- That didn’t take long: Russia’s “calm and collected” central bank chief cracks
- The Fed’s next volley in the currency wars
- Jim Rickards’ most important lesson from six years of “exceptionally low” Fed rates
- If the bankers can make money from currency wars, why shouldn’t you?
- “Needs moar inflation”… why one ETF is up 45% today… the downside to LED lights (who knew?)… and more?
There’s no such thing as neutrality in a currency war.
We were developing a soft spot for Elvira Nabiullina, the head of the Russian central bank. As we mentioned yesterday, she jacked up interest rates from 10.5% to 17% to stop the bleeding in the ruble.
Nor were we alone. “She is staying calm and collected,” observed economics blogger Robert Wenzel, “and is not calling for any kind of government interventions that would only make things worse. She seems to get that markets will resolve things themselves.
“Contrast this coolness with the panic in the eyes of Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson during the 2008 financial crisis, when they caused the U.S. government to intervene one hundred different ways and bail out the banksters.”
Who would you rather trust in a crisis?
Then the alert crossed your editor’s iPad this morning as he began to assemble today’s episode: “Russian central bank preparing measures to pump money into banks in 2015.”
O, the pain of shattered illusions. But that’s how it goes in a currency war — everyone takes sides sooner or later.
“The current global currency war started in 2010,” says our Jim Rickards — whose book Currency Wars came out the following year.
“One of the points that I made in the book is that the world is not always in a currency war. But when we are, it can last for a very long time. It can last for five, 10 or 15 years, sometimes longer.
“And so it’s really not a surprise that here we are in 2014 talking about currency wars, because it’s the same one that’s been going on. A lot of what you read or see on the TV is after some policy move by, let’s say, Japan to weaken the yen. And reporters will say: ‘Hey, there’s a currency war going on’ or ‘There’s a new currency war.’
“I roll my eyes a little bit and go: ‘No, this is the same one, the same currency war; it’s just a new phase or new battle.'”
And so it goes in Russia this week.
The Federal Reserve is set to fire a new volley in the currency war later today.
The Fed’s Open Market Committee (FOMC) is wrapping up its once-every-six-weeks meeting and will issue a pronouncement around the time this episode of The 5 hits your inbox.
Much of the chatter in the run-up to this meeting has been about whether the FOMC would alter the language used to describe how much longer the fed funds rate would remain near zero.
So once you see the news online or hear it on the radio, here are a few things to keep in mind: It’s been six years since the FOMC yanked the rate down to near zero in hopes of arresting the Panic of 2008. A 60-year chart of the fed funds rate reveals how we’ve been living in extraordinary times of late…
Herewith, a brief retrospective of the Fed’s promises about how long the fed funds rate would stay near zero. Starting six years ago, the Fed promised rates would remain “exceptionally low”…
- … first “for some time” (December 2008)
- … then “for an extended period” (March 2009)
- … which morphed into a target date of “at least through mid-2013” (August 2011)
- … stretching to “at least through mid-2015” (September 2012).
Only three months after that last revision, the Fed threw out the chronological playbook and opted for numerical targets…
- … “as long as the unemployment rate remains above 6.5%” (December 2012)
- … “well past the time that the unemployment rate declines below 6.5%” (December 2013).
When Janet Yellen took over from Ben Bernanke, the targets became based on the anticipated wind-down of quantitative easing (QE)…
- … “for a considerable time after the asset purchase program ends” (March 2014)
- … “for a considerable time following the end of its asset purchase program this month” (October 2014).
We have no idea how the Fed might change the language this afternoon. And it doesn’t matter…
“Don’t ever think for a minute that the central bankers know what they’re doing,” Jim Rickards told me when we sat down for an extended chat last spring. “They don’t.
“That’s my own view, but I’ve heard that recently from a couple central bankers. I recently spent some time with one member of the FOMC, the Federal Open Market Committee, and another member of the Monetary Policy Committee of the Bank of England, which is the equivalent of their FOMC, both policymakers, both central bankers.
“And they said the same thing, ‘We don’t know what we’re doing. This is a massive experiment. We’ve never done this before. We try something. If it works, maybe we do a little more; if it doesn’t work, we pull it away, and we try something else.’
“The evidence for this is the Fed has had 15 separate policies in the last five years. If you add it all up, all the forward guidance, all the dates, all the targets, the currency wars, Operation Twist, all the flavors of QE, 15 separate policies in five years, that tells you they don’t know what they’re doing. They’re making it up as they go along.”
That said, Jim was confident enough to forecast on Bloomberg TV yesterday that the FOMC won’t raise the fed funds rate at all in 2015. What’s more, it will resort to another round of quantitative easing (QE) in 2016.
As if on cue, this morning’s inflation numbers affirm Jim’s outlook.
The consumer price index fell 0.3% in November. The year-over-year increase works out to 1.3%. Even if you throw out food and energy (and the statisticians do, because they’re “volatile,” to wit falling gasoline prices), you end up with a 1.7% annual increase — still short of the Fed’s 2% target.
“The latest CPI report gives the Fed room to keep monetary policy loose,” Bloomberg suggests this morning. Gee, ya think?
