The last two days has seen two of the world’s key central banks deliver fresh interest rate decisions and there was very little in way of surprises. In a salute to the philosopher Isiah Berlin, I have noted that Chairman Bernanke is a HEDGEHOG and President Draghi a FOX. A hedgehog is one who “views the world through a single defining idea.” The economy is slowing, unemployment is high, inflation is low, so it is appropriate for the FED to buy and continue buying Treasury debt. You say it is not having the desired effect? Buy more. In yesterday’s FOMC statement, the FED noted that ”… FISCAL POLICY IS RESTRAINING ECONOMIC GROWTH.” The meaning of this is that Washington is acting irresponsibly, thus the FED needs to possibly INCREASE its bond and mortgage-backed securities purchases. Whatever it is, QE IS THE ANSWER.
The international distress call is going out from Europe as the overall eurozone unemployment rate reached 12.1%. Germany had a low rate of 5.4% while Spain was more than 27%. So how is the ECB to do deal with the huge discrepancy between the economic performance of its 17 members? If the austerians are being relegated to economic purgatory then the pressure on the ECB to act will be diminished. Cutting rates for the sake of a show of action will be a detraction from the bigger political issue. Why irritate the Bundesbank and Chancellor Merkel by moving the ECB lending rate by a measly 25 basis points?
It seems that the European debt markets are rallying in response to the end of ADVERSE FEEDBACK LOOPS. In a mind-numbing thought, it appears that the implementation of austerity budgets actually had the effect of increasing deficits as economies slowed as austerity began to bite. (The outcome of the adverse feedback.) The more austerity, the larger the deficit, which is compounding the debt problems of peripheral nations. Greece is the poster child of austerity gone awry. So as the threat of AUSTERITY diminishes, the more a nation’s bonds rally. The ITALIAN BTPs (10 years) saw its yields drop precipitously as a new government was formed over the weekend. But the rally in the BTP futures had begun well before the new government was actually crafted, as I noted last week. The BTP FUTURES had closed over the February 25 high–that was made before the failed election was a reality.
First, I need to clear the air on an issue that is cited over and over, of which causes me great discomfort. In last Thursday’s Financial Times, Robert Pollin and Michael Ash, the two professors who sponsored graduate student Thomas Herndon of UMass-Amherst–and of recent fame for finding the flaws in Rogoff/Reinhart–published the article heard round the world: “Why Reinhart and Rogoff are wrong about austerity.” I am not disputing the results of their work but I am questioning a causal relationship that they note:
Tonight’s BLOG headline is attributable to my friend KM after a long conversation about the IMF and G-20 meetings that took place in Washington during the past four days. It appears that Japanese monetary policy was not the subject of derision but rather applauded as a strong measure to lift Japan’s domestic economy out of two decades of malaise. Let me be as clear as possible: There is a full frontal assault being waged on the German model of GROWTH THROUGH AUSTERITY. The first shot fired was several months ago when IMF economist Olivier Blanchard delivered a paper stating that the previous belief that the negative impact on GDP from austerity was not a multiplier effect of 0.5% but rather a greater measure of 0.9-1.5% in its impact so a decease in fiscal spending would create a much greater slowdown than previously thought. The battle was waged in the efforts to limit the sequestration in the U.S. even as IMF Managing Director Lagarde cautioned that U.S. tightening is “too much, too fast and it’s in the wrong place. It’s not right for the U.S. economy and it’s not right for the world.”
It appears that the world is awash with Schadenfreude as analysts and pundits are experiencing great satisfaction and joy in the misery of others. Today the European automakers released sales data for March and the numbers were much weaker than the markets had expected. Registrations fell 10 percent and German auto sales dropped 17 percent. It appears that European auto sales in the passenger market are expected to hit 1993 levels. Ford and Peugeot also saw double-digit falls in sales. The euro rally against the YEN is dramatically biting into German car sales and the proof is in the fact that Japanese auto production has increased, and Toyota, Honda and Nissan stock prices have performed very well during the last six months.
What ailed the markets yesterday seems to have moved to the back pages and the equity markets recovered most of their losses. Gold and silver staged very tepid rallies considering the massive selling that took place during the past week. The global equity markets are still comfortable with central bank policy and even a terrorist attack on U.S. soil cannot shake of confidence of investors seeing high profits, low inflation and no alternative to the returns on equity. It is an old theme but when a market continues to discount unfavorable data and news the power of momentum is in full bloom.
Last night’s BLOG attempted to make sense out of all the chatter around the gold action of the last few days, and, more importantly, during the last several months. The points I tried to make were:
- A reiteration of a theme I have stated over and over again, that the GOLD MARKET WAS/IS A TIRED BULL and that investors were leaving the moorings of great store of value or haven. The GOLD has been the repository of investor and traders confidence in a very unstable, insecure investment climate. The GOLD has risen for 11 straight years and as any market can correct as the financial landscape changes. As investors have gained comfort that the world central banks have for the moment been successful in generating some economic growth, money has left the precious metals in search of more risk-oriented assets with a yield attached. It is no mistake that it is the large-cap, strong dividend stocks that have led the way. A failure to understand that and react accordingly is just a case of myopia;
- I, IN NO WAY INTENDED TO INFER THAT I HAD INTERVIEWED JIM SINCLAIR AND THAT HE PROVIDED ME WITH A PRICE TARGET FOR THE CHINESE. HE DID NOT AND I CERTAINLY DID NOT INTERVIEW HIM. THE ONLY POINT I WAS TRYING TO MAKE WAS THAT I AGREED WITH JIM’S RECENT COMMENTS ABOUT THE NEED FOR CHINESE AND RUSSIAN GOLD PURCHASES TO PROVIDE THE NEEDED BUYING TO STEM THE AVALANCHE OF SELLING FROM FUTURES, OPTIONS and ETFS. When markets correct, be that housing or stocks, it is THEN YOU LEARN THE PAIN OF LEVERAGE. Gold has been a very popular, profitable investment, which means that in today’s world of financial engineering leverage is involved. I wholeheartedly agree with Jim’s analysis that the massive selling can only be absorbed by a massive buyer, be it a desirous procurer or somebody with a massive short wishing to cover.