The chart below crystallizes why the Fed is stranded in a monetary no man’s land. By the time of next week’s meeting the federal funds rate will have been pinned at about 10 bps, or effectively zero, for 84 straight months.
Yet during that same period, the consumer price level has risen by 1.75% per year. And that’s if you give credit to all of the BLS gimmicks, such as hedonic adjustments for quality change, homeowners “imputed” rents and product basket substitution, which cause inflation to be systematically understated.
On a basis that is close enough for government work, therefore, the real money market interest rate has been negative 2% for seven years. But that’s so crazy, unjustified, and unprecedented that even the Keynesian money printers who run the Fed have run out of excuses.
Presumably, Yellen and her posse know that we did not have seven years running of negative real money market rates even during the Great Depression of the 1930s.
So after one pretension, delusion, head fake and forecasting error after another, the denizens of the Eccles Building have painted themselves into the most dangerous monetary corner in history. They have left themselves no alternative except to provoke a riot in the casino——-the very outcome that has filled them with fear and dread all these years.
Indeed, Yellen and Bernanke before her have made a huge deal out of communications clarity and forward guidance. But how do you explain to even the credulous gamblers and day traders on Wall Street that the business cycle has not been outlawed and that free money can not last forever, world without end? Continue reading
Submitted by William Bonner, Chairman – Bonner & Partners
Draghi’s New Promise
Mario “Whatever It Takes” Draghi came back strong on Friday. After disappointing investors on Thursday with limp and irresolute measures to juice up asset prices, the European Central Bank’s head honcho made it clear he would not be held back by common sense, sensible theory, or the cumulative experience of generations of central bankers.
Photo via National Geographic
Barron’s has the report:
“Draghi dismissed speculation that dissent among the ECB’s governing council (notably from the Germans) kept him from taking more forceful action.
Dissent is normal at central banks, including the Fed, but he added that lack of unanimity isn’t a constraint on his decisions. Neither is the size of the ECB balance sheet, which can be expanded as needed to meet its objectives.
‘We have the power to act. We have the determination to act. We have the commitment to act,’ the ECB president stated emphatically.”
Draghi’s goal is to force consumer price inflation levels higher in Europe. Why losing buying power is a worthy goal for a nation’s money has never been fully explained. Nor has it been demonstrated – either in practice or in Ph.D. theses – that buying crummy debts from banks at above-market prices (aka QE) is an effective way to boost consumer prices.
Draghi’s strategy doesn’t work, and once it does work, we confidently predict it will work too well. In any case, the attempt to keep prices “stable” by forcing the monetary unit’s purchasing power down by 2% per year is a completely lunatic and counterproductive policy, that creates unsustainable asset bubbles, price distortions across the economy and malinvestment of capital on a grand scale. These policies are best described as a slightly souped-up version of the policies of John Law – click to enlarge. Continue reading
Poached baby gorilla, Virunga Park
Anglo American, a British company, and one of the world’s biggest miners, and a ‘producer’ (actually just a miner, how did those two terms ever get mixed up?!) of platinum (world no. 1), diamonds, copper, nickel, iron ore and coal, said today it would scrap dividends AND fire 85,000 of it 135,000 global workforce (that’s 63%!).
Anglo is just the first in a long litany line we’ll see going forward. Commodities ‘producers’ are being completely wiped out, hammered, killed, murdered. They’ve been able to hedge their downside risks so far, but now find they can’t even afford the price of the hedges (insurance) anymore. And then there’s all the banks and funds that financed them.
And they’ve all been gearing up for production increases too, with grandiose plans and -leveraged- investments aiming for infinity and beyond. You know, it’s the business model. 2016 will be a year for the record books.
Just check this Bloomberg graph for copper supply and demand as an example. How ugly would you like it today?
And what’s true for copper goes for the whole range of raw materials. Because China went from double-digit growth to shrinking imports and exports in pretty much no time flat. And China was all they had left. Continue reading
Gee, These Saudis Ain’t Really Kosher
Germany’s secret service BND discovered something entirely new last week. At least Germany’s citizens know now what their spooks are getting paid for. Saudi Arabia, so a recent BND report concludes, might not be the perfectly ideal ally for democratic nations. Who could have known?
Behind these walls, Germany’s spook agency usually does the bidding of the NSA. That it dares to publicly pipe up about the Saudis is quite astonishing actually.
Photo credit: Stephan Jansen / DPA
We dimly remember that others have come to similar conclusions, some 20 years or so ago. Recently cartoonists have picked up on the many philosophical similarities between the so-called Islamic State (bloodthirsty gang of decidedly non-moderate habitual beheaders) and Saudi Arabia (valued ally, administered by a feudal medieval monarchy apparently consisting of decidedly non-moderate habitual beheaders as well).
Assorted Middle Eastern beheaders. Continue reading
China’s trade estimates continue the trend of the global economy pushing closer to recession, assuming that it is not already there. We know that the lower part of the global supply chain below Chinese manufacturing and assembly, the resources and materials flow, has already been pushed beyond simple recession in some places, like Brazil, into defining a new disastrous economic state. What is left arguable is the end markets that precede all of this where economists and economic forecasts simply dismiss increasingly dark financial indications, especially commodities but not limited to them, as if the global supply chain were in high working order at the top but mysteriously chaotic just underneath.
That view is, of course, absurd. There are feedbacks and amplifications (and counterbalances) to consider, but the obvious track in these kinds of economic reflections are all working in the same direction; the one far and away from recovery in any part. That is why oil traded today below $37, copper threatens to trade below $2 and swap spreads continue to find new ways to overtake, perhaps, yield curve inversion.
Exports declined by nearly 7% in November in China while imports were marginally better than October at -8.7%. For the global supply chain, neither of those figures truly deliver the full extent of the economic disassociation. China’s imports in November 2015 are down almost 15% from November 2013, and a little more than 10% lower than November 2011! Continue reading
Submitted by Mark O’Byrne – GoldCore
With blood on the streets across the entire commodities sector, Future Money Trends interviewed ‘Silver Guru’ David Morgan of the Morgan Report about the outlook for markets and why he remains bullish on silver and gold.
David Morgan astutely noted:
“At this moment in time, that we are truly at a level that it is really only the ardent silver bulls and resource investors who truly understand where we are in the market. Not only are we skipping along the lows, perhaps we can go lower, but there is true value here – in all aspects – not only in the gold and silver but also in the natural resource sector as a whole with bargains all over the place”.
People understand nothing lasts forever. The bottom does not last forever. You want to buy low and sell high.”
Futuremoneytrends.com Silver Sumit 2015: David Morgan Silver Update
According to Future Money Trends:
David’s analysis of the Federal Reserve (FED) is that they truly are in a real bind here. They want both a weaker dollar and for the dollar to remain the reserve currency. With a huge multi-year trend out of the dollar for major transactions amongst some of the top countries in the world, like Russia, China, and Brazil, the FED is likely now being forced to raise rates.
Though the rate increase will be meaningless for the most part, the FED needs to shore up support for dollar denominated transactions. An attractive dollar means the FED remains the manager of the top reserve currency of the world.
However, David said to expect the FED to quickly do what they can to weaken the currency later in 2016.
At the core of all of the world’s problems is debt. David believes that it is the ultimate debt bomb that will spark an avalanche of demand into anything precious metals.
He noted the supply and demand concerns for physical metals, but said the real market to watch is the debt market.