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.
Tags: 1937, Ben Bernanke, BOE, BOJ, China, deflation, ECB, EU, Fed, Gold, gold/yuan, IMF, Janet Yellen, QE, SNB
September 24, 2014 at 2:08 am |
2+2 = 5 re Gold. Nice, quick summary of the ethos of this Blog’s tagline.
Here’s a good link to the Gold price in different currencies, use the links on the right hand side –
http://www.goldpriceoz.com/gold-price-china/
September 24, 2014 at 5:11 am |
alex–thanks for the input.the 200 day m.a. are also in play on the gold/yen,gold/euro and gold/chf
September 24, 2014 at 11:21 am |
Yra- great post. Agree on Gold, but at what level?
What will be the sign to buy Gold? When the cost of credit insurance starts moving up on Treasury debt?
I think the FED has blown it, as we are likely headed toward another recession. They should have put FF up to 1 or 2%, while they had the chance and let conservative savers actually have some increased disposable income.
They also should have ( and should still ) jawbone the banks on reducing the usurious rates on credit cards ( still around 18% ? ) and consumer debt that hurt the poorest segment of the economy. The spread between bank borrowing costs and the rates banks charge on credit cards is a disgrace.
We need some people at the FED who can actually think on their own and have market experience,…… not just academic geniuses who have no common sense.
The FED needs to work to strengthen the balance sheets of consumers, NOT just banks and corporations who are almost 100% dependent on consumers for sales and profits. The typical consumer (the basis of the economy) is still in bad shape, and in absolutely in no position to weather another recession.
September 25, 2014 at 9:18 am |
Shocked, you’re exactly right to question who the FED looks out for. The following is yet another example they are going in the wrong direction, and goes on to state the obvious negative impact on municipalities from this.
http://wallstreetonparade.com/2014/09/the-fed-just-imposed-financial-austerity-on-the-states/
The Federal Reserve Board of Governors, together with the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency – the top regulators of Wall Street’s largest banks – finalized liquidity rules yesterday that make absolutely no sense to anyone with a historical perspective on how Wall Street operates in a crisis.
The Federal regulators adopted a new rule that requires the country’s largest banks – those with $250 billion or more in total assets – to hold an increased level of newly defined “high quality liquid assets” (HQLA) in order to meet a potential run on the bank during a credit crisis. In addition to U.S. Treasury securities and other instruments backed by the full faith and credit of the U.S. government (agency debt), the regulators have included some dubious instruments while shunning others with a higher safety profile.
Bizarrely, the Fed and its regulatory siblings included investment grade corporate bonds, the majority of which do not trade on an exchange, and more stunningly, stocks in the Russell 1000, as meeting the definition of high quality liquid assets, while excluding all municipal bonds – even general obligation municipal bonds from states with a far higher credit standing and safety profile than BBB-rated corporate bonds.
September 30, 2014 at 11:36 am
Thus the sell off in instruments such as JNK?
September 24, 2014 at 4:45 pm |
[…] 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. […]
September 30, 2014 at 11:35 am |
Yes, greater fool theory might suggest perhaps the FED has only delayed temporarily at taxpayer and savers expense, the ’37 redo to allow for special interest groups last minute preparation.
Way up in the air with my beautiful balloon…….
September 24, 2014 at 5:47 pm |
I agree the FED has blown it with on again off again guidance. Perhaps they were just helping a few friends “delever”?
Wonder, will the Germans vote with the Scotts?
September 24, 2014 at 9:27 pm |
Yra Happy and Healthy New Year to you and your Family Bob MELCHIORRE
Sent from my iPad
>
September 30, 2014 at 6:08 pm |
Yra, did you mean Nov 2010? Or, Nov 2009?
http://www.imf.org/external/np/exr/faq/goldfaqs.htm
“During October and November 2009, the Fund sold a total of 212 tons in this manner to the Reserve Bank of India, the Bank of Mauritius, and the Central Bank of Sri Lanka.”