As the markets attempt to recover from the Bernanke press conference and the threats of Chinese forcing an economic slowdown, the spinmeisters are out trying to “TAPER” Chairman Bernanke’s words. It seems that Jon Hilsenrath and others are saying that the markets have misinterpreted the chairman’s words. So, the pundits and talking heads are correct and the markets are wrong. It seems that many bloviators insist Bernanke was not saying when, just throwing it out there and testing the waters. Not one talking head has raised the idea that Chairman Bernanke was unnerved by the work of fellow academic and Fed Governor Jeremy Stein and remove some of the overheating in the credit markets. After all, the SPOOS have held reasonably well in the face of global political upheavals, rising interest rates and the looming fears of deflation.
By stealthily removing some credit market froth, the Fed Chairman gets room to maneuver in case the economy slows further and also gets to show the FOMC hawks that the entire economy may still be too fragile to discuss ending the large-scale asset purchases (QE). Friday will bring another major speech by Jeremy Stein (8 a.m. EST) to the Council on Foreign Relations. The topic, “Monetary Policy.” We will pay close attention to this speech as the Council is a place where significant speeches are delivered.
In today’s London Telegraph, our man in London, Ambrose Evans-Pritchard, raises a similar argument to mine in a piece titled, “Risk of 1937 relapse as FED Gives Up Fight Against Inflation.” My readers know that for three-plus years I refer to Chairman Bernanke as a ’37er for he promised Milton Friedman that the FED would not repeat the disastrous mistakes of prematurely raising rates while the Treasury and legislature were pursuing budgetary frugality in a fragile economy. Pritchard makes notes of many criticisms being directed toward the FED, from both the political left and right. Ambrose asks the question: “Does Mr. Bernanke’s pledge still hold [being an anti-deflationist], now that he is talking down the relevance of PCE inflation at 0.7% Or has he taken to heart warnings from ex-governor Mishkin that the Fed itself risks becoming trapped if QE continues to 2014? Has he buckled to pressure from his own Advisory Council, who now warn that QE is doing more harm than good? Has he simply been outnumbered?”
The Pritchard piece is important for it puts Bernanke, the slayer of deflation, back into the market’s thought process. Many have argued that GOLD has been losing its importance because its anti-inflationary credibility has been undermined by the lack of the predicted rise in inflation. I say nonsense. Gold has fallen because the FED created stability and the lack of ECB liquidity pumping removed investor fear. I have long argued that it was not inflation pushing gold higher but rather the fears of how far central banks would go to prevent a deflationary spiral. The equity market took on gold’s haven status as the stability syndrome became investors mantra. Thus, large cap, high dividend paying stocks became the new hedge. Gold is waiting to see if Mr. Bernanke retools the anti-deflation argument, and, more importantly, what President Draghi will do if a banking crisis begins in Europe and he actually has to infuse the system with massive amounts of liquidity. Proof will lie in the GOLD/EURO, GOLD/SWISS and GOLD/YEN crosses.
Besides the Bernank and Mario Draghi going to war against the THREAT of DEFLATION, we will have to watch the GOLD/YUAN CROSS. I HAVE MENTIONED THE SIGNIFICANCE OF THE $1048 level in the GOLD for that was when the IMF sold INDIA 200 tons on November 2, 2009. Gold, in terms of Chinese YUAN, was priced at 7147 YUAN to an ounce of GOLD. Today, the GOLD/YUAN CLOSED AT 7552. I have always thought the price in terms of DOLLARS at $1048 was critical but it may be more important in terms of the Chinese domestic currency. For all you gamers at home, just take the price of the nearest gold futures and divide by the DOLLAR/YUAN SPOT. This may be significant, just looking through the trash bin and trying to find levels that have historical perspective.
***Quick Hitter: I have been looking at the NIKKEI and thinking that some of Prime Minister Abe’s third arrow of structural reform would be positive for Japanese shareholders. A piece tonight by Tobias Harris may throw cold water on this theory. It is worth the read.