Just a quick note in the run up to the beginning of the Jewish New Year. A happy and healthy new year to all the readers of Notes From Underground. May your year be blessed with less turmoil both on a micro and macro level. For all my readers no matter what faith or no religious view: May we all find peace and have the wisdom and grit to prosper. Best Wishes, Yra.
This title is a tribute to the recent movements in the world financial and commodity markets. The “strong” dollar has been attributed as the dynamic factor pushing commodity prices lower and creating the environment for potential DEFLATION around the world. Emerging markets are under pressure as raw material prices drop and the fear of rising U.S. interest rates are combining to generate outflows from Mexico, Brazil, Turkey and many others. Europe is struggling to create any growth as even the EU‘s great locomotive, Germany, is beginning to feel the pains of its growth-constrained neighbors.
The European problems are compounded by the sanctions placed on Russia and Russia’s retaliatory actions. The ECB‘s efforts to generate growth through quantitative ease has failed and continuing German intransigence to fiscal stimulus is proving a difficult barrier to overcome. Japan is failing in its herculean task to generate two percent inflation and lift wages even as the Bank of Japan has been buying a huge amount of JGB’s to monetize the Japanese economy.The recent rise in the sales tax has slowed domestic consumption and the promised further sales tax increase next year is adding to the present economic malaise. China is slowing according to the reported data and while Chinese economic statistics are always suspect the recent slide in the Aussie and New Zealand dollars are an indication of rising strain in the Chinese economy.
The global picture is not pretty and the recent IMF predictions of economic growth will not be met … yet again. Last week, Rick Santelli interviewed Marin Feldstein and asked the most poignant question: Would the Yellen Fed refrain from raising rates if the global economy was mired in an economic slowdown? Feldstein answered with an emphatic NO and said the Fed would move because of domestic concerns. I believe that Feldstein is unequivocably wrong for the Yellen Fed–same as the Bernanke Fed–would use the global economy as an excuse to keep rates lower for longer. This is a FED driven by the continued fear of recreating 1937.
The FED fears duplicating the errors of 1937 and choking off an incipient growth story. Remember that Bernanke used the Japanese tsunami as a reason to be aggressive in QE and called the disruption in the global manufacturing supply chain bad luck. Global economic conditions will be a factor for the Fed, especially if Europe and Japan both return to full-blown recessions. The U.S. economic growth is not strong enough to provide for the entire global system as consumer spending is not as robust in prior periods. When Japan endured 20 years of slow growth it could muddle through because the global economy was strong enough to sustain Japanese manufacturing. This is not the same global picture, especially as China is beginning to sputter.
The FED, ECB, SNB, BOJ, BOE are all at zero interest rates and we are left to wonder what monetary tools the central banks have at their disposal. IF YOU ACCEPT THE PREMISE THAT THE FED WILL NOT ALLOW ANOTHER 1937, ALL THE CENTRAL BANKS WILL HAVE TO ENSURE AGAINST DEFLATION TAKING HOLD OF THE GLOBAL ECONOMY.It is not inflation but deflation that worries the world’s policy makers and it is this fear that will create crisis and panic. Something to ponder: Gold has struggled against the headwinds of equity appreciation, possible rising interest rates in the U.S. and commodity price depreciation. If GOLD is a hedge against central bank malfeasance in a world of fiat money, it is time to brush off the long-term technicals and examine the condition of the GOLD market. If the FED will act to prevent a 1937 redo it provides for some measure of GOLD in one’s portfolio.
Equities have been the smart choice for 36 months but the reallocation will signal the need to own precious metals against all global currencies. The most important GOLD price may be the GOLD/YUAN level at 7150 YUAN to an ounce of GOLD, taking us back to November 2010 when the IMF announced a sale of 200 tons of GOLD to the Bank of India. Everybody is pushing for a short position in gold because of commodity deflation. Time to think of terms of 2+2=5.