Janet Yellen, and the Fed’s inflation target, should both stay

The bipartisan tradition and the 2 per cent target have served the US well

by: Martin Wolf

The Federal Reserve is ahead of other important western central banks, in normalising monetary policy. This has provoked lively debate. Prominent questions are whether the Fed is wise to proceed with its tightening and whether it should change its inflation target. A third question is also under discussion: should the president replace Janet Yellen as chair when her term expires in January? The answers to all three questions are: no.

Why should the Fed not hasten to tighten monetary policy? Even after the latest move, the rate on federal funds is a mere 1.25 per cent. Moreover, unemployment has fallen to modest levels.

This is even true for a broader measure, which allows for “marginally attached” and “part-time” workers. (See charts.)

Yet a powerful argument against tightening remains: inflation is stubbornly low. Moreover, as Janet Yellen noted in her press conference on June 14, inflation has been below the Fed’s objective for “roughly five years”. It is reasonable to ask whether a central bank that is tightening while persistently failing to hit its target takes the latter seriously.
Is the 2 per cent a ceiling, not a symmetrical target? It is certainly a ceiling for the European Central Bank, which defines its objective as “below, but close to, 2 per cent over the medium term”.



One reason for holding back further fire is to prove that the Fed is as willing to let inflation exceed 2 per cent as to let it remain below it. Another reason is that the data do not show overheating. Many have fretted over an inflationary upsurge ever since the Fed acted decisively against a looming depression in late 2008. The Fed has largely ignored them. It should go on ignoring them.

In explaining his dissent from the June decision to raise rates, Neel Kashkari of the Minneapolis Fed stresses that risks are asymmetric. If the Fed tightens too soon and too strongly, the economy could be needlessly weak. If one takes seriously the notion of hysteresis (the permanent long-run impact of recessions), these losses could be forever. If the Fed tightens too late and too weakly, inflation would overshoot temporarily. The former error would be far worse.

Moreover, when expectations are well anchored, the impact of falling unemployment on inflation may be weak. Olivier Blanchard, now at the Peterson Institute for International Economics in Washington, notes that today’s relationship resembles more that of the 1960s than that of the 1970s, with its explosive increase in inflation. A historical example may help.

Between 1960 and 1970, West German unemployment was below 1 per cent for long periods.

Yet inflation showed no secular increase. It was only in the global inflation of the 1970s that inflation rose consistently.



The Fed is too enthusiastic about tightening. But should it also raise its inflation target? This is a separate issue, as Martin Sandbu has noted. If one fails to achieve one’s objective, discussing whether to raise it looks to be mainly a diversion. Nevertheless, influential economists have argued for raising the target. The main argument is that highly negative real short-term interest rates may be needed in the next recession, because the equilibrium real rate is so low.

With inflation at 2 per cent, the “zero bound” on the nominal short-term interest rates limits needed downward flexibility in real rates.

This argument would be stronger if it were really hard to lower short-term, nominal rates below zero.

But there is no such binding limit. People are not going to shift into cash to avoid negative rates even of several percentage points, especially if the latter are not expected to last. Operating in cash is very inconvenient. If necessary, one could restrict the ability to convert bank deposits into cash, via a system of charges. Once this is understood, significantly negative nominal rates become feasible. The zero lower bound is as mythical as the four-minute mile turned out to be in 1954.




That would not matter if changing the target were costless. But it is not. Much effort has gone into establishing the 2 per cent target. In the recent crisis, this kept inflation expectations up and so real interest rates down. Changing the target is sure to destabilise expectations over any future target: if they abandoned 2 per cent for 4 per cent, why might central bankers not raise it to 8 per cent? Yes, study the issue. Yes, consider how to make negative nominal rates work better. But do not change the target without much careful thought.

