Not that we advocate violence or vandalism… but on the surface, it seems Europeans have a better sense than Americans of the harm wrought by central bankers…
You don’t see this outside the Marriner Eccles Building in Washington…
Yesterday, protesters showed up en masse for the opening of the European Central Bank’s shiny new headquarters in Frankfurt. It wasn’t pretty — dozens hurt, 350 arrested.
The media describe the demonstrations as “anti-capitalist” — as if central banking has anything to do with capitalism.
We can’t tell what the protesters were upset about, other than vague grievances over “austerity measures.” But hey, at least someone in Europe has a pulse and refuses to treat central bankers as demigods.
Meanwhile in the United States yesterday, thousands of “financial professionals” and “journalists” hung on every word of Federal Reserve chief Janet Yellen — starting with the word “patient.”
The Fed’s Open Market Committee tried — tried real hard — to have it both ways when it concluded its latest meeting.
On the one hand, it delivered on expectations by removing the word “patient” from its policy statement. No longer will the FOMC be “patient” in deciding when to finally start raising the fed funds rate. It’s been near zero ever since the Panic of 2008. An increase could come as early as three months from now.
On the other hand, the assembled worthies also performed an about-face. Every three months, they forecast their expected path of the fed funds rate for the next couple of years. Back in December, they forecast it would be 1.125% at year-end 2015. Now they figure on only 0.625%.
So… rates will rise, but not as fast as previously thought, because the “economic recovery” remains stuck in low gear? Is that the gist?
Yellen summed it up like this: “Just because we removed ‘patient’ doesn’t mean we’re going to be impatient.”
It’s at this moment we resort to one of those animated GIFs favored by colleague Chris Campbell at Laissez Faire Today…
“It’s becoming clearer to more investors that the Fed has trapped itself into a position of permanent ease,” says Dan Amoss, lead analyst for our growing Jim Rickards research unit.
“What most people label ‘recovery’ is just a flurry of economic activity driven by low interest rates. The roots underneath this activity are shallow. Take away the fertilizer of low interest rates and that activity will wither.
“Instead of a self-sustaining recovery, we have an economy more addicted to low interest rates than it’s ever been. The economy requires low interest rates, or it will quickly revert to a deflationary, pre-bubble state — one that the Fed wants to avoid.
“Going forward, with this backdrop, investors can expect lower Treasury bond yields, stronger precious metals prices and more downside risk in the stock market — especially among cyclical stocks that have rallied on the assumption we are in a self-sustaining economic recovery.”
And that’s the best-case scenario.
Worst case? The head of the world’s biggest hedge fund fears a rerun of the 1937 “depression within the Depression.”
Ray Dalio runs the $165-billion-strong Bridgewater Associates. His own net worth is $14 billion — good for 31st richest man in the United States. Since the launch of his Pure Alpha Fund in 1991, he’s generated 21% compounded annual returns, before fees.
Dalio and colleague Mark Dinner recently wrote a note to clients comparing the landscape now with that of 1937. In both cases, years of money printing had sent stocks soaring from historic lows. Back then, the Fed began tightening, and the Dow lost of a third of its value.
Now, as the Fed contemplates tightening? “We don’t know — nor does the Fed know — exactly how much tightening will knock over the apple cart,” they wrote.
“What we do hope the Fed knows, which we don’t know, is how exactly it will fix things if it knocks it over. We hope that they know that before they make a move that could knock over the apple cart.”
[You can mentally insert the guy shaking his head again…]
That’s a lot of wishing and hoping, and Mr. Dalio does not invest on the basis of wishing and hoping. “We do not want to have any concentrated bets, especially at this time.”
Consider Mr. Dalio’s note another one of those “alarm bells you’re not supposed to hear.”
It was a note addressed to Bridgewater clients — minimum net worth $5 billion, thank you — but it found its way into the inside pages of yesterday’s Financial Times.
“There’s an old saying in the stock market that when prices are about to collapse, ‘nobody rings a bell,'” Jim Rickards reminded us here in The 5 last November.
“Yet sometimes, the global power elites do ring a bell. But they ring it for the wealthiest and most powerful individuals only. Everyday investors like you are not intended to hear it.”
Jim went on to detail a series of reports from bodies like the International Monetary Fund, the Bank for International Settlements and the International Center for Monetary and Banking Studies.
“All of the reports and press releases,” Jim said, “are written in highly technical language and were read by only a relatively small number of expert analysts.
“Some of these reports may have been picked up and mentioned briefly in the press, but they didn’t make the front pages.
“For you, such pronouncements are just more financial noise in a flood of information that washes over you every day on TV, radio, the Web, in newspapers and in other publications. The power elite were not signaling you — they were signaling each other.
