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.
Tags: Ben Bernanke, bitcoin, BOE, bonds, Fed, forward guidance, GDP, Gold, Janet Yellen, Mark Carney, Pound, yield curve
December 1, 2013 at 8:12 pm |
My guess is that the powers that be will let BITCOIN survive for now as it is doing the job of deflecting money from going into GOLD, the ULTIMATE BAROMETER of FEAR, for the last 5000 years. GOLD is indeed political, for when its price rises over the long term,political legitmacy and the ability of Govt. to lead and manage is being called into question.Also is not value set upon something when it takes a little sweat to produce it? This will all end in tears as with all fiat currencies that have been created out of thin air, and eventually gone to ZERO.
December 1, 2013 at 9:37 pm |
The other possible explanation for the steepening of the yield curve (which no one is talking about), is that both the Treasury and FED balance sheets are in shambles. Commodity indices, such as the main CRB index, are if anything, predicting deflation. Treasuries may become credit-impaired assets, once the next recession hits. Stocks are trading off short term cheap money, but bonds are looking ahead. Gold should rally (eventually) on deflation fears. (revised)
December 2, 2013 at 1:26 am |
Hi Yra,
You write “A key question for the FED: Are equity markets a better long-term investment (hedge) against the success of fed policies?”… and then that if the FED is successful stocks will benefit from increased pricing power.
Then I don’t understand how stocks would be a hedge against the success of fed policy? isn’t that going long the success of fed policy?
December 2, 2013 at 7:08 am |
shocked—where have you been all my life.I have been arguing for many years that the rise of Gold is more the fear of deflation and thus central banks policy response then inflation at the present time—without Fed purchases of bonds “the bond vigilantes are finally getting their voice and warning about the fear of a bloated Fed balance sheet—thank you for the feedback and this will be an ongoing discussion.
December 2, 2013 at 7:14 am |
Jon–my point is that stocks have pricing power where bonds don’t.If inflation rises and GDP growth increases or in Yellen’s words a rise in NOMINAL GDP,stocks are a better investment then bonds–meaning for those already involved in the differnet investment classes.The paradigm for this is of course Zimbabwe where stocks kept pace with rising prices whereas the debt markets got slaughtered.If the FED succeeds in creating growth with inflation then stocks will out perform.I think this is why Stocks have rallied while gold has declined this year—large money investors believed the need was for assets with a possibility of increased value rather then just a mere store of value—does that help???
December 2, 2013 at 8:16 am |
Yra- A piece I thought you would find of interest even though you are well aware of the battle at hand. One can hear the Bundesbank screams while reading this article: http://www.project-syndicate.org/commentary/jean-pisani-ferry-argues-that-eurozone-officals-should-be-considering-how-to-fight-deflation
December 2, 2013 at 11:58 am |
Aren’t Disney Dollars just great?
Wonder if emerging market growth isn’t spurred as yak farmers discover apartments with hot/cold running water, toilets, televisions, refrigerators, and all else the developed world is despised for?
December 2, 2013 at 1:40 pm |
Chicken;
Only if Yak farmers decide to spend accumulated savings on such western luxuries, and maintain sufficient productivity to maintain the new lifestyle. Wait a minute…like Yra, I’m no Luddite! Why not just convince the Yak farmers to borrow whatever they need to build that “Western-American Dream?” It can be their birthright too! Send them a copy of our “Community Investment Act.” And teach them how to keep on borrowing to maintain their newly minted middle class. (They can use TARP’s, Maidan Lane’s, QE’s and the like in case they encounter a few unforeseen policy bumps along the way.)
What are the Emerging Market equivalents of Fannie Mae, Freddie Mac, and Goldman Sachs? They already have Central Banks, what are they waiting for? Cash in Bitcoins for these new Disney Dollars? All it would take is political courage and real change they could believe in. And if they don’t want to change to do their fair share to grow global economies, we can send in the U.S. military to give them democracy, teach environmental stewardship and the way to prosperous salvation. Just gotta have faith, brother.
December 3, 2013 at 8:54 am |
Yra is looking to compile the best of the best Underground Notes over the past several years. Take the time as Yra takes the time to send us his findings on NOTES that impacted your trading strategy. mario@vfund.com …..Its YOUR time to share your thoughts on the Underground
December 3, 2013 at 4:08 pm |
Yes Yra that does help! Thank you.