Finally, should Donald Trump replace Ms Yellen with someone else? Narayana Kocherlakota, former head of the Minneapolis Fed, provides a negative answer. On the assumption that Mr Trump does not suffer from the ultra-hard-money cum gold-standard disease of many Republicans, Ms Yellen has to be a superior choice. I would have liked her to take still more risk on the side of expansion, but of her competence and willingness to balance the arguments in a non-ideological way there is no doubt.
 
Remember that Ronald Reagan reappointed Paul Volcker, a Democrat appointed by Jimmy Carter, just as Bill Clinton reappointed Alan Greenspan, a Republican appointed by Mr Reagan, and Barack Obama reappointed Ben Bernanke, a Republican appointed by George W Bush. The tradition that the Fed is apolitical, bipartisan and supported by presidents of both parties, regardless of the party label of the chairman, has served the country admirably.

If Mr Trump wishes to take a small step towards establishing a reputation for judgment he should reappoint Ms Yellen. At a time of turbulence, this is no time for radical new departures.

Let the Fed nurture the recovery the US and, for that matter, the president need, under Ms Yellen’s leadership.


The Snowballing Power of the VIX, Wall Street’s Fear Index

Created to track expectations of volatility, it has spawned a giant trading ecosystem that could magnify losses when turbulence hits.

By Asjylyn Loder and Gunjan Banerji
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Retail investor Jason Miller at his apartment building in Boca Raton, Fla., has been shorting the VIX. Photo: Scott McIntyre for The Wall Street Journal


Wall Street’s “fear gauge” has neared all-time lows this year. That hasn’t stopped retail investor Jason Miller from making a nice chunk of change betting it will go even lower.

The Boca Raton, Fla., day trader says he has made $53,000 since the start of the year by effectively shorting the CBOE Volatility Index, nicknamed the VIX. That includes a white-knuckle day on May 17, when the VIX spiked 46% following reports that President Donald Trump had pressured former FBI Director James Comey to drop an investigation into former National Security Advisor Michael Flynn.

As the 40-year-old Mr. Miller recalls, he rode out the storm, confident the market would revert to its torpid ways—which it did. “One person’s fear is another person’s opportunity,” says Mr. Miller.

Volatility—or the lack of it—has become the central obsession of the markets as the S&P 500 trades around its all-time high. Invented 24 years ago as a way to warn investors of an imminent crash, the VIX has morphed into a giant casino of its own.



Volatility trading has wormed its way into many corners of the investing universe, including insurance products that guarantee retirement income and mutual funds that try to avoid the worst declines. Once the obscure province of academics and derivatives experts, volatility is now traded by would-be retirees alongside the most sophisticated hedge funds in the world.

Even investors who have never heard of the VIX are exposed to its gyrations. There’s an estimated $200 billion in so-called “volatility control” funds that use the VIX to decide whether to buy or sell stocks. “Tail risk” strategies, designed to steer clear of sudden slumps, often rely on it. Pensions such as the San Bernardino County Employees’ Retirement Association have profited from bets the VIX would fall. Asset managers including AllianceBernstein incorporate volatility into retirement-date savings funds, adjusting stock exposure based on the severity of market swings. And insurance giant AIG sells annuities with fees that rise along with the VIX.

Lately, the VIX has been signaling a near-complete absence of fear, and the preternatural calm is making some people nervous. Opinion is divided on whether it is a bullish signal for stocks or a worrying sign of complacency. After all, the VIX also approached a record low in early 2007, just before the subprime crisis began unspooling. In recent days the VIX nudged higher, rising more than 10%, as technology stocks fell.

Some analysts see low volatility as a sign of increased efficiency, where shocks are more quickly absorbed by the markets. Others credit the growth of passive investing with overriding the herd mentality that exacerbates panicked selling. And yet another theory claims VIX trading itself has smoothed the market’s jagged edges by allowing traders to easily offset risks.

Whatever the reason, becalmed stock markets have become a feature of the postcrisis world. Central bankers have lulled investors with record-low interest rates and flooded the market with cash. Even though the Federal Reserve is slowly withdrawing those supports, stocks have lost none of their appeal, notching new highs despite U.S. political turmoil.



