FIG Topics of Interest



 “My analysis is that we are really heading for the abyss,” said one senior EU figure handling Brexit. “We may extend to June. But it is coming. The risk of no-deal is huge.” The drumbeat of planning helps those, like German chancellor Angela Merkel, who see the Brexit brinkmanship as potentially helping shift support in favor of a deal in Westminster.
But the EU is also adjusting its thinking and energy, with an emphasis on three priorities: making sure voters do not find their leaders at fault for the costs of a hard Brexit; mitigating the worst effects of such a crash-out, even if it temporarily bends some EU principles; and, finally, working out how to pick up the pieces afterwards. “A three months extension is likely,” said Rem Korteweg, a research fellow at Clingendael, the Netherlands Institute of International Relations. “But it is not to give the UK a shot at another agreement. It is to give the EU more time to prepare itself for no-deal. They will not say this out loud, but this is the calculus.”
Two of the most difficult challenges of a no-deal Brexit — the Northern Ireland border and the hole left in the EU budget from missing UK contributions — are still largely sidestepped in public EU preparations.
The issues are so important and potentially so divisive they will be the last to be publicly addressed in contingency planning — and probably the first to be reopened with the UK in the wake of a no-deal exit.

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Financial types have long had a preoccupation: What will the Federal Reserve do with all the fixed income securities it purchased to help the U.S. economy recover from the last recession? The Fed’s efforts to shrink its holdings have been blamed for various ills, including December’s stock-market swoon. And any new nuance of policy — such as last week’s statement on “balance sheet normalization” — is seen as a really big deal.
I’m amazed and baffled by this. It gets much more attention than it deserves.
The run-off of the Fed’s balance sheet had a smaller-than-expected impact on the yields of those securities. Longer-term Treasury yields remained low, and the spread between them and the yields on agency mortgage-backed securities didn’t change much. It’s hard to see how the normalization of the Fed’s balance sheet tightened financial conditions in a way that would have weighed significantly on stock prices.
Better explanations for this fall’s weakness in the equity market abound. For one, economic growth and corporate profits looked set to falter in 2019, as the effects of corporate tax cuts waned and the labor market tightened. Demand for scarce labor should increase its share of income, crimping profits. And if the economy didn’t slow enough on its own, the Fed was likely to raise interest rates to make sure that happened. These developments weren’t good for an equity market that had been accustomed to strong earnings growth and an accommodative central bank.
The concept of using the balance sheet as a monetary-policy tool isn’t new, either. It has always been part of the Fed’s toolkit. The shift is merely in emphasis. When the Fed was clearly on a tightening path, the attention was on interest rates. The Fed has made it clear that this is the primary tool of monetary policy and that hasn’t changed a whit. However, now that the balance sheet is getting more attention and the direction of short-term interest rates is less certain, the Fed is simply reminding people that the balance sheet is still available in circumstances where its primary tool might be insufficient. 

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Huawei Sting Offers Rare Glimpse of the U.S. Targeting a Chinese Giant
The sample looked like an ordinary piece of glass, 4 inches square and transparent on both sides. It’d been packed like the precious specimen its inventor, Adam Khan, believed it to be—placed on wax paper, nestled in a tray lined with silicon gel, enclosed in a plastic case, surrounded by air bags, sealed in a cardboard box—and then sent for testing to a laboratory in San Diego owned by Huawei Technologies Co. But when the sample came back last August, months late and badly damaged, Khan knew something was terribly wrong. 

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The two sides made important progress during talks that were candid, specific, and fruitful, according to a statement published by China’s Xinhua News Agency on Friday. China agreed to increase imports of U.S. agriculture, energy, industrial products and services, it said, without providing details. The countries also agreed to strengthen cooperation on intellecual property rights and technology transfer, Xinhua said.
Lighthizer told reporters on Thursday that the two sides had engaged in an intense and detailed discussion focused largely on U.S. demands for Chinese structural reforms this week. He conceded, however, that the two sides were only just starting to draft a common negotiating document, a sign of just how much work remained on nailing down the substance.
The U.S. is insisting that any deal should be enforceable and Lighthizer called that idea “foundational” on Thursday. But people familiar with the discussions say the U.S. side itself has yet to agree internally on what the right mechanism to enforce any agreement would be.

While the Chinese have signaled their willingness to have a deal be enforceable, they have been toying with ideas such as having independent arbitration tribunals that the U.S. is unlikely to accept, one person familiar with the negotiations said.
In a statement, the White House didn’t list any new commitments by either side, saying only that progress had been made or “much work remains to be done.” The White House reiterated its threat to raise tariffs by March 1, unless a “satisfactory outcome” is reached.
Trump also raised the possibility of a face-to-face meeting with Xi Jinping after receiving an official invitation from the Chinese leader. Earlier, he tweeted that “no final deal will be made until my friend President Xi, and I, meet in the near future.”
One possibility would be for a meeting with Xi after the U.S. president’s planned summit with North Korean leader Kim Jong Un in late February.

