There is a myth prevalent today that the gold price always falls when interest rates rise. The logic is that when interest rates rise it is more expensive to hold gold, which just sits there not earning anything. And since markets discount future expectations, gold will even fall when a rise in interest rates is expected. With the Fed's Open Market Committee debating the timing of an interest rate rise to take place possibly in September, it is therefore no surprise to market commentators that the gold price continues its bear market. Only the myth is just that: a myth denied by empirical evidence.
Less than a decade after a housing/derivatives bubble nearly wiped out the global financial system, a new and much bigger commodities/derivatives bubble is threatening to finish the job. So... the central banks will panic. Again. Countries that retain some control over their monetary systems will see their interest rates fall to zero and beyond, while those that don’t will be thrown into some kind of new age hyperinflationary depression. Not 2008 all over again; this is something much stranger.
Deflation is back on the front burner and it's going to destroy all of the careful central planning and related market manipulation of the past 6 years. Clear signs from the periphery indicate that a destructive deflationary pulse has been unleashed. After years of suppression, the forces of reality are threatening to overwhelm our managed global ""markets"'. And it's about damn time.
Straight-forward discussion of next week's economic data and events, and why it is important for the dollar.
And how you will be paying for her 'exit party' bill...
But for those equity investors caught in the artificial glare of the goalseeked stock market to appreciate how truly ugly it has gotten in the junk bond space, here is a heat map showing the YTD change in junk bond prices (relative box size indicates total outstanding debt amount) when seen in terms of either the 31 subsectors or the 805 issuer companies that make up Citi's junk bond tracking universe.
"The modern financial animal is wont to assume that he or she lives in an age of science. The truth is we live in an age of pseudoscience. Far from dealing in science, central bankers, and, to a degree, investment bankers and security analysts, employ magical thinking... For an individual to fix Libor is a crime. For a central bank to suppress European bond yields is an act of financial statesmanship..."
You do not start confiscating deposits at banks until the government itself is bankrupt and cannot foot the bill for a bailout.
The dollar's pause may be short-lived. Divergence still the key driver.
In a note by BofA's Michael Hartnett, the bank looks at the latest EPFR fund flows and concludes that the wave of commodity "capitulation" revulsion selling has finally arrived.
"If investors want complete safety, they can't get much income, and if they aim for high income, they can't completely avoid risk. It’s much more challenging today with rates being suppressed by governments. This is one of the negative consequences of centrally administered economic decisions. People talk about the wisdom of the free market – of the invisible hand – but there’s no free market in money today. Interest rates are not natural."
First The 'unaudited' Fed leaks its FOMC minutes. Then they leak 'inside-information' to Nikkei's latest addition, Medley Global advisors (and remain "above the law" with regard consequences. And now, The Fed admits it leaked full blown confidential economic projections (due to a code glitch), whose summary assessment is shown below as per the leaked file.
Despite the glad-handing over Amazon's results, the rest of the world appears less than impressed with the state of the status quo. Bond yields continue to plummet with 30Y yields at 2.95% - its lowest since the start of June. Gold saw a double-flash-crash overnight but is bouncing back for now - back above the key $1080 level. The Dow and S&P have given up gains and are back in the red and even Nasdaq is fading fast as Biogen and Amazon battle it out to affect the index...
Because of their credit issues, these bonds often trade more closely with equities than they do with base interest rates. Occasionally, however, junk bonds and stocks will diverge with one another. Such a divergence is occurring at the moment. It is often suggested that when the bond and stock markets diverge, the bonds typically prove to be correct, i.e., the stock market usually ends up going the way of the bonds. Is there evidence to back that up? According to our research there is, and with junk bond yields at s-x month highs while the S&P is within 1% of record highs, for stock bulls, that isn’t necessarily good news.