This leads to the VIX paradox: The lack of fear scares some investors who say bloated stock prices portend a painful reckoning when monetary policy tightens.

“They’re not adding to market stability. They’re just building a bigger bomb,” says Tom Chadwick, a New Hampshire financial adviser who uses VIX options to help protect his clients’ portfolios from downturns. He says the Fed’s policies have kept volatility artificially low for so long that the speed of any reversal will be more severe. “When this goes, you’re going to see the mushroom cloud from Saturn.”

The VIX was conceived after the Black Monday crash in 1987, when the market fell 23% in a single day. The measure used stock-market bets, known as options, to gauge expectations for the speed and severity of market moves, or what traders call volatility. Options prices rise and fall based on the perceived odds of a payoff, akin to the way home insurance costs more on a hurricane-plagued coast than in an untroubled inland suburb.

Unlike home insurance, options prices fluctuate constantly as traders react to news and reassess their risks. Those prices feed into the VIX. The CBOE launched the original index in 1993, and it quickly became a staple of the financial press.

It took Wall Street another decade to figure out the VIX wasn’t just a market weather vane but also a potential gold mine. In the summer of 2002, newly minted billionaire Mark Cuban called Goldman Sachs Group Inc. looking for a way to protect his fortune from a crash. Because the VIX typically rises when stocks fall, he wanted to use it as insurance. But there was no way to trade it.

Devesh Shah, the Goldman trader who fielded the call, says he instead offered him an arcane derivative called a “variance swap,” but Mr. Cuban wasn’t interested.

Lamenting the lost opportunity, Mr. Shah met up with Sandy Rattray, a Goldman colleague and erstwhile indexing buff with a knack for packaging investment products. What if, the pair speculated, they could tap the VIX brand and reformulate the index based on their esoteric swaps?

“The world wanted to drink Coca-Cola , ” says Mr. Shah, who retired from Goldman as a partner in 2011. “They didn’t want the white label.”

These were the heady days after financial deregulation, and Wall Street was busily securitizing everything from weather reports to bundles of sliced-and-diced mortgages. Turning the VIX into something tradable was nothing more than a math problem, says Mr. Rattray.

The pair rewrote the VIX formula, expanding it to a larger universe of stock-market bets and making it possible to create a tradable futures contract. Their equation synthesizes thousands of trades and distills them all into a single number meant to represent the collective expectations for the market. When the VIX is at its current level of around 10, it implies that traders believe the S&P 500 will move by an average of less than 1% a day during the next 30 days.

The more stocks move, the higher the VIX goes. Since the market typically falls much more sharply than it rises, the VIX tends to surge when the market crashes—hence its potential as insurance.

Messrs. Shah and Rattray handed their invention to CBOE Holdings Inc., the owner of the VIX trademark. Neither had any idea that their brainchild would transform the markets for years to come.

“I didn’t realize how big it would be,” says Mr. Rattray, who is now the chief investment officer for Man Group PLC, an $89 billion hedge fund.

The formula allowed the CBOE to cash in its marquee index. The exchange launched VIX futures in 2004, and VIX options two years later. The firm billed VIX trading as a new risk-management tool, banking on the same appeal that had drawn Mr. Cuban. Trading grew steadily, but slowly.

Then the financial crisis hit, serving up a huge marketing opportunity. Amid an economic tailspin akin to the Great Depression, surging unemployment, and more than $5 trillion erased from the S&P 500, the only thing rising in the U.S. was the VIX, which topped 80 in late 2008. Who wouldn’t pay just a little bit more to protect their nest egg from the wipeout?

At Barclays PLC, a farsighted few realized access was a big problem. Trading futures and options was too complicated and costly for many investors. The bank instead devised a product that tracks VIX contracts but trades on an exchange just like any a corporate stock. Suddenly anyone with a brokerage account could trade like the pros. The Barclays iPath S&P 500 VIX Short-Term Futures ETN launched in January 2009, just months before the S&P 500 hit a 12-year low.

