Central bankers hate to be seen to be wrong

With so much seeming to ride on central bank interest policies in terms of equities in general, and precious metals in particular, perhaps one should look at the motivations behind the timings of likely interest rate hikes.

If we start with the U.S. Fed – nine months ago its Federal Open Market Committee (FOMC), which calls the tune on interest rates, was predicting that the U.S. economy was recovering sufficiently to allow three, or perhaps four, small rate hikes in 2016.  Presumably the economy has not so far recovered sufficiently to do so and thus not a rate hike to be seen as yet, which is why there has been so much attention being paid to a possible September rate increase.  Perhaps this could still happen despite some poor economic data, if only to save FOMC face.  We get successive statements suggesting the U.S. economy is coming right, only for the next set of government data showing that it patently is not doing so, and the rate increase can gets kicked down the road again.

The latest data, showing disappointing retail sales in August, following on from an ultra cautious statement from Fed Governor Lael Brainard, seems to have left those thinking that there could yet be a September rate increase announcement, in the distinct minority.  But there are still lingering doubts that the FOMC may talk itself into a rise this month, hence some of the weakness seen in the gold price and equities.

Everyone rules out a November rate hike as that would come so close only a couple of days ahead of the Presidential election date and now apparently some 70% of analysts believe that the FOMC will bite the bullet and implement a small increase in December – probably whether the data would seem to justify this or not.  While the Fed’s forecasting credibility is perhaps near zero, to do this might be a tiny face-saver, although there are still analysts and commentators out there who believe the Fed may hold off any tightening for a few months beyond that date.

Here in the UK we have the opposite scenario post the Brexit vote.  The establishment spent so much time telling everyone what a disaster a vote to leave the EU would be economically that not surprisingly, in the immediate aftermath of the referendum, economic nervousness prevailed.  Bank of England (BoE) Governor, Mark Carney, was at the forefront of the dire warning brigade, as was the Chancellor of the Exchequer (Finance Minister), George Osborne who had suggested there would have to be an immediate increased austerity budget should Britain vote to leave the EU.  George Osborne is no longer Chancellor and his successor, Philip Hammond, does not seem to be considering drastic changes ahead.

To almost everyone’s surprise, the UK economy is yet to show much, if anything, in the way of a downturn after an initial stutter which we would put down to the ‘Project Fear’ Remain campaign.  Even so the BoE lowered interest rates ‘just in case’ as an economic stimulus in August and although it has kept them steady this month as the data so far has notGovernor  supported the necessity of a further cut, Carney is still forecasting the likelihood of an additional drop before the year-end – presumably taking the bank’s base rate down to zero percent – or very close, although his most recent statements have perhaps been slightly less negative.

Consider the data.  The stock market is up post Brexit, employment has risen, property prices appear to be on the rise again, we are still in a GDP growth phase, the latest Services PMI for August (i.e post Brexit) has shown the biggest month on month rise in its history;  the August manufacturing PMI also grew at the fastest rate in its 25 year history to 53.3 when the market had been expecting a contraction;  inflation has not yet taken off, despite the fall in the value of the pound sterling against the euro and the US dollar.  Indeed the pound seems to be just about the only sufferer so far from the Brexit vote, although this is a two-edged sword in that it makes UK exports more competitive, and boosts tourist spending as foreign currencies go further making the UK an even more attractive destination.

Now Carney, the BoE  and the other Brexit naysayers will warn that this is a phony temporary outcome.  Inflation is almost certainly going to increase as lower sterling means higher costs of imports and if that starts filtering through to consumer spending we could well see difficult times ahead.  It is early days yet, and the UK is still in the EU so the real exit fallout is perhaps still two years or more away.  But so far the figures have confounded virtually all the ‘expert’ predictions and perhaps they will continue to do so when some of the potential positives of Brexit are at last taken into account.

However, this doesn’t stop the Brexit doom and gloom merchants from still trying to talk things down in order to justify their dire predictions – and Carney and the BoE are among these and thus may yet decide to cut rates again whether the data really justifies this or not.  Conversely the U.S. Fed may well raise rates to pursue the so-called legitimacy of its own forecasts.  That’s what happens in global economics and politics.  The experts and the establishment hate to be seen to be wrong and will often follow their pre-conceived paths regardless with no thought for the general public and the investment community if it may affect them adversely in the process.

What is doubly worrying is that this same analysis may well apply throughout the global political arena – even down to going to war!  Once national leaders are set on a particular path they tend to continue regardless, even though intelligence data may change and not ultimately support their decisions.  One might argue that the Iraq wars and the interventions in Afghanistan, Libya and Syria have indeed followed this kind of route with no planning or perception of the potential consequences, not only for the combatants, but probably even more importantly for the domestic populations of those nations. They just create a power vacuum allowing extremist organisations to take control, if not of the whole country, but large swathes of it.

