Fed: “Party On”
By Jason Van Steenwyk
Somebody jumped the gun. As our colleagues at ZeroHedge.com show, someone in the gold markets smelled the coming dovish announcement from Chairman Ben Bernanke and the Federal Open Market Committee of the Federal Reserve that the Central Bank would continue the current policy of buying up some $85 billion worth of securities every month.
That purchasing effort amounts to some $45 billion in Treasuries to enable the Congress junkies to continue their spending binge, and $40 billion in mortgage securities to shelter the banking system from the consequences of its own lending — until further notice.
Graphic Source: www.kitco.com
Now, a trading point to consider here: The gold markets knew something… or were pretty confident about something, 3 minutes early. But other markets didn’t budge until after the FOMC report was out. The Forex guys, bond guys, stocks guys – they were all left in the dark… UNTIL the FOMC hit the streets. Then the move happened… in a couple of milliseconds.
The program traders won decisively… UNLESS the little guy was looking across the field to the gold markets. If you believed that continued QE3 was bullish for gold, AND bullish for stocks, you could have made very good money. But only by thinking outside the box. You could not gain a trading advantage by playing the technical analyst and looking at a chart of the market you were trading in. You had to be watching the gold traders – and poised ready to move.
Now, this insight might give you a bit of a trading advantage the next time the FOMC makes a move. If Goldman Sachs or someone else has a mole within the Federal Reserve, they will likely tip their hand again, if they think they can get away with it. That gives human-speed investors a chance to compete against the black boxes. But think more broadly.
The Federal Reserve lost its nerve, and for the time being, abandoned the dollar. Now, last time the FOMC met, back in June, they let slip that they didn’t think they would be ready to hit the brakes on QE3 and the massive treasury purchases propping up the economy until unemployment was around 6.5 percent. Clearly, they were waiting for some signs of life before they removed the patient from the ventilator. But the cancer in the economy is deeper than the unemployment rate indicates.
It’s not just the point-blank issues explicitly cited by the Federal reserve: That is, the approaching deadline for Congress and the President to agree a budget or continuing resolution to avoid a government shutdown, and the approaching deadline for Congress to increase the federal debt limit before the U.S. began defaulting on its debts.
Furthermore, While not directly referenced by the FOMC statement, one shouldn’t discount the pending implementation of the Affordable Care Act, the unintended effects of which have rippled through the labor markets, driving the labor force participation rate to lows not seen in decades, and driving millions from full-time to part-time work.
Consider: Since 2012, the usual ratio of new full-time jobs to new part-time jobs has turned topsy-turvy. Normally, we see two or three full-time jobs created for every part-time job. Now we see as much as 77 percent of all newly-created jobs are part-time – which allows employers to escape the onus of providing medical benefits to workers – but also cuts off the ability of the consumer to support an economic off at the knees.
At any rate, the despite the positive reaction of equity markets to the news that the Fed was going to stay in business a while longer, the overall forecast was pretty glum. The Fed reduced its economic growth forecast this year to between 2 and 2.3 percent, its 2014 forecast to between 2.9 and 3.1. That’s sharply down from its earlier prognostication of between 3.0 and 3.5 percent.
Additionally, the Fed believes unemployment will fall to between 6.4 and 6.8 percent in 2014, and between 5.9 and 6.2 percent in 2015.
The FOMC also indicated they intended to hold short-term interest rates at barely above nothing until 2015 and possibly 2016.
So does that mean the Fed will start tapering off with unemployment at 6.5 percent, as Bernanke intimated they would back in June? Not so fast. It’s not just that the labor market is weaker than the raw unemployment figures would suggest. And it’s not just because of the fiscal issues surrounding the debt ceiling, budgets and sequestration. Rather, it’s because Bernanke’s a lame because of the shifting political fortunes of some of Bernanke’s likely successors.
Larry Summers, widely considered to be the most hawkish of likely candidates when it comes to monetary policy withdrew his name from consideration of the running after an insurrection among progressive members of the President’s own party. At the top of the list now: Janet Yellen, former head of the San Francisco Fed and a liberal favorite, with the enthusiastic backing of the National Organization for Women. Yellen is seen as a likely more aggressive regulator than Summers, with more of an appetite for protectionism and populism – a set of beliefs more associated with ‘easy money’ monetary policy going back to the Progressive Era and William Jennings Bryan.
Her usual focus at the Fed has been pro-labor, rather than pro-dollar. She has been willing to maximize employment at the expense of maximizing the value of the currency. So a return to Volker-era hard money policy under Yellen is highly unlikely.
Edge to gold, precious metals, manufacturers, exporters, real estate and other currencies. A Yellen chairmanship would likely be disadvantageous to the financial industry and the dollar itself.
But enough about what I think. What say you?
Sound off in the comments!
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