VIX trading exploded. Terrified investors piled into Barclays’s new product and similar ones that followed, desperate for anything that might help them repair their dented fortunes.

“I think of it as the great democratization of volatility,” says Bill Speth, vice president of research and product development at CBOE. “Investors who never would have opened a futures account or traded an option could and did trade these exchange-traded products.”

Amid the panic, investors were willing to pay to insure their portfolios. The costs would be a drag in bull markets, but looked like a small price to pay in the immediate wake of the crisis.

“It was the Wild West,” says Bill Luby, who quit a 20-year consulting career in 2005 to become a full-time trader. “If you knew the landscape, there was a lot of money to be made.”

Trading the VIX, however, is a lot different from watching it on TV, and its idiosyncrasies left some investors feeling burned. No trading strategy can exactly replicate the VIX index, and traders rely on proxies like futures and options, which can veer widely from the VIX itself.

VIX exchange-traded products are especially susceptible to this divergence because of the peculiar structure of VIX futures. Uncertainty increases with time, and the further away an anticipated downturn is, the more expensive it is to insure against. That means VIX futures for this month are typically less expensive than next month’s contracts, which are less expensive than the month after that, and so on.

Some of the most popular exchange-traded products invest in a combination of this month’s VIX futures and next month’s. To maintain their exposure, they sell the contracts that are nearing expiration and buy contracts for the following month. Put simply, they buy high and sell low almost every day, steadily bleeding money. A share of the original Barclays product, bought at its January 2009 debut, would be nearly worthless today.

This decay is difficult to comprehend, even for sophisticated investors, and leveraged funds can compound those losses. Market experts say the products are designed for short-term tactical trading, not long-term passive investment.

When the VIX dipped in September, Larry Tabb, president and founder of the Tabb Group, a consulting firm, thought volatility would rise and bought an exchange-traded product that aims to double the daily gain of VIX futures. And even though the VIX rose 28% in October, the VelocityShares Daily 2x VIX Short-Term ETN lost money.

“It just kept going down and down and down,” says Mr. Tabb, who blames himself for not reading up on its mechanics before buying. “I got completely screwed.”

Janus Henderson Group PLC, owner of VelocityShares, declined to comment.

Larry Tabb, president and founder of the Tabb Group, lost money in a product tied to VIX futures. Photo: Kevin Hagen for The Wall Street Journal


The flip side of the punishing decay favors short sellers, allowing them to profit when volatility is flat and sometimes even when it rises. Instead of buying insurance, selling it became the new hot trade. Traders like Mr. Miller see spikes in volatility—such as those ahead of the U.S. presidential election— as opportunities to bet that the VIX will quickly collapse again.

Such bets have paid off in the past year as market shocks proved fleeting. The ProShares Short VIX Short-Term Futures ETF that, like Mr. Miller, shorts the VIX, is up 70% this year. Pravit Chintawongvanich, head of derivatives strategy for Macro Risk Advisors, estimates that traders and investors now have a near-record $512 million at stake for every single-point move in VIX futures.

In a twist, the very funds that are meant to protect against volatility may make any correction worse, says Rocky Fishman, an equity-derivative strategist with Deutsche Bank . So-called “volatility control” funds aim to provide investors with a smoother ride by sidestepping the worst dips. A rising VIX signals the funds to shed stocks in favor of safer assets, accelerating the selloff and spooking other investors into joining the exodus.

Rising volatility triggered $50 billion in stock selling during the market gyrations of August 2015, and $25 billion in the wake of the U.K.’s surprise vote to exit the European Union last year, according to Mr. Fishman.

“It’s a feedback loop that can make selloffs unfold faster,” says Mr. Fishman. “There are fund managers whose job it is to sell equities when volatility goes up. And that affects everyone.”