[Reality check: As we’re fond of saying, any resemblance between the official inflation numbers and your cost of living is purely coincidental. Inflation as calculated by John Williams at Shadow Government Statistics, using the methodology the government applied 30-some years ago, is 9%.]
Currency wars can be very profitable for you, the retail investor… provided you know how to play them.
To help illustrate the point, we examine an early skirmish that presaged the current currency war. We turn back to March 2009, when the Fed nearly tripled the size of “QE1” from $600 billion to $1.65 trillion.
Not coincidentally, the S&P 500 bottomed that month at the infamous 666 mark. At last check this morning, it’s at 1,988 — a 198% increase in less than six years.
That’s impressive. But not nearly as impressive as certain Wall Street players with the right connections who are first to get their hands on all that newly created money — like private equity firms.
Few of them are publicly traded. But a handful are, including Blackstone Group (BX). Its shares have grown 10-fold since the Fed made its move in March 2009.
Research from MIT estimates certain Wall Street bankers have pocketed $653 million from the global currency wars.
And there’s no reason you shouldn’t be able to grab a share. That’s the idea behind a new premium service we’re launching with Jim Rickards, in addition to his entry-level newsletter Rickards’ Strategic Intelligence.
To be absolutely clear, this service will not involve currency trading. The forex markets are for pros only. Rather, Jim and his research team will identify stocks set to soar from the currency wars — just like Blackstone. So you won’t have to open a forex account or stay glued to a computer screen for hours on end to make up to 10 times your money.
This new service, Currency Wars Alert, won’t launch until early next year. When it does, it will cost $2,500 a year.
But if you act now, you can secure lifetime access effectively free. Ditto for another premium service Jim will oversee — allowing you to seize on profitable trends other people miss. Click here for full details — there’s no “long-winded presentation” to watch.
We’re leaving this offer open through the Sunday after Christmas… but before the holiday rush begins, we encourage you to give it your attention.
Major U.S. stock indexes are drifting higher in advance of the Fed announcement. As noted above, the S&P is at 1,988 — up more than three-quarters of a percent.
Energy shares are picking themselves up off the floor, with crude up more than a percent, to $56.64. Gold remains mired just below $1,200.
Many crosscurrents are at work again this morning — not just the aforementioned inflation numbers. FedEx delivered an earnings “miss”… but traders aren’t taking that as a sign of an economic slowdown or, for that matter, trouble for retailers — XRT, the retail ETF, is also up more than three-quarters of a percent.
And then there’s the Cuba wild card. “The U.S. will restore full diplomatic relations with Cuba and open an embassy in Havana for the first time in more than a half century,” says The New York Times website. President Obama and Raul Castro are both delivering speeches today.
“This is huge!” colleague Peter Coyne exclaimed by email. Peter visited the island only weeks ago along with our investment director, Paul Mampilly; look for his observations in today’s Daily Reckoning.
Huge, indeed: Shares in the Herzfeld Caribbean Basin Fund (CUBA) are up 45% as we write. “Never mind it has nothing to do with Cuba,” Peter quips, the ticker notwithstanding.
Shades of traders bidding up a bankrupt electronics retailer named Tweeter on the day Twitter announced it would go public… Heh.
[Update: Obama calls the 54-year embargo a “failure.” What’s that they say about a stopped clock?]
“Have you guys been hacked?” a concerned reader inquires. “Not sure if you’re aware, but when I open your email, a window pops up that says, ‘The security certificate for this site has been revoked.’
“Keep up the good work! Although I am getting overrun with Agora emails lately.”
The 5: No hackage to our knowledge. Our order-taking system was down for about 90 minutes yesterday afternoon; some customers might not have even noticed with the backups we have in place. In any event, we’re fully up and running again.
“The LEDs are a great new technology,” a reader writes after yesterday’s episode, “but, as with everything, not necessarily good for all sauces.
“Here in Montreal, we are facing winter challenges after replacing some standard traffic lights with LEDs. Since they do not emit a lot of heat, they are no longer ‘self-cleaning’ when it comes to snow or ice buildups. This week, they are mostly nonfunctioning unless regularly cleaned by a city worker. Not much of a budget-saving device for the city.”
The 5: “Energy-efficient lights can be hidden by snow,” confirms a 2009 Chicago Tribune article unearthed by our crack proofreading/fact-checking team. Police in the town of Oswego, Illinois called the lights a “contributing factor” to a fatal crash that year.
Of course we’re talking about government — the same crowd that’s happy to shorten yellow lights and generate more red-light-camera fines, even if it means more rear-end collisions…
“How will Chris Mayer deliver his details about the NOVA Code?” a reader inquires. “Through a live online presentation? Will there be a recording available for people who are in different time zones, i.e., Asia?
“Grateful if you can provide more details. Thanks!”
The 5: With pleasure. Chris’ full presentation is set for delivery next Monday, Dec. 22. It will not be live, so you can check it out anytime after we send you the link. Just make sure you’re signed up to receive it… otherwise, you’ll miss out.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Although Chris has begun revealing details of the “NOVA Code” to readers who’ve signed up already, those details are archived on a website you can check out at your convenience. It’s information that will come in handy when Chris’ full presentation goes out next Monday.
Not sure what the “NOVA Code” is all about? Curious to know more? Details at this link.