Monetary Policy

We are entering an inflationary death spiral. YES, we might have another round of debt deflation, but the flight from the US Dollar is already beginning worldwide. Saudi Arabia has sent representatives to China and Russia to strengthen trade ties (an obvious move away from pricing Oil in Dollars). China and Russia have agreed to begin trading in their own currencies rather than Dollars. And in some emerging markets people don’t even want to accept Dollars in business transactions anymore.

Silver's nearly 3% surge in trading in Asia may indicate that the long expected short squeeze may be underway. Bullion banks with very large concentrated short positions may be being forced to buy back their short positions – propelling silver higher. This could see silver surge over the record nominal high of $50.35/oz in short order. At the same time caution is merited as silver has risen nearly 10% in April so far and over 33% year to date. Speculators need to be very cautious as margin requirements may be increased again and profit taking could lead to sharp falls in price. Leveraged speculation is extremely high risk and should be avoided by investors and savers. Proof of the lack of animal spirits in the silver marker is seen in the data which shows that speculative sentiment on the COMEX (as seen in the Commitment of Traders/ COT data – see chart below) is subdued. While the total silver ETF holdings increased to a record, they are not far above the levels seen in December 2010 (see chart above). Importantly, even at $41.30/oz the dollar value of the total silver ETF holdings remains very small at just over $20.5 billion. To put that number in perspective, today bankers put a prospective value of around $60 billion on Glencore, one of the world’s largest commodity trading companies. BP has set up a fund worth $20 billion to cover legal claims from the oil spill disaster.

The last time Bill Dudley hosted a Q&A on inflation, he made the now legendary phase, noted here, that people should just eat iPads and let their betters worry about such trivial problems as "transitory" inflation. Today Jan Hatzius' predecessor and Goldman's plant at the New York Fed continues his Titans of Taste (substitution) world tour, speaking in Tokyo, Japan, where he is experiencing one after another aftershock while discussing "Regulatory Reform of the Global Financial System." Select highlights from the speech: US economy in better shape than last summer; QE2 is partially responsible for recent rebound although the US economy has lost momentum in past few months due to oil prices; oil prices are negative to economic outlook; big focus for Fed is inflation expectations; expectations have not become anchored; CPI rise in US may be more modest than other countries as US starting at lower base; "it is important to not to overreact to rise in headline inflation as its likely to be temporary", there is more slack in the US economy than in Europe; "there should not be too much enthusiasm about tightening monetary policy too early", and many other such dovish rambling which once again confirm that Hatzius and Dudley are laying the groundwork for additional QEasing.

The barrage of Fed commentary in the coming week could keep the debate over the future of Fed policy in the spotlight, as will the US PPI and CPI data that will be out toward the end of the week. Meanwhile, oil prices continue to climb, with Brent sitting firmly above $120/bbl. Elsewhere, there is a deluge of China macro data on Friday, where we expect inflation to pick-up a touch and activity to remain reasonably solid. The trade data out on Sunday posted a tiny surplus. Import and export growth both improved substantially and were stronger than expected; however, we must be mindful of Chinese New Year effects. On the monetary policy front, we and the consensus expect BoK, BI, and BoC to keep rates unchanged, though the MAS is likely to re-center the SGD NEER.

We have a debt problem. And according to our elected leaders, the way to address that debt problem is to fight over some $30 billion in spending at the exact same time that unelected leaders (the Fed) are printing three times that amount (at least that we know of) to buy MORE US debt.

I can spin this any way you want. So can Bernanke.

"When a country's public debt exceeds 90% of GDP, that is the magic number. You get to 90%, there is no way back, and that is the number that the U.S. is going through pretty much as we speak. It is also the number which the UK has gone through; all of the PIGS are going through it, as well. They are all going past the 90% debt to GDP ratio. Obviously, Japan is miles past it already. It's up to 200%+. There does not appear, in the historical analysis, to be any great likelihood of getting back from that level of debt safely. There is this strong evidence that above 90% debt to GDP, you will experience either a cataclysmic default or some form of very serious inflation." So observes Paul Tustain, gold market analyst and founder of BullionVault. In his view, gold serves as a beacon who's price is currently signalling the monetary system is in grave danger. He and Chris Martenson discuss the primary factors driving the price of gold and smart strategies for investors looking to build or maintain their holdings of the metal.

Some stunning remarks from Dallas Fed's Dick Fisher: " Our duty is most distinctly not to monetize?or even
be perceived as monetizing?the debt of fiscally imprudent government.
Throughout the history of nations, monetizing the budgetary excesses of
governments has proven to be a direct path to economic perdition.
Having already peeked inside that door, I feel strongly that we must
now shut it, lock it and throw away the key." Well, thanks Dick. You are only $2.6 trillion dollars late.

The borg collective is out in full force, with more gibberish on 'transitory inflation' coming from Atlanta Fed's Lockhart: "As I've said before, my expectation is that commodity price increases that are now translating into accelerating headline inflation will be transitory. In support of this claim, I'll make three points. First, these increases have been driven by global pressures in markets for food commodities, energy, and other commodities. These pressures are largely the result of supply-and-demand factors, some of which are one-off in nature. Second, inflation indices are made up of a wide spectrum of goods and services that don't uniformly have these commodities as inputs. Roughly two-thirds of consumer spending is on services, which are not materials-intensive. And, third, to the extent that some goods and services have these commodity inputs, the pass-through to ultimate consumer prices is limited." Fair enough: on the other hand one can present the following point indicating inflation is only transitionary to higher prices: "reality."

Everyday Congressman Paul Ryan steals a few headlines with his plan to balance the Federal Budget. Ryan's plan is to cut $650 billion a year from the deficit.

To get a better feel for what this really means, let's take a few steps back to the beginning of the credit crisis. To rescue banks and stimulate the economy, the budget deficit increased from $455 billion in 2008 to $1.416 trillion in 2009. This deficit funded TARP and a variety of stimulus efforts from Cash for Clunkers to Energy Efficient Appliance credits.

The UN's Food and Agriculture Organization, whose January print was the catalyst for us to revolutionary food riots ahead of time, released its March food price update - "the Food Price Index (FFPI) averaged 230 points in March  2011, down  2.9 percent from its peak in February, but still 37 percent above March last year. International prices of oils and sugar contracted the most, followed by cereals. By contrast, dairy and