Emmanuel Macron

Electoral victory will make France’s president a potent forcé

But he will still have to face down a challenge from the Street
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FLORENCE LEHERICY is a nurse, but on Monday she is likely to start a new career as a parliamentary deputy for Calvados, in northern France. Jean-Marie Fiévet, a fireman, will join her from a constituency in Deux Sèvres in the west. Both are political novices. They belong to La République en Marche! (LRM), the movement behind Emmanuel Macron, who last month also won his first ever election—and duly took control of the Elysée Palace. Welcome to the revolution.

Across France people have risen up against a political class that failed them. The first round of voting for the legislature, on June 11th, suggests that LRM, which Mr Macron created only 14 months ago, will win at least 400 of its 577 seats. The Socialists will lose 90% of their deputies, including their leader who did not even make the run-off. The Republicans will hang on to more, but they expected to win this election—until a few weeks ago, when LRM’s victory became as inevitable as the blade sliding down the guillotine.

Mr Macron offers a fresh answer to the popular discontent that has swept through Western democracies. He promises a new politics that ditches divisions between left and right. He wants to restore dynamism and self-belief to France and, with Germany’s help, to the European Union. And he is being watched from abroad by politicians who, in their own countries, cannot seem to make themselves heard above the din. For his revolution to succeed, he needs to have good ideas and the ability to carry them through. Does he?

A different kind of rebel
 
Mr Macron is the right man at the right time. Voters tired of France’s stale politics wanted an outsider. Although he comes from the establishment—he is a graduate of an elite college, an ex-banker and an economy minister under his predecessor, François Hollande—Mr Macron has never been a party man. He has designed LRM to act as a break with the past. Half of its candidates are new to politics. Half are women. It has campaigned against corruption. In the outgoing assembly the most common age is 60-70; the average of LRM’s novices is 43.

Whereas most populists cleave to right and left, the Macron revolution is to the centre. He steals policies without prejudice—from the right, a desire to free up markets and businesses to create jobs and wealth; from the left, a belief in the role of government to shape, direct and protect. In the battle between open and closed, Mr Macron is broadly for open in both trade and immigration. In French terms, he is an economic liberal.

And, crucially, he is an optimist. For decades France has suffered from the morose belief that politics involves struggle, but no real solutions. That sabotages reform: why give up what you have today for something worse tomorrow? Elsewhere in Europe, democracy often seems a joyless transaction in which voters are asked to endorse politicians’ empty promises in exchange for benefit cuts and shoddy public services.

Somehow, Mr Macron has convinced the French that progress is possible. He has hit back against populist taunts that free markets are a concession to the bankers and the globalists with refreshing patriotism—whether by crushing the hand of Donald Trump or restoring pomp to the presidency. Against warnings about immigrants and foreign competition, he asserts that both will invigorate France, not enfeeble it. To Eurosceptics who accuse Brussels of sucking the life out of the nation, he insists that, no, the EU magnifies French power.











Good ideas are not enough. Mr Macron must also break the habit of 30 years in which France’s reforms have been blocked by the hard left. Success rests on early, visible progress in two areas—employment and relations with Germany.

French unemployment is double what it is in Germany. For the under 25s, it is stuck above 20%. Firms are reluctant to create permanent jobs because of high social charges and because redundancy and dismissal are expensive and difficult. Mr Macron wants to lower employment taxes and to make workplace bargaining more flexible. Success in the labour market will help him win over Germany, which has lost faith in France’s ability to keep up. So will getting a grip on France’s public spending and its army of bureaucrats. Germany, often standoffish, should give Mr Macron the benefit of the doubt. He is the best, and possibly last, chance to create the impetus for the euro zone to shore up the structure of the single currency.

LRM’s landslide makes this programme more likely to succeed. Mr Macron has been lucky.

His chief opponent on the mainstream right, François Fillon, was fatally damaged by allegations of corruption. LRM’s victory will be flattered by France’s two-round voting system.