NATO could find itself embroiled in something similar in the Ukraine when it could talk itself into lining up against Russia – altogether a different, and far more alarming, confrontation for all concerned.  But it’s too easy for what starts as combative rhetoric to lead to an ultimate nightmare scenario with neither side willing to back down for fear of losing face.

But that’s something of a digression, albeit an alarming one.  Both the U.S. Fed and the BoE, and perhaps the European Central Bank too, could be talking themselves into economic policies which are to the ultimate detriment of their own domestic communities and will likely also adversely impact the world’s emerging economies.  Arguably the Bank of Japan has already accomplished this having implemented policies which have driven this key economic and industrial powerhouse into years of average zero growth.

But until we hear the results of the FOMC deliberations before the end of this week, precious metals and equities may remain volatile – even with the week-long moratorium on Fedspeak ahead of the meeting so there won’t be FOMC participants muddying the waters with their conflicting statements.  If, as most expect, there’s no decision on rates this time, the markets may breathe a collective sigh of relief up until the weeks ahead of the December FOMC meeting when we’ll see this all play out again.

The above article is an updated and edited version of one which first appeared on the Sharps Pixley website last week

Advertisements

U.S. Fed Continually Wrong in its Forecasts. Why?

 

By Stefan Gleason* 

“The last duty of a central banker is to tell the public the truth.”
– Alan Blinder, former Federal Reserve Board Vice Chairman

The Federal Reserve Board finds itself back in a quandary of its own making. When Fed chair Janet Yellen pushed through an interest rate hike this past December, she confidently cited an “economy performing well and expected to continue to do so.”

The Fed set the stage for more rate hikes in 2016. But something went awry along the way – namely, the Fed’s upbeat forecast.

Smoke and Mirrors

Official pronouncements of optimism don’t square with the economic realities now unfolding. Since the Fed’s rate hike, warning signs of a looming recession have rapidly accumulated. Industrial production is slumping. Global bulk shipping rates are in the dumps. The number of people without full-time jobs is growing. Corporate earnings are weakening. The junk bond market is melting down, and the stock market appears to be following suit.

Most of these warning signs were flashing back when the Fed decided to hike. The stock market was still positively diverging from economic indicators, but now that the Dow Jones Industrials too is rolling over, the Fed is back-tracking on rate hikes.

The Fed’s next move could be to cut rather than raise rates – perhaps even pushing them into negative territory as central banks in Europe and Japan have done.

The Fed Has a Remarkable Track Record of Failed Forecasts

Federal Reserve policymakers can be counted on to react to market developments, because that’s all they can do. Time and again, they have shown that their forecasting models don’t work. The Fed doesn’t actually prevent financial crises from occurring. It just comes in after the fact to try to clean up the mess its loose money policies helped create – the 2008 financial crisis being the latest example.

Fed officials won’t admit publicly that they’re just making it up as they go. But that’s the reality. As James Rickards explained in an interview with Mike Gleason, “I’ve spoken to Fed governors, I’ve spoken to Regional Reserve presidents, I’ve spoken to a lot of senior officials at the Federal Reserve, and insiders there. They don’t know what they’re doing. They won’t say it publicly but they do say it privately.”

If Fed officials admitted that they couldn’t outsmart the market or forecast the economy, that they don’t know anything beyond what’s in latest edition of the Wall Street Journal, then they’d be admitting there is no reason for them to be in charge of setting interest rates or managing the money supply.

The Fed’s Rarely Admitted Mission Is Psychological Manipulation

But as alluded by the unguarded comment of Alan Blinder quoted above, incompetence is not the only problem with the Federal Reserve System. Although that would be bad enough.

As much as anything, the Fed is a disinformation and propaganda machine.

Manipulation

A primary goal is to manipulate the public and the markets, and spewing false information is justified by a larger objective. It’s all part of “managing inflation expectations” and jawboning to prop up the market. Central bankers know that perception can become reality, at least in the short run.

Of course, the whole public justification for the creation of the Federal Reserve system in 1913 was that enlightened policymakers would tame the animal spirits that drove economic booms and busts. What a farce that turned out to be.

The Fed went on to give us the Great Depression, a great stagflation in the 1970s, one asset bubble after another (commodities, stocks, housing, etc.), after another. The central bank always reinflates the system rather than allow deflation to cleanse it out completely. So the bubbles rotate from one asset class to another in perpetuity. Before the creation of the Fed, major asset bubbles were a once in a generation event. Now they are the norm.

