Wednesday is yet another Fed meeting where we get to hear “policy” from them. So many times in the past, the upcoming meeting has been called “THE” most important meeting ever. This one is being called the same thing. I have mentioned more than a few times in the past six years “what can they really say?”. I’ve done this because the Fed never had any choices.
Do they have any choices now and for this meeting? Let’s look at what they can do, what they cannot do and what they shouldn’t do. The first option is for the Fed to do nothing and not even change what their mantra has been for so long by remaining “patient”. If this is their choice and I suspect it should be, the question then begs whether the markets will remain patient with the Fed? An impatient market place would presumably cast their vote in the Treasury and dollar markets amongst others.
Another option and the one the press wants you to believe is the Fed will do nothing, but with a caveat being the Fed actually hints at the June meeting as their target date to begin tightening. I am not sure about this one because the markets will react by front running the Fed. Let me sidetrack for a moment and point out how front running was initialized during Alan Greenspan’s era. It used to be the Fed would meet and decide policy, and then implement it. Market participants needed to decipher by Fed actions whether they were tightening, loosening or what the policy decision was, and then place their bets. (Mr. Greenspan changed this deciding to “spoon feed” the markets and actually say what their policy was). It was in this manner the Fed truly kept people guessing and more “cautious”. Caution was thrown to the wind when the Fed began making policy statements after each meeting. I am convinced they did this because they knew by announcing an easing of credit, it would be “front run” by the markets and thus the heavy lifting done by the market. In other words, the Fed could jawbone and let the market do their work for them.
This works (worked) quite well during the easing cycles, it doesn’t work so well if the Fed needs to tighten. You see, the markets are now so levered, any front running of a tightening cycle will turn into an outright panic overnight. This is the problem. The Fed CANNOT actually tighten, they cannot even put a date on a tightening. The only thing they can do is say “we are gonna gonna gonna tighten” but never say when. They have well over a $4 trillion balance sheet that must, but can never be wound down or liquidated. The financial markets have been a one way street where the Fed could either do nothing, or accommodate more, tightening has been off the table for nearly 10 years.
Were the Fed to tighten to any extent now, the dollar will move even higher, setting losing carry trade positions even further offside. Another reason tightening is no option is the following chart.
Consumer consumption represents about 2/3rds of the U.S. economy. No matter what you look at, actual consumption, inventories or new orders, they are all in decline. The last two times all three series went negative in unison the U.S. was already well into recession. Tightening credit now will not only blow up the financial markets but also take the real economy with it. You see, the real economy need help, not a headwind. Were the Fed operating with a clean slate and the Treasury a clean balance sheet, the argument today would not be whether or not the Fed was going to tighten, it would be the reverse, whether they were going to or already EASING! The Fed is cornered …and it is of their OWN DOING!
Lastly, this meeting has a lot to do with “credibility”, or in this case, the lack of. This meeting is important because the Fed stands to lose ALL credibility because of the space they have painted themselves into. They need to actually ease and begin QE4 to soothe the markets (more importantly the real economy) but all they have done is talk about “when” they will begin to tighten. Six years worth of “medicine” has clearly not worked, can the Fed really admit this? They surely cannot reverse their talk of tightening and instead dispense more medicine …can they?
Clearly the recent economic numbers argue the economy at best is treading water and is flat lined. Even the Fed’s own growth model shows a .3% growth rate for the first quarter. Add on top of this the dollar’s strength as the euro implodes and European banks begin to fail (two in just the last 10 days in Austria which were AAA rated). Does the Fed really believe they can tighten and press the dollar even higher? Without blowing up markets and derivatives? Can they really believe blown up derivatives will not affect our own banks …which are not exactly healthy? While I am not saying the Fed “cannot” tighten, because they can do anything they choose, if they do put a date on it we will not reach that day without a panic. The markets will front run any tightening because in effect it will be a margin call …ON EVERYTHING! A margin call with no free margin available I might add.