A strong EU economy will create jobs (if he is not to jeopardise that, he needs to go easy on the budget cuts). As Theresa May, Britain’s hapless prime minister, can attest, firm control of the assembly will cement his good fortune.

However, resistance will move to the streets. Already, the ancien régime is warning that the election leaves Mr Macron dangerously powerful, and that the turnout of under 50% has deprived him of a mandate. Militant hard-left unions are threatening to fight his labour-market reforms all the way.

They must be faced down. The French president is indeed powerful—but in recent years the problem has been the weakness of the Elysée, not its dominance. The turnout was low, but it has been falling for years and is not much lower than in America or Canada. The unions speak for only the 8% of workers who are their members. That is no mandate. It is what ordinary citizens like Ms Lehericy and Mr Fiévet have been elected to sweep away.

Renaissance man
 
Plenty could go wrong. Expectations of Mr Macron are sky high. Though LRM has experienced politicians to keep order, it could prove chaotic and amateurish. There will be strikes and marches. As the pain bites, the French public will need to hear again and again why reform will benefit the nation.

These risks are obvious. More remarkable is the revolution that Mr Macron has already achieved. The hopes of France, Europe and centrists everywhere are resting on him.


The Global Age of Complexity

Andrew Sheng, Xiao Geng
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NEW YORK – Every century, it seems, has its “age.” The Renaissance, from a philosophical perspective, has been called the Age of Adventure. The seventeenth-century Age of Reason was followed by the Age of Enlightenment. The nineteenth and twentieth centuries were ages of ideology and analysis, respectively. As for the twenty-first century, I would argue that it is the Age of Complexity.
 
On the one hand, science and technology have progressed to the point that humans can create life and, through ultra-advanced genome-editing technologies, even engineer new species.

Futurologist Yuval Noah Harari anticipates the imminent rise of Homo deus: a species of humanity that can “play god” by manipulating nature in myriad ways, including delaying and ultimately even conquering death. Most of the technological trends identified by the US Department of Defense as crucial in the coming years were unheard of just 30 years ago.
 
On the other hand, much of humanity is besieged by feelings of helplessness and frustration, owing to the challenges we seem unable to resolve, from pollution and climate change to unrelenting radicalism and terrorism. Economic inequality – reinforced by job losses from automation, deeply entrenched social orders, and damaging political power dynamics – has contributed substantially to this sense of powerlessness.
 
At a time when our power of creation, matched by our power of destruction, has reached unprecedented levels – when one weapons launch could change the course of history – the development of a more equitable and effective system could not be more urgent. In this new age of complexity, we need a new paradigm for thinking about the world, and thus for guiding our efforts to advance peace and prosperity.
 
A prevailing worldview has always been essential to shaping human destiny. Alexander the Great would not have conquered most of the known world of his time without the influence of his philosopher-teacher Aristotle. And he was not unique: behind every great empire has been a great philosopher or historian whose worldview imbued the imperial drive with legitimacy and even sacred significance. (Were history written by the victims, not the victors, empire-building would look a lot less glorious.)
 
As we move to develop a new worldview to guide our future, we must embrace a truly global perspective. In the past, analysis of the evolution of humanity’s worldview has tended to focus on the West, following the European and, later, American progression from exploration, colonization, and empire-building, to industrialization, the diffusion of market relations, and technological innovation.
 
In the twenty-first century, however, this narrative is being revised. The global economic crisis that originated in the United States in 2007 exposed the fragility of the advanced-country model, giving rise to a new, more multipolar worldview, in which the emerging economies, led by China, India, and Russia, have increasingly challenged the status quo.
 
Meanwhile, the challenges countries are facing have become increasingly interconnected, with global mega-trends, from climate change to financialization, playing out beyond the purview of individual governments. As the physicist-turned-ecologist Fritjof Capra and the chemist Pier Luigi Luisi remarked in their 2014 book The Systems View of Life, “the major problems of our time are systemic problems – all interconnected and interdependent.” Accordingly, “they require systemic solutions.”
 
