It’s all good, so say the pundits. The tapering discussions have now moved to the issue of FORWARD GUIDANCE as Chairman Bernanke has maintained that at the zero bound interest rate FG may have more influence on rates than quantitative easing. For the Nth time, the FED is at a fork in the road and doesn’t know which path to take. A continuously steepening YIELD CURVE is an indication that the market is signaling its discomfort with the Fed. The rise in the longer end of the curve is causing the Fed a great deal of concern because their model seems to say that continued pressure on the short end will act to keep long rates low (unless, of course, the market is questioning the Fed’s credibility and rolling out of BONDS and into the equities). A key question for the FED: Are equity markets a better long-term investment (hedge) against the success of Fed policies?
If the FED is successful in fostering economic growth–and with it a higher inflation rate–BONDS WILL BE A DISASTROUS INVESTMENT. Higher growth rates and nominal GDP (YELLEN’S FAVORITE threshold) will drive BOND YIELDS HIGHER. However, stocks will benefit from increased pricing power and thus will have the capability of being a strong inflation hedge, at least in the short term. As we move into 2014, I believe that the U.S. yield curve will be a primary story and be a barometer of investor sentiment. We will continue to discuss the yield curves and its possible implications for various types of investment. Earlier in the year, I noted how the Australian 2/10 yield curve was pointing to an overly tight RBA and if the Aussies wanted to relieve upward pressure on the Australian dollar, interest rates would have to be cut and thus the yield curve steepen. The Aussie curve went from 45 basis points to a much steeper 150 basis points, bringing a significant drop in the value of the Aussie dollar. Again, I BELIEVE global yield curves will be a central theme for 2014.
***QUESTION FOR CHAIRMAN BERNANKE: You have admitted that you know very little about GOLD PRICES and the role that gold plays in the global financial system, but in recent Congressional questioning regarding the relevance of BITCOIN, you maintained that virtual currencies held “LONG-TERM PROMISE” for innovation in finance (although you worried that virtual currencies could aid and abet money laundering and other crimes). Since Bernanke acknowledged the potential role of virtual currencies, BITCOINS have increased 400% in value. It’s interesting that the world’s key central banker believes in the transaction and possible store of value for virtual currencies but struggles with comprehending the significance of GOLD‘s role as both a medium of exchange and store of value, the two key principles for any currency.
I remember when baseball cards and Beanie Babies were also deemed solid stores of value. I am not a LUDDITE but merely struggling to wrap my arms around the BITCOIN mania. It is forcing me to dust off my dog-eared copy of the Charles Mackay’s, “Extraordinary Popular Delusions and the Madness of Crowds.” (It’s the same book that I gave away for Chanukah and Christmas in 1999.) A secondary fear I have about BITCOINS is that governments detest competition in the fiat currency business. It was only 80 years ago that the U.S. government outlawed gold as a medium of exchange.
Below is a map of the world’s currencies flowing in BITCOINS in real-time (h/t DR). Click on the image to continue watching.
***As tonight’s title indicates, the recent news cycle has been boring and repetitive. The British pound has been the star of the global currencies as its strong growth has surprised many who doubted the recent economic strength of the British economy. BOE Governor Mark Carney surprised the markets last week by announcing that the central bank was going to cut back on its FUNDING FOR LENDING SCHEME. Governor Carney let it be known that BOE loans would no longer be available for mortgages and personal loans (only businesses would be allowed to access the cheap loan program). The BOE is afraid of sponsoring a second housing bubble. The markets deemed this a market positive for the British economy was gaining traction.
The British pound had struggled to rally above the 1.6250 level, unchanged on the year. Previous resistance should now be support as the POUND is currently trading above 1.6400. Later in the week the Bank of England, Bank of Canada and the European Central Bank meet to set interest rates so be alert to market rumors and the volatility news flashes cause to prices.