He is concerned about the markets going into collapse where we see a “no bid” scenario. In my opinion he is quite correct, but this is only half of the equation. The other half will be gold and silver going “no offer”. The danger with this scenario is your avenue for insurance will be closed. As I’ve mentioned over the last couple of days, and since we are discussing “options”, I believe the Chinese will ultimately have no other option than to re mark gold into the stratosphere in order to recapitalize themselves and their banks. Any such action will put the no offer scenario front and center even if you are able to afford the new price of gold.
The Fed is now faced with the scenario of not having any options left, yet they must make a choice. They are damned whatever they do… and little time to do it. Hopefully this is something you calculated into your own actions before arriving at such a “choice”!
Bill, Always enjoy your writing and
perspective on geopolitical and economic
issues. The concern is now that the T.P.T.B.
are really going to stuff gold big time.
I was sent this you tube video this morning.
I think you should have a look.
https://www.youtube.com/watch?v=H8z3RJfcjcs&feature=em-upload_owner
if you know what the end game is, does it matter?
Why do we own physical…..
Likely because we know that when all is said and done GOLD will be the one remaining true measure of value.
For now Gold prices are being influenced by things other than supply and demand principles.
This is not a time to be speculating on the equities continuing their upward climb.
For some of us it is about positioning ourselves on the side of caution.
Would rather leave my children some physical than a drawer full of fiat.
correct.
i hope USA raises rates that would make the rest of the world gold go through the roof since they are all lowering and easing sorry about your luck to us citizens but no one really cares about the us gold price
PS me live in russia
Bill these may be words that will soon tell the tale.
(I believe the Chinese will ultimately have no other option than to re mark gold into the stratosphere in order to recapitalize themselves and their banks. Any such action will put the no offer scenario front and center even if you are able to afford the new price of gold.)
In my view that is how this will go down….
With China likely holding the worlds largest gold hoard they can do just that…
Reset the price of gold high enough to back their currency and watch the remaining physical available disappear.
From there they become the strongest economy for many decades to come.
Manufacturing capability.
Population base for huge internal consumer consumption.
Strong financial real money foundation.
Energy partnership with Russia.
we will soon see.
Regarding the Chinese having the strongest economy for decades to come, that could only happen under two scenarios (that I can think of):
1. They fight and win a nuclear war with a jealous West, probably with Russia on their side. You know the old saying about wars and the Rothschild clan.
2. The Rothschild clan wants the Chinese on top. Anglo-Saxons don’t willingly give away their power, or the appearance thereof, without good reason.
I disagree.
Indeed, the Fed has solidly backed themselves into a blind alley.
With no where to go, no means to get there, with an empty tank!
Their only move left is NIRP and more printing.
Further printing will just add dollar supply, damaging what little credibility they have left, with the result of possibly causing a flight away from the USD and more instability.
It used to be that with each dollar of debt the GDP would get a $2.63 boost in return. Recently this has fallen and is now 2 cents, soon to go negative if it hasn’t already! In economic ‘speak’ this is known as “the diminishing marginal utility of debt”.
It remains to be seen what long term consequences of NIRP will be to the global economy, with 22 countries (and counting) going this route. One thing for sure – this is an abhoration and far from normal.
With each interdiction into the market place causing more chaos and uncertainty, which requires even more ‘meddling,’ the resultant coming crash will be epic.
I plan to write more on this subject tomorrow.
Looks like the Fed took the only other way out for them, according to the just released FOMC press release.
DO NOTHING! Just a lot of hot air with no substance. So be it.
…and go on down the road.
The USD has just flash crashed. Gold has spiked up.
Bernanke has been quoted as saying “no normalization of rates during my lifetime”. He is 60 years old and in good health!
he has always known.
Bill,
Another hit out of the park. I enjoy all of your articles and their titles.
The Fed has bullshitted us for a long time and with me they have ZERO credibility. If you bullshit someone long enough, they will catch on.
Also 100% of the Feds actions ARE NOT for main street so the masses are the LOSERS.
Thanks Farrell, they are insane.