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“Short of announcing that a rate cut is in the cards, this is about as dovish a statement as possible,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd. “Policy makers appear to be going all-in on the slowdown story.”
Chairman Jerome Powell signaled the Federal Reserve won’t raise interest rates again until inflation accelerates in a dovish pivot that left many investors betting against any further hikes in this economic expansion.
Not only did central bankers drop a reference to “further gradual increases” in their statement on Wednesday, they implied the next move could just as likely be down as up. They also announced a more flexible approach to shrinking their bond portfolio, another acknowledgment of the recent financial market angst over tighter monetary policy.
After nine increases since 2015, Goldman Sachs Group Inc. economists said they now see just a 25 percent probability of the federal funds rate being lifted in the second quarter from the current 2.25 percent to 2.5 percent, down from 55 percent previously.

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The Chinese government will rush a new foreign investment law through its rubber-stamp parliament in March, in a move that Beijing hopes will help smooth over trade talks scheduled to open later today in Washington.
The official Xinhua news agency reported on Wednesday that the National People’s Congress would vote on the new law, which will supersede existing legislation governing foreign investments in China, when it convenes for its annual session in early March. 
The new law, which was first reviewed by the NPC’s Standing Committee in December, formally bans “forced” technology transfers and other illegal interference by government officials in the operations of foreign-invested enterprises.
The report came just hours before vice premier Liu He and US Trade Representative Robert Lighthizer were due to begin two days of possibly make-or-break talks to avert an escalation in the two countries’ trade war. 

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On Monday, White House National Security Adviser John Bolton entered a press briefing on new Venezuela sanctions with a yellow legal pad, accidentally -- or not -- turned to face gathered reporters and photographers. On the pad appeared a hand-written note: “Afghanistan --> welcome the talks. 5,000 troops to Colombia.”

Photos of the note rocketed around Twitter, causing a stir. National Security Council representatives didn’t respond to questions about whether the U.S. is planning to deploy the military to Colombia, which, of course, borders Venezuela, or otherwise explain Bolton’s note.

Secretary of State Michael Pompeo directed most of his agency’s personnel to leave Venezuela, but the U.S. Embassy in Caracas will remain in operation with a skeleton staff. A U.S. military force in Colombia would be well positioned to respond if Maduro attempts to forcibly evict the remaining American diplomatic presence, or if he arrests or otherwise takes action against Guard.

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3-month bill auction ($42b)
6-month bill auction ($39b)
2yr note auction ($40b)
5yr note auction ($41b)

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Now the Fed has to weigh again the balance between continuing to please markets and responding to continued domestic economic strength. On the one hand, it will wish to be cautious about reinforcing too much the notion of a full return to a “Fed put” that excessively decouples asset prices from fundamentals. On the other hand, it needs to refrain from again appearing to signal that it is not sufficiently sensitive to the risks to domestic economic activity of spillovers from weakness in the rest of the world and spillbacks from excessively volatile markets.

The best way to achieve this would be for the Fed to hint at greater policy flexibility than it signaled in December. Specifically, my expectation is that the central bank will use the statement and, especially, the press conference that follows the meeting to:

  • Indicate that the next revision of the blue dots and economic projections will again likely be down;
  • Point out that the balance of overall global economic risk has shifted more to the downside;
  • Reiterate its inclination for patience when it comes to future interest rate hikes;
  • Signal progress on the ongoing technical work on balance-sheet policy;
  • Keep open the possibility of altering both its journey and destination -- that is the pace of balance-sheet reduction over time, and the final equilibrium number.

With better technicals now helping markets, though not as much as in 2017, this approach should maintain a sense of a responsive policy underpinning for now, thereby limiting the scope for self-inflicted wounds. However, it won’t sustainably remove the longer-term policy dilemma facing systemically important central banks. For that, the Fed -- and even more so the European Central Bank -- needs the help of politicians to open up the way for more pro-growth policies on the part of other economic-policy-making agencies.

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“We’re talking, we’re talking,” said Schumer of New York after emerging from McConnell’s office.
Senate Majority Leader Mitch McConnell, who until now has publicly sat on the sidelines during the 35-day government shutdown, opened negotiations with Minority Leader Chuck Schumer Thursday after the chamber blocked two rival spending bills to reopen the government.

House Democrats postponed plans to unveil a proposal on Friday for securing the border without erecting new barriers. Homeland Security Committee Chairman Bennie Thompson of Mississippi said he expects it to call for more than $5.7 billion in spending on technology, personnel and other aspects of security.
Overcoming a veto would require two-thirds majorities in the House and Senate, and votes so far have shown support well below that amount.

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