In this context, the world needs a more holistic worldview that accepts the pluralism and diversity – in terms of geography, tradition, and governance models – that reflect and reinforce the complexity of today’s global trends. Such an approach must recognize not just the need for countries to work together to shape the world, but also the limits of our ability to shape it at all.
 
Humanity has long operated within a paradigm of determinism; we believe we can predict and manipulate outcomes. But we have not discovered any natural laws or equations that explain how life evolved into its current state, much less indicate how it will evolve in the future.
 
Determinism has run its course, and must be replaced by a paradigm in which uncertainty is accepted as an irreducible fact of life.
 
In the natural sciences, this is already happening. Quantum mechanics, general relativity, and uncertainty have been accepted as the way forward in physics and mathematics. In biology and neuroscience, there is a growing acceptance that life emerges through cognition (self-awareness and self-generation) and changes constantly, meaning that there is no “prestatable becoming,” in the words of the biologist Stuart Kauffman.
 
Yet in the social sciences – from economics to politics – this transition has yet to take place.
 
Economics continues to operate in a largely linear manner, guided by the deterministic eighteenth-century Newtonian framework. But simple mechanistic theories cannot deal with living, complex, and often quantum systems. Indeed, the reductionist logic, based on simplistic assumptions, that dominates economics today is at best incomplete, and potentially fundamentally wrong.
 
Similarly, in politics, we continue to struggle to reach systemic solutions, not least because we often cannot agree on the nature of the complex problem we face. This partly reflects the global nature of today’s challenges and the diversity of perspectives that therefore must be reconciled.
 
More fundamentally, it reflects the fact that humans are not always rational – a fact that a new “complexity economics” would do more to acknowledge.
 
More broadly, a new “complexity worldview” must appreciate that human behavior is driven by everything from politics and economics to culture and psychology – even by technology itself. In an age of complexity, the institutions we build and sustain demand a system-minded approach that evolves alongside the rapidly progressing natural sciences.
 
 


Do not exaggerate the effect the election will have on Brexit
     

The legal framework for the UK’s departure from the EU needs no further legislation
 
by: Wolfgang Münchau            
 
        

The fall of the Berlin Wall changed the history of Europe, and so did last year’s Brexit referendum. Last week’s UK general election belongs in a different category — that of the things that shine brightly in the darkness of an election night, but fade away in the harsh light of the following morning. The election is important for domestic politics, and for Theresa May. But it is almost entirely irrelevant to Brexit.

Much of the commentary I have read in the past couple of days overlooks three fundamental points.

The first is that Brexit, hard or soft, is not the UK’s decision alone. It is not even primarily the UK’s decision. The second is that the Brexit process is driven by the legal procedures of the EU, not whether commentators think a UK prime minister has a mandate or not. And finally, from a European perspective, it does not matter whether the UK has a minority government, a coalition or a governing party with a 100-seat majority. Angela Merkel, the German chancellor, never achieved a result as good as Mrs May did last week.
Can Brexit still be stopped? For that to happen, an unlikely sequence of events would need to take place in the next 18 months in the right order: a fresh election won by a party that explicitly campaigns in favour of a second referendum, followed by a victory of the Remain camp in that poll.

Both are improbable. But even then, the reversal of Article 50 would not happen automatically.

It may not even be legally possible.

Even in the unlikely case that the European Court of Justice were to give an opinion on this issue, the final decision does not lie with the British parliament, but with the European Council, which is guided by its own self-interest.

If Brexit cannot technically be reversed, can it be materially altered or softened?

I do not see how this is possible, either, except through a longer transition period. Mrs May’s letter triggering Article 50 laid down two clear conditions: no membership of the customs union and no membership of the single market.

What very few Remainers in the UK seem to realise is that the EU favours a Brexit with no single market and customs union membership, because it makes a difficult negotiating process easier. The degrees of hardness and softness are not unilateral choices to be taken by the UK electorate.