“Have you noticed that government officials, billionaires and major CEOs rarely seem to suffer when the financial system collapses, as it does from time to time? They see the catastrophe coming and warn each other to get out of the way in advance.”
It’s with those warnings in mind — and the desire to spread the word to everyday Americans — that Jim rushed his third book to completion, less than a year after his best-selling The Death of Money.
His earlier books aren’t a prerequisite for reading this one. This one is less theory, more how you can act on all those new warnings. The book is yours free, if you can cover the shipping and handling cost. Give us a valid U.S. address and we’ll have it on your doorstep within a week or two.
The sugar high that rushed through stocks after the Fed announcement yesterday is wearing off.
Dow 18,000? Gone. An S&P 2,100? No more. Curiously the Nasdaq is in the green, if only barely, at 4,987.
Crude — which soared yesterday from below $43 to nearly $45 — is back down to $43.90.
But gold is holding onto the gains it notched yesterday. At last check, the bid was $1,170. And bond prices continue to rally, sending yields lower. The 10-year Treasury yield fell back below 2% yesterday, and as we write, it’s 1.94%.
In the midst of the bond rally yesterday, the aforementioned Jim Rickards issued this tweet, packing much into his available 140 characters…
Meanwhile, the dollar index — which crashed yesterday from near 100 to below 97 — has already sprung back to 99.3.
No “self-sustaining recovery” evident from the leading economic indicators.
The Conference Board is out this morning with its laundry list of 10 indicators that supposedly point to what conditions will be like for the next six months. Mash them all together and the indicators grew another 0.2% in February, back to the robust levels of 2004. Looks really good right?
Alas, all the growth was concentrated in areas juiced by Fed policy — low interest rates, high stock prices and easier borrowing conditions.
Stuff that really matters over the long haul like manufacturing, building permits and jobs? Meh.
“I read all your articles and like them,” writes one of our regulars, teeing up the inevitable “but…”
“But I find The 5 too pro-China, and anti-U.S.,” he goes on — citing our coverage of the nations lining up to join China’s upstart challenger to the World Bank, and low oil prices.
“Don’t you know we always outsmart ’em, every time, all the time?” he goes on.
“And Jim Rickards, even though I subscribe to his Strategic Intelligence… I find he is just so negative to wake up to in the morning.
“Did Wednesday’s later events have any effect on your confidence?”
The 5: See above.
And we’re neither “pro-China” nor “anti-U.S.” We’re just surveying the landscape, following the breadcrumbs, whatever you like to call it.
“Why shouldn’t this country join the Asian Infrastructure Investment Bank?” writes a reader with a follow-up from yesterday’s mailbag.
“Besides the fact that Washington is stupid, arrogant and acting like a room full of spoiled 2-year-olds? There really is no point. China is neither arrogant nor stupid, is very patient and has already taken for itself the majority founding (and funding) position. That ensures that even if Washington managed to gain some maturity before the sign-up deadline for founding members, it would never have anywhere near the voting power to influence any decisions it favors.
“China will be smart and keep pushing back every time the Washington children throw a tantrum. This will keep them from signing before the deadline and in the process (not positive on this) eliminate a chance for them to get veto power. I don’t know the details, but if members can have a veto, I would expect that would be limited to founding members only.
“I doubt Washington will even be able to influence its allies that are members to push for agendas that favor it. I’m sure a significant unspoken reason for joining was so that our allies could start to work their way out from under our overly burdensome thumb. Those forced compliance sanctions on Russia hurt the EU significantly — and has a pissed-off Russian war machine staring them down while we sit back fat, happy and so far unaffected.”
“I am not understanding all the fuss over this new Chinese bank,” writes another.
“Doesn’t Obama want us to be just another country like Belgium or Luxembourg? And strategically, why would we try to control the entire Europe-Asia economy? After thousands of years of running their own affairs, control passed to us for a century due to their mistakes. When they are ready to run their own affairs again, should we not let them try?”
The 5: You wish.
After the Berlin Wall fell, former U.N. Ambassador Jeane Kirkpatrick suggested we could once again be “a normal country in a normal time.” Then Saddam invaded Kuwait, Maggie Thatcher told Poppy Bush not to “go wobbly” and the rest is history.
Again, we’re not conveying value judgments here. Sole superpowers don’t last forever, but it’s not for lack of trying. As Agora Inc. founder Bill Bonner is fond of saying, “Fish gotta swim, birds gotta fly and bubbles gotta blow.”
We can only hope the decline is gentle like that of the British, and not precipitous like the Spanish…
Best regards,
Dave Gonigam
The 5 Min. Forecast
