Richard Fisher on Fed Policy

By Biiwii

Very interesting talk from Richard Fisher on ZIRP’s effects on insurers and the financial sector.  Yet at the end he notes they could “flatten the curve even further; that would be the only tool left in the Fed’s Toolbox.”

We have noted for years that the whole operation, post-2008, has been little more than a series of ingenious parlor tricks.  But they seem to be a 1 trick pony now.  It’s sad, really.

MSM Hits New Highs… in Stupidity: WTI Golden Cross

By Biiwii

We have shown again and again how when a “Golden Cross” (or Death Cross for that matter) is touted – especially in the greater media – that it is at best a non-factor and at worst a sign that everybody’s got the memo and the market in question will soon take a turn for the worse.

On cue, not only does MarketWatch chime in with some Golden Cross hype this morning but it leverages the idiocy to call crude oil’s Golden Cross a good thing for stocks this summer.  Bulls take note!

If this happens, it could be a fantastic summer to own stocks

Not good, not sensible… Fan effing tastistic!

wtic

MSM, always on watch to make up stories to justify market moves or simply inspire peoples’ imaginations hallucinations.

Should the Gold Price Keep Up With Inflation?

By Monetary Metals

The popular belief is that gold is a good hedge against inflation. Owning gold will protect you from rising prices. Is that true?

Most people define inflation as rising prices. Economists will quibble and say technically it’s the increase in the quantity of money, however Milton Friedman expressed the popular belief well. He said, “Inflation is always and everywhere a monetary phenomenon.”

There you have it. The Federal Reserve increases the money supply and that, in turn, causes an increase in the price of everything, including gold. It’s as simple as that, right?

Except, it doesn’t work that way. Just ask anyone who has been betting on rising commodities prices since 2011. Certainly the money supply has increased. M1 was $1.86T in January 2011, and in March it hit $3.15T. This is a 69 percent increase. However, commodities have gone the opposite way. For example, wheat peaked at $9.35 per bushel in July 2012, and so far it’s down to $4.64 or about 50 percent. And the price of gold fell from $1900 in 2011, to $1050 late last year, or 45 percent.

Would you say that inflation is +69%, or is it -45% or -50%?

Most people look at retail prices, not raw commodities or gold. Retail prices have not followed into the abyss. Love it or hate it, the Consumer Price Index registers a cumulative 8 percent gain from 2011 through 2015 inclusive.

Let’s consider an example to help understand why. Suppose you own a coffee shop in a central business district. The city enacts a new regulation that limits the hours for delivery trucks. This forces you to pay overtime wages to your staff to unload the trucks, and of course, the carrier charges more for delivery too.

Next, the city allows poor people to stop paying their water bill. So to compensate, they raise the water rates on businesses. While they’re at it, they raise the fees for sewer, garbage, gas line hookups, fire inspections, and sign permits. The state passes a higher minimum wage law. The building inspector requires that you increase the size of your bathroom to accommodate wheelchairs, and you lose revenue-generating floor space. There are hundreds of ways that government increases your costs.

Is this inflation?

Not yet, costs are up but not prices. Sooner or later, all of the affected coffee shops try raising their prices. Consumers don’t necessarily want to pay more for coffee, so a few shops fail. The survivors are now charging 15% more for coffee. They have their higher prices, at the cost of lower sales volume.

The burden of government bearing down on the coffee business only increases. Every day, three constituencies conspire to drive up costs. We’ll call them the “there oughtta be a law” crowd, the “government needs more revenues” mob, and the “they served 10oz of coffee plus 4oz of ice so let’s sue them” racket.

Regulation, taxation, and litigation drive up price. Friedman was wrong. The rising price of lattes is not a monetary phenomenon (the monetary system is pressuring prices lower right now, and in my theory of interest and prices I discuss why). Rising retail prices are a fiscal, regulatory, and judicial problem.

There is no reason for the price of gold to follow retail, because there is no mechanism that connects gold to these non-monetary costs.