I have argued before that the UK should — and likely will — seek a sufficiently long transitional agreement. It would be sensible to remain a member of the single market and the customs union during this period, simply to buy some time for the flood of legislative and technical changes that Brexit necessitates, and for a bilateral trade deal with the EU to be agreed.

A long transition period is the only way to defuse the dispute about the exit bill. The UK would simply continue to pay into the EU budget during that period.

If the UK election is to have any impact, it will be on the length and nature of this transitional agreement, but not on the Brexit process itself.

Even a landslide victory for Mrs May would have resulted in a longer transitional period than the government previously admitted, for technical reasons. There is no way the prime minister would have chosen a cliff-edge Brexit, because the economic and political consequences would have been too costly. It would have been irresponsible. We saw last week how quickly political fortunes can turn. A transitional period would have been necessary under any scenario. The only conclusion I can draw, therefore, is that the election has changed absolutely nothing for Brexit.

 The Everything Bubble, Part 1: Return Of The Subprime Mortgage

This cycle’s main bubble is in government bonds and fiat currencies, with a dash of large-cap tech thrown in for variety. But like a hurricane spawning tornadoes at its periphery, this Money Bubble is creating secondary bubbles like student debt and subprime auto loans that are impressively destructive in their own right.

An example of how extreme things have gotten is US housing, which — as the previous decade’s main bubble — wasn’t supposed to be a problem this time around. But apparently no sector is immune from all that excess central bank liquidity. As today’s Wall Street Journal notes, the subprime mortgage is now being resurrected:

Does Anyone Remember How to Make a Subprime Mortgage?
Brokers willing to learn the lost art of making risky mortgages are in demand again
Brandon Boyd was a high school junior during the financial crisis. Now, the former Calvin Klein salesman is teaching mortgage brokers how to make subprime loans. 
Mr. Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis. 
Mortgage brokers, who serve as middlemen between lenders and borrowers, used to be a key part of the home-loan process. But some brokers faked loan applications and steered people into debt they couldn’t afford. 
Financial regulation has severely diminished their ranks since the housing meltdown. And big banks with national sales teams say they won’t use brokers anymore because they are third-party contractors, making it harder to police loan quality. 
Now, small and midsize independent lenders want the brokers back. Nonbank lenders that typically cater to riskier borrowers say they need brokers to fan out across the country and arrange mortgages to people with lower credit scores, or who can’t prove their income through a typical tax return. 
Brokers are a key part of a mortgage chain that starts with a borrower going to a broker for a loan. The broker surveys lenders for the best loan to fit the customer. The lender then funds the borrower’s loan. 

While brokers before the crisis served banks and independent lenders, today they are working largely for nonbank lenders who make up a critical part of the mortgage market.
In the first quarter, nonbank lenders accounted for about half the mortgages originated in the U.S., according to industry publication Inside Mortgage Finance. 
Lenders say there is an untapped market among borrowers with good credit scores like self-employed workers who don’t have proper income documentation, or for responsibly made loans to borrowers with credit problems that have had bankruptcies in the past or had to sell their home for less than it was worth. 
If they are successful in recruiting brokers, lenders believe the market potential for both types of loans could reach $200 billion annually.

Housing is late to the credit bubble party because the memory of its 2008 bust is still fairly fresh. So the lure of easy money had to become extremely powerful – and the fear of regulatory reprisal sufficiently weak – for subprime to once again be considered a serious business model.

Apparently that day has arrived.

Long expansions breed this kind of behavior because after five or six years of growth banks find that they’ve used up all their legitimate customers and must – if they want to maintain the deal flow on which their executives’ compensation is based – start scraping the bottom of the barrel. So they replace tried-and-true practices with “innovations” that are actually Ponzi schemes or other cons.

Then they implode.
 
The question with housing is whether it has time to travel this road before the Money Bubble bursts, making the secondary bubbles irrelevant.