenda, Stockman told Fox Business' Neil Cavuto: "We don’t need a $54 billion increase in defence when the budget already is ten times bigger than that of Russia. We don’t need $6 trillion of defence spending over the next decade because China is going nowhere except trying to keep their Ponzi scheme together."Stockman rejected Trump's policies by adding "Trump is so deep in fiscal la-la-land, he won't even find the wrong envelope... he is saying crazy things."

This is what Stockman said at the end of February, “I think what people are missing is this date, March 15th 2017.  That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015.  That holiday expires.  The debt ceiling will freeze in at $20 trillion.  It will then be law.  It will be a hard stop.  The Treasury will have roughly $200 billion in cash.  We are burning cash at a $75 billion a month rate.  By summer, they will be out of cash.  Then we will be in the mother of all debt ceiling crises.  Everything will grind to a halt.  I think we will have a government shutdown.  There will not be Obama Care repeal and replace.  There will be no tax cut.  There will be no infrastructure stimulus.  There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.” Stockman also predicts very positive price moves for gold and silver as a result of the coming budget calamity.
China’s toothless legislature convened at the weekend with the focus on containing economic risks while president Xi Jinping consolidates power ahead of a pivotal Communist party meeting later this year. The gathering of 3,000 delegates for the national people’s congress in Beijing’s Great Hall of the People is staged annually by the party and although it has little bearing on policy, it will be scrutinised this year for any clues about the state of the economy in Premier Li Keqiang’s. This will include a target for economic growth, which analysts expect to be unchanged from last year at between 6.5-7%. This level of Growth will be the slowest rates for more than a quarter of a century, a development which has complicated government efforts to shift from an economic model based on debt-fuelled investment and exports towards a consumer-driven one. The government also wants to trim its bloated state-owned government industries while tackling a slumping currency, massive capital flight by Chinese enterprises seeking better returns abroad, and fears of a housing bubble and bad-loan crisis. 

The total of Chinese debt has reached almost 250% of GDP and Capital Economics has warned that this is the last window for Beijing to tackle the problem by recapitalising the banks and allowing state firms to fail was “closing fast”. The currency issue could also become a major issue. The yuan fell on Friday below the 6.9 per dollar level for the first time in one-and-a-half months, as the dollar continued to gain momentum on expectations of higher US interest rates. Pressure on the Chinese currency was due to growing expectations the Federal Reserve could raise rates as early as this month after a solid run of US economic data and policymakers hinting a rate rise would be appropriate soon. Investors will be looking for signs about whether the Beijing government is prepared to let the yuan fall further against the dollar and risk the anger of US president Donald Trump, who has accused China of keeping the yuan low in order to boost exports to the detriment of US producers. The People’s Bank of China has burned through a trillion dollars of foreign exchange reserves since 2014 in order to keep the yuan from falling even further. 

Since taking over in 2012 Xi has consolidated power more rapidly than any leader in decades. He is expected to unveil a leadership shuffle at the autumn gathering amid speculation it could indicate he intends to stay on beyond the traditional 10-year term. Facing pressure over severe smog, authorities have shut down factories and other polluting activities in northern China to clear the air for the legislative spectacle. China supports the work of the World Trade Organization, the country's foreign ministry said on Thursday, after U.S. President Donald Trump's administration said it might defy WTO rulings it viewed as interfering with U.S. sovereignty. Maintaining a fair and open multilateral system with the WTO at its centre benefits global economic growth and is in the interests of everyone, foreign ministry spokesman Geng Shuang said. “Since China joined the WTO it has always proactively supported the WTO's work, and this position will not change," he told a daily news briefing, when asked about the U.S. proposal. China’s Commerce Ministry declined immediate comment.

In an annual trade policy agenda document released to Congress on Wednesday, the U.S. Trade Representative's office said the administration "will not tolerate" unfair trade practices that distort markets. These range from currency manipulation and unfair government subsidies to intellectual property theft, it added. The document signals that the administration may try to push the limits of what is acceptable under WTO rules in its quest to make good on campaign promises to slash U.S. trade deficits with China and Mexico, and bring home manufacturing jobs. It marks a departure from the Obama administration's strict adherence to WTO compliance in its challenges to unfair foreign trade practices. China, worried that its export-dependent industries will suffer, has repeatedly urged global leaders to reject protectionism, which Trump has championed with his "America First" campaign.
Whilst the euro could possibly survive a Greek exit, it certainly could not survive in anything like its present form were Italy to have a full-blown economic and financial crisis that forced it to default on its public debt mountain. Italy has a much larger economy than Greece. Being the third-largest economy in the Eurozone, Italy’s economy is around 10 times the size of that of Greece. Equally troubling is the fact that Italy has the world’s third-largest sovereign bond market with public debt of more than $2.5 trillion. Much of this debt is held by Europe’s shaky banking system, which heightens the risk that an Italian sovereign debt default could shake the global financial system to its core. In addition the country’s economic performance since 2008 has been abysmal. Italian living standards today are around 10 percent below where they were 10 years ago. 