Not Even The Smallest Hint of Cyclicality Anymore

By Jeffrey Snider of Alhambra

It is a myth of the modern age, particularly post-1930’s, that the American banking system needed a central bank in order to perform the function of currency “elasticity.” There were, of course, several severe bank panics that occurred in the decades before the Federal Reserve but they did not end with its imposition. The worst banking liquidation wave in history occurred with the relatively new Fed system in place, demonstrating conclusively that it is not the central apparatus that makes any difference. That point was further pressed starting August 2007.

The bank panic of 1907, for instance, was unusually confined. Typically, these kinds of currency problems (shortage) began in NYC and radiated outward. That was certainly the pattern starting in 1930 after the call market imploded and along with it the nation’s and a good part of the world’s payment system. The Knickerbocker panic two decades before, however, remained almost exclusively a Wall Street affair and, not coincidentally, was for once unaccompanied by severe depression.

The New York problem began with trust companies, a form of financial organization legally dissimilar from banks by intention. New York City banking organizations were distrustful of them and sought active exclusion from their membership. Banks since the earliest days of the republic had gathered together to form associations not out of social impulses but rather to function as private clearinghouses. They adhered to strict rules where the benefits were tremendous. As the Suffolk System in and around Boston in the earlier 1800’s, members found their bank notes more acceptable and liquid because of their standing within the clearing system.

Continue reading Not Even The Smallest Hint of Cyclicality Anymore

Wage Inflation Keeps Fed in Picture

By Chris Ciovacco

Wage Inflation Keeps Fed in Picture for Stocks and Bonds

Fed Does Not Have A Singular Mandate

Given the big miss on the job creation side of Friday’s monthly employment report, it may appear to be easy for the Fed to continue to put off a hike in interest rates. However, the Fed has two primary mandates; full employment and keeping inflation in check. From the Federal Reserve Bank of Chicago’s website:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

Inflation: Glass Half Full

The ratio of Treasury inflation-protected securities (TIP) vs. intermediate-term treasuries (IEF) can be used to monitor inflation expectations. If we use a weekly chart that plots closing prices, you can make an argument that a bullish breakout recently occurred in inflation expectations (see green arrow).

Inflation, Stocks, Bonds, and Commodities

This week’s stock market video examines current inflation expectations in the context of market history/performance of stocks (SPY), bonds (IEF), and commodities (DBC). From The Wall Street Journal:

Continue reading Wage Inflation Keeps Fed in Picture

The Daily Shot

By SoberLook

We begin with the United States, where weaker than expected jobs report resulted in Barclays, Merrill Lynch, and others to revise forecasts for the number of Fed rate hikes in 2016. Most economists now expect only one hike in 2016 (in September) – down from two.

Below are a few other observations on the payrolls report that weren’t covered by the financial media.

1. The percentage of Americans employed in residential construction is rising but remains at pre-recession lows.

2. Coal mining jobs in the United States are quickly disappearing.

3. Americans are still leaving the labor force in large numbers. Much of this is retirement and stay-home parents. It is important to point out that many Americans who have the ability to leave the labor force find that salaries and small business earnings are too low to make it worthwhile for them to stay.

Continue reading at TalkMarkets→

Gold is Slowing

By Monetary Metals

Our calculated fundamental [gold price] is up a few dollars, but it’s still more than $40 below the market price

The price of gold moved down slightly this week, while that of silver dropped more substantially—1.9%. We don’t see much decrease in the enthusiasm yet from this minor setback.

This was a shortened week due to the May Day holiday outside the US.

Let’s look at the only true picture of supply and demand fundamentals. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter may 8 prices, gold and silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was up over a point this week.

Continue reading Gold is Slowing

The Relentless COMEX Fear-Mongering

By Steve Saville

I suspect that when it comes to the idea that a COMEX default is looming, ZeroHedge.com is “fear-monger zero*”

321gold.com’s Bob Moriarty recently took someone to task for making the wrongheaded assertion that there was a high risk of the CME (usually still called the COMEX) defaulting due to the amount of paper claims to gold being orders of magnitude greater than the amount of physical gold in store. Bob makes the correct point that a default isn’t possible because the COMEX allows for cash settlement if necessary. However, the assertions being made by the default fear-mongers aren’t just wrong due to a failure to take into account the cash settlement provision; they would be complete nonsense even if there were no cash settlement provision. I’ve briefly explained why in previous blog posts (for example, HERE). In this post I’ll supply a little more detail.