The Fed Has Unequivocally Failed in Maintaining “Price Stability”

One of the Federal Reserve’s core mandates is “price stability.” Yet the Fed’s pursuit of stable price levels has translated into a 97% loss in the purchasing power of the U.S. dollar since 1913.

The decline in the value of the dollar accelerated beginning in 1971 – as did the frequency and severity of asset bubbles. That’s no coincidence. In 1971, President Richard Nixon revoked international gold redeemability, rendering the U.S. dollar a pure fiat currency.

“We had a gold standard from the 1790s right through the 1970s, a hundred and eighty years, and it worked very well. We had the most phenomenal growth of any country in the history of the world,” said Steve Forbes in a recent Money Metals podcast. “Since then we’ve had more financial crises, more dangerous banking crises, lower economic growth, and we see the stagnation that we have today.”

Negative Interest Rates and Helicopter Money Drops Are Next

How will Fed officials respond to the present stagnation if it morphs into something worse? Probably as before, with the only tool left in their toolkit: the printing press.

If 0% interest rates prove ineffectual, then they can push rates into negative territory. If negative rates don’t nominally lift financial markets and economic indicators, they can always try helicopter drops (or the digital equivalent).

Or they could try the sound money approach.

Helicopter Money

They could re-link the currency to gold, allow the value of the dollar hold a constant purchasing power over time, and stand aside while markets determine interest rates and asset valuations. The major hurdle to transitioning toward sound money within the Federal Reserve System is that central bankers would have to admit markets know better than they do.

It’s not in the nature or the institutional interests of people like Janet Yellen – an Obama-appointed leftist – to announce that their services aren’t needed. So the path forward for monetary reformers may be to work outside the system.

Toward that end, we are helping to expose the Fed to the general public. We aim to educate the people about precious metals as real, alternative money. The more individuals who adopt their own personal gold standards, the less relevant the Fed will become.

Gold Price: Waiting for Yellen

The New York gold price closed at $1,078.20 up from $1,071.70 on Friday’s close.  In Asia prices dropped to $1,074 before London took it down to $1,067 as the dollar index held close to Friday’s level of 97.90 at today’s 97.85 on the dollar Index. The euro is at $1.0955 almost the same as Friday’s $1.0956 against the dollar. The London a.m. LBMA gold price was set at $1,068.00 up from Friday’s $1,067.20 Friday.  In the euro the fixing was €974.05 up from yesterday’s $972.79. Ahead of New York’s opening, the gold price was trading at $1,068.65 and in the euro at €974.33.  

The silver price in New York closed at $13.95 down 16 cents. Ahead of New York’s opening the silver price stood at $13.80.

Price Drivers

Dealers and speculators are trying to second guess what the market’s reaction to the expected Fed rate hike on Wednesday will be and are reading the price in line with the Technical picture, as downwards. But such plays are high risk ones, for if the Fed does not affect the dollar exchange rate they will have to unwind their positions in the face of a market going the other way.

As you likely know, all financial markets across the globe are waiting with bated breath for the Fed announcement. When markets presume to know what is about to happen they discount that presumption. So the markets then go another way after that. If it is even slightly different to what is expected markets react strongly. So while we expect a quiet week until the announcement, thereafter expect volatility. One new provider [Bloomberg] even has a countdown clock for Janet Yellen’s speech. While she is a demure academic, it is more than likely that she will surprise us. –

Once again, we saw no sales from the SPDR gold ETF and nothing from the Gold Trust, on Friday. The holdings of the two gold ETFs, the SPDR gold ETF and the Gold Trust remain at 634.63 tonnes in the SPDR gold ETF and at 156.32 tonnes down from 157.07 tonnes in the Gold Trust. These sales would have had no impact on the gold price and most probably were from investors reducing their exposure to higher risk on Wednesday.

When the Bank for International Settlements warned of the “uneasy calm” in global financial markets it touched a host of global problems that would be affected by an interest rate move in the U.S. What they meant too was that many of these problems are in themselves structural problems that have not been fixed by those concerned or cannot be fixed by them. So the ‘ripple effect’ will not just be a short term reaction to Wednesday’s announcement, even if calm returns after the initial reaction.  We see these ripples moving through into 2016 and likely changing the scene of world financial markets for more than next year. This will be positive for gold and silver.

The silver price will follow gold closely this week. –

Julian D.W. Phillips for the Gold & Silver Forecasters – www.silverforecaster.com and www.goldforecaster.com