Meanwhile, Italy’s banking system has become highly troubled and its public sector debt as a share of gross domestic product is now the second highest in the Eurozone.  Today there are as many reasons for worrying about the Italian economy as there were to worrying about the Greek economy back in 2009. Like Greece then, Italy today has all of the same issues for the making of a full-blown economic and financial crisis within the next year or two. the Italian economy today is barely above its level in 1999 when the country adopted the Euro as its currency and since the Great Global Economic Recession in 2008-2009, the Italian economy has experienced a triple-dip recession that has left its economy today some 7 percent below its pre-2008 crisis peak level and its unemployment rate stuck at over 11 percent.  Since adopting the Euro in 1999, Italy’s unit labour costs have increased by around 15 percentage points more than have those in Germany and Italian banks now have around €360 billion in non-performing loans, which amounts to a staggering 18 percent of their loan portfolio.

If that were not bad enough, the Italian banks also hold unhealthily large amounts of Italian government debt, which now total more than 10 percent of their overall assets. The country’s public debt level has risen from 100 percent of GDP in 2008 to 133 percent of GDP at present. Compounding all of this Italian families have been shrinking for decades. In 2015, 488,000 babies were born in Italy, the fewest since the country first unified in 1861. It has one of the lowest birth-rates in Europe, with 1.37 children per woman, compared with a European average of 1.6, according to Eurostat figures. Italy has a massive tax-and-transfer welfare state that is predicated on an ever-expending population of workers (i.e., taxpayers) to finance benefits to retirees. But old people are living longer and low birth-rates mean that there won’t be enough taxpayers to prop up the Ponzi scheme of big government.
The US government deal on the debt ceiling is coming to an end this month, and there is about to be a great deal of noise about it and whilst the political system will simply try and pass the issue around again, but things may have finally reached the point where the road cannot be stretched further out ahead. The Federal Reserve System has acknowledged that QE stimulus reached its theoretical limit, and has crippled the economy; it has also acknowledged that the law of boom and bust has put us into a dangerous space and that there will be economic pain one way or another. The experts, critics and Cassandra’s have all talked about the massively vulnerable system we are all part of, but the biggest question of all is when will it inevitably break. The US debt level and monetary schemes have simply reached the point of no return and public disorder and economic instability are the next logical step. 

We are in a season of time when economic conditions have appeared to be getting a little bit better in the United States, and this has blinded so many people to the truth of what is about to happen to them and society. Americans whose economic life and prospects for their children have been destroyed in the last two decades by the offshoring of American manufacturing and tradable professional skills jobs, such as software engineering, elected Donald Trump as there answer to remedy the situation. These people, dispossessed by the offshoring corporations, elected Trump, because Trump was the only American running for a political office who called attention to the problem and declared his intention to fix it. By standing up for Americans, Trump alienated the global corporations, their executives and shareholders, all of whom benefit from stealing the economic life of Americans and producing abroad where labour and regulatory costs are lower. Neoliberal economists describe this labour arbitrage, which reduces the real incomes of the American labour force, as the beneficial working of free trade. Beneficial for whom? 
These offshoring firms not only have destroyed the economic prospects of millions of Americans, but they have also destroyed the payroll tax base of the Ponzi schemes of Social Security and Medicare. Together with the tax base of local and state governments, with the consequence that numerous pension systems are on the verge of failure. The New York Teamsters Road Carriers Local 707 Pension Fund failed last week. This failure, experts predict, is the beginning of a tsunami that will spread into the US municipal and state pension systems. When you add up the external costs of jobs offshoring that are imposed on Americans, these costs far exceed the value of the profits that flow to the One Percent. Clearly, this is an intolerable situation. Dispossessed Americans rose up. They ignored the media hysteria, or perhaps were driven to support Trump by the hostility of the media. Trump was elected by dispossessed America, by the working class. These are the factors that is driving the global change in politics and Europe is next in line next for Political overthrow. 
There should be no doubt about the current status of the European Union. It’s crumbling in front of us. Between the sprawling unaccountable bureaucracy in Brussels, the unpayable debts, the unfettered immigration, and the unprecedented emergence of conservative, nationalistic groups, it is plain to see that the EU is not long for this world. No nation can survive those pressures; much less a loosely held, 24 year old political union consisting of a wide variety of languages and cultures and this fact is beginning to show. Not just because nations like the UK have already voted to leave the EU, and talk of independence referendums is spreading like wildfire across the continent. Ultimately the EU is run by unelected bureaucrats who don’t have to consult ordinary people on what to do, and history proves that these political systems rarely survive for very long.
The Fed has hiked just 2 times in the past 10 years but On March 15th the Fed will likely tighten for the 2nd time in 3 months and a second rate hike in 3 months would cause markets to anticipate a hike in each quarter of 2017 and a jump in the Fed funds rate to 1.5-2% by early 2018. Also the 15th March is also the date of the Dutch election, and also when the US debt ceiling will be hit. On this very same day Teresa May, many give notification to Europe about invoking article 50.Not only is the Trump rally over because the Fed is rushing into putting up rates, but stocks are the last to get the memo. Bond markets are already in flight. Globally there is a stealth flight to safety taking place.
Equity Market tops in a bull run have what is often referred to as “the blow off phase", a manic event which defies rational understanding. Snap chats listing last week in my view is such an event - see Friday's note as to why this is the case.

Enjoy your last few weeks of elevated normality. Your wealth may never be so high again for a very long time.

David Scott works for investment Manager Andrews Gwynne

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