Another great article, Bill.
In the medium-term, there’s another reason they can’t tighten–interest rates.
The US’s current debt ($18.64t) has an average maturity duration just north of sixty months. Couple this with a deficit that is increasing at a pretty brisk pace (~$800b per year), and you are looking at, for each 1% increase in interest rates, an additional cumulative $8b per year in interest; and the kicker, in sixty months we get to roll everything over.
All this leads to the following outlays *per 1% increase in interest rates* (I’ve rounded for clarity):
Year Interest Cumulative interest
1 $8b $8b
2 $16b $24b
3 $24b $48b
4 $32b $80b
5 $40b $120b
5 Rolling the year 1 debt
$18.64t * 1% = $186b/year for sixty months
What happens if the FED screws up by over-tightening; sending rates all the way to their historical norms (5%)? Just the INTEREST on the debt would be more than the all the individual income tax receipts.
When you are damned if you do and damned if you don’t, you do what you want. I predict the FED will do whatever is in their best interest. Mathematically, at this point, it doesn’t really matter.
It’s like playing the game Monopoly when you’ve lost your last property. You’re going to lose. You just don’t know if you’ll lose in 1 time around the board or 10.
yes, correct.
Great article Bill.
Correct me if I’m wrong. Under the current fractional reserve non-gold backed system, all money originates as debt with an interest rate attached. As such it can only grow so far before the debt bubble collapses under its own weight regardless of how low the interest rate is set (ZIRP). There is simply too much debt and as the economy slows, heading toward outright contraction, debts must now be repaid (think Greece). This is now global and is touching everything.
Right now there is a giant sucking sound as borrowers scramble to get the US dollars needed to repay their mostly US$ denominated debts. There is effectively a short squeeze on the US$. It has absolutely nothing to do with US or global economic strength. In fact, it is the opposite.
Notwithstanding the big reversal in the US$ today, I wouldn’t be surprised if this was just the start of some serious volatility prior to its very rapid and final blow off.
As far as raising rates goes, the market will do it for the Fed before the Fed will do it itself and it won’t attract any capital. Those days are over and require the presumption that you can actually get your investment back after seeking the higher interest rate. “Return of capital” always trumps “return on capital”.
I do happen to know something about insolvencies and this is an insolvency of the highest order.
Cheers!
excellent logic!!! When I need a day off, may I tap your shoulder?
Thanks Bill. You made my day!
Always willing to help but I think I would have a tough time trying to fill in for you.
Hoorah!! Gold to 3500 in the year 2089. Thanks Bill.
Its coming. Its almost here. Get ready. I see no way out. They are lying..duh?
Hedge your bets. Be patient. Everything can be erased with a key stroke.
Enough already.
great comment! Why do you read my work? Not very smart on your part…
Bill – once again, thanks for the great article. Can you briefly help me understand what you mean by ‘no bid’ and ‘no offer’ at the end of you article?
no bid means “no buyers”, no offer means nothing for sale.
They need to actually ease and begin QE4 to soothe the markets (more importantly the real economy)~~Bill Holter~~
LOL bill I like reading your stuff but this line doesnt jive with me QE 1,2,or 3 didnt help the economy surely 4 will not either but I understand at this point you probably need it to lift your business (you do know the stock market is not the economy on ground zero right ?)
QE3 did what exactly for gold and silver? You miss my point entirely, they CANNOT tighten and with normalized rates (not zero bound) and balance sheets they would be talking about easing, NOT tightening. Talk is cheap and the only thing they have left david.
Here is a possible reason why Kokanse is missing something about all money being debt. The Congress released information on Fed actions in 2009. One item involved 20 billion dollars SWAPPED with our war time buddy Ireland. They took our $20 billion and immediately spent it. We took their money to sit on, perhaps forever. Result $20 billion of new money was created and they probably paid off $30 billion of reportable loans. Money supply up, debt down.
You can do this as long as inflation doesn’t set a limit— on us. The rest of the world is experiencing Mother Nature now.