I suspect that when it comes to the idea that a COMEX default is looming, ZeroHedge.com is “fear-monger zero*”. Every now and then ZeroHedge posts a chart showing the total Open Interest (OI) in COMEX gold futures divided by the amount of “Registered” gold in COMEX warehouses. An example is the chart displayed below, which was taken from the article posted HERE. The result of this division is supposedly the amount of gold that could potentially be demanded for delivery versus the amount of gold available for delivery, with extremely high numbers for the ratio supposedly indicating that there is a high risk of a COMEX default due to insufficient physical gold in storage. I say “supposedly”, because it actually indicates no such thing. The ratio routinely displayed by ZeroHedge — and other gold market ‘pundits’ who spout the same baloney — is actually meaningless.

ZH_goldcover_050516

Continue reading The Relentless COMEX Fear-Mongering

Inflection Point for EM

By Doug Noland

Credit Bubble Bulletin: Inflection Point for EM

Don’t let a relatively tame week in the S&P 500 engender complacency. Perhaps it was not obvious, yet the trading week provided important confirmation for the incipient “Risk Off” dynamic thesis. Indeed, the global bear seemed to roar back to life. Stocks were lower, financial stocks were under heavy selling pressure, and some commodities reversed sharply lower, while safe haven bonds were in high demand. It’s worth noting that financial stocks lagged during the recent global risk market rally and now lead on the downside.

Japan’s Nikkei equities index dropped 3.4% this week, boosting its two-week drop to 8.3% (down 15.4% y-t-d). The Nikkei closed the week at 16,107. Keep in mind that the Nikkei traded at about 20,000 this past December (and about 39,000 in December 1989), and is now only about 1,000 points off February lows. Japanese financial shares trade even worse than the major indices. Japan’s Topix Bank Stock Index sank 4.6%, with a two-week decline of 12.8% (down 32.5% y-t-d). The Topix Bank Stock index traded at 250 last summer and closed Friday at 140.

Chinese stocks (Shanghai Comp) declined another 0.9%, increasing 2016 losses to 17.7%. Hong Kong’s Hang Seng Financial Index fell 5.0%, with a two-week decline of 7.6%. The Singapore Straits Times equities index lost 7.1% over two weeks, with financial share weakness behind 10 straight losing sessions.

Continue reading Inflection Point for EM

Inflation With Deflationary Overtones?

By Michael Ashton

So you should cheer for the “good” sort of deflation. At least, you should cheer for it if you are still earning wages.

The Employment report was weak, with jobs coming in below consensus with a downward revision to prior months. It wasn’t abysmally weak, and not enough to change the a priori trajectory of the Fed. If the number had been 125k below expectations or 125k above it, then it may have had implications for the FOMC. But this is a number that has big swings and is revised multiple times. Getting 160k rather than 200k isn’t cause for celebration, but neither is it cause for panic. So whatever the Fed was getting ready to do didn’t change because of this number.

To be sure, no one knows what the Fed was planning to do, so this mainly has implications for the day’s volatility…which is to say that the market quickly went to sleep for the day.

Now, interestingly the Average Hourly Earnings number ticked higher to 2.5%, continuing the post-crisis upswing. At 2.5%, hourly earnings growth is slightly higher than median inflation and thus potentially “supportive of the inflation dynamic” from the standpoint of the Committee. Yes, wages follow inflation but not in the Fed models – so, while I don’t think this has any implications for future inflation it will eventually have implications for Fed policy. But this is a dovish Fed, and 2.5% earnings growth is not going to scare another tightening out of them…unless they were already planning to tighten.

Continue reading Inflation With Deflationary Overtones?