Submitted by Guest Contributor, Clint Siegner – Money Metals Exchange
Precious metals investors heading into 2016 worry the dollar will continue marching ahead, right over the top of gold and silver prices. The Fed is telegraphing additional rate hikes throughout the year, and commodity prices – led by crude oil – are falling. There have been tremors in the biggest beneficiary markets of all when it comes to the Fed’s QE largesse – U.S. equities and real estate. And the possibility of a recession is growing, both in the U.S. and around the world.
There are plenty of reasons we might see even lower official inflation numbers and a stronger dollar in 2016. But don’t think for a second that consumer prices or living costs will fall. They haven’t, they aren’t, and they never will in a sustained way – thanks to the Fed’s creation in 1913. This is where the deflationists have it wrong.
The impact of further disinflationary forces or even a deflationary episode on precious metals prices is a bit harder to predict.
The bear case for precious metals is rather simple. Should metals trade like commodities, they are likely to follow other raw materials lower. If we get a liquidity crunch akin to the 2008 financial crisis, just about everything will be sold as investors raise cash to meet margin calls or flee to the dollar as a perceived safe-haven.
There is also the possibility that metals prices will simply be managed lower. Growing numbers of investors realize that Wall Street is not a bulwark of free markets. Major banks have admitted to rigging markets against their own customers, and the Federal Reserve aggressively intervenes in markets in its quest to centrally plan the world economy. Why wouldn’t the Fed also be active in trading precious metals? Those dismissing the notion that metals prices are manipulated are naive.
Today’s Situation Is Different Than 2008
The bear case assumes history, in particular the experience surrounding 2008, will repeat. Or that there is still plenty of ability for anyone seeking to force metals prices lower in the futures market to actually do so. Or both.
Maybe. But relying on those assumptions could be a tragic mistake. Continue reading
A few Friday Bloomberg headlines: “Asian Stocks Jump by Most in Four Months on Stimulus Speculation;” “Japanese Stocks Surge by Most in Four Months as Bears Retreat;” “Hong Kong Dollar Jumps Most in 12 Years as Global Stocks Rally.” It was quite a week.
Back in early December I posited that Mario Draghi had evolved into the world’s most powerful central banker. I also stated my view that his inability to orchestrate a larger ECB QE program was likely an inflection point in the markets’ confidence in Draghi and central banking more generally. Mario’s not going down without a fight.
Global markets were too close to dislocating this week. Wednesday saw the S&P500 trade decisively below August lows. Japan’s Nikkei 225 Index sank to test November 2014 lows. Emerging stocks fell to six-year lows, with European equities at 13-month lows. Wednesday also saw WTI crude trade below $27 (sinking almost 7%), boosting y-t-d losses to 25%. Credit spreads were blowing out, and currency markets were increasingly disorderly. Early Thursday trading saw the Russian ruble down 5.3% (at a record low vs. dollar), with Brazil’s real also under intense pressure. The Hong Kong dollar peg was looking vulnerable. The VIX traded to the highest level since the August “flash crash,” while the Japanese yen traded to one-year highs (vs. $). De-risking/de-leveraging dynamics were quickly overwhelming global markets.
The Italian banking sector sank 7% Wednesday, pushing y-t-d losses above 20% (down 32% from 2015 highs). Fears of mounting bad loans and undercapitalization have been weighing on Italian and European bank shares and bonds. This week also saw a notable widening of sovereign spreads to bunds. Despite a post-Draghi narrowing of risk premiums, Italian spreads to bunds widened another seven bps this week, with Portuguese spreads blowing out 35 bps. A fragile European financial sector was rapidly succumbing to a deepening global financial crisis.
January 21 – Financial Times (Claire Jones and Elaine Moore): “Mario Draghi signalled that the European Central Bank is prepared to launch a fresh round of monetary stimulus as soon as March, bolstering a recovery on US and European equities in the wake of heavy losses this year. The ECB president said it would ‘review and possibly reconsider’ its monetary policy stance at its next meeting in six weeks… ‘We are not surrendering in front of these global factors,’ he said, referring to the China slowdown and the falling oil price that have destabilised global markets in recent weeks. The ECB has ‘the power, the willingness, the determination to act, and the fact that there are no limits to our action’ to bring inflation up to its target of just below 2%, he added. Policymakers, he said, would ‘absolutely reject’ attempts to derail their efforts to raise inflation ‘without undue delay’.” Continue reading
If markets have rebounded today after the sustained selloff on fresh “stimulus” hopes, then one would have to wonder immediately what the background fundamentals might be. Setting aside all notions of past “stimulus”, the call for more would seem to suggest, quite strongly, something far, far less than desirable. Yet, in the same breath economists and brokerage firms would have it both ways; the market is up because there may be more “stimulus” and also that the market is overly pessimistic. It can’t be both, because if there might be more monetary policy effort it isn’t markets that are psychologically inbounded.
Despite worries about a global economic slowdown and falling oil prices punishing the markets so far this year, a global recession is not in J.P. Morgan’s outlook. “We think it’s really all about negative psychology right now, which seems to be self-reinforcing but not based on fundamentals,” said Santos.
We can’t, however, simply set all aside from before. The two constants throughout the economic period since the end of the last recession have been persistent monetary efforts and the obvious failure of them revealed through nothing more than their persistence. Today happens to be the anniversary for the ECB’s QE which pretends as if it were some new and useful upgrade. They did massive LTRO’s at the start of 2012 and Europe fell back into recession anyway. They have narrowed the rate corridors, stuck Eonia further to nothingness and then pushed it negative with an increasing negative nominal floor, pushed forward with a third covered bond program and then an ABS program; and all of that only accomplished the “necessary” conditions for ECB QE.
It started out last year on essentially a lie:
“One could argue that this type of approach Draghi is using should have been applied much earlier, which would have gotten Europe on a similar kind of platform the U.S. was on,” Stephen Schwarzman, chairman of the Blackstone Group LP, said in a Bloomberg Television interview at the World Economic Forum in Davos. “It is never too late to do the right thing.”
US asset gatherers appear to be very much enamored with QE in all its forms but only when it is actually termed “Q” with “E.”
“We’ve seen over the last few years you have to trust in Mario,” Laurence Fink, chief executive officer of BlackRock Inc., said in Davos. “The market should never, as we have seen now, the market should not doubt Mario.”
Dovish Cooing from the Desolation of Draghi
As Reuters informs us, on the heels of Mr. Draghi’s somewhat “disappointing” attempt to assassinate the euro on occasion of the previous ECB meeting, the chief European printing press supervisor and certified monetary crank has decided to assure everyone of his ultra-dovish stance again on Thursday, by announcing that even more monetary insanity must be expected soon:
“Fading growth and inflation prospects will force the European Central Bank to review its policy stance in March, President Mario Draghi said on Thursday, a strong signal that more easing could be coming within months.”
The economy isn’t doing well? Let us set fire to the currency then, maybe that will help.
Still not enough inflation! Euro area M1, a close approximation of the true money supply. Currently this aggregate is growing at roughly 14% p.a. This is the actual rate of inflation. Rising consumer prices are merely one possible consequence of inflation, and not necessarily the most pernicious one. Moreover, consumer price inflation can often appear on the scene with a very long lag (many years) – click to enlarge.
Here are a few more excerpts from the Reuters article:
“Downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks,” Draghi told a news conference. “We are not surrendering in front of these global factors.”
Dismissing concern that the ECB’s policy arsenal is all but empty, Draghi said: “We have the power and willingness and determination to act. There are no limits to how far we are willing to deploy our (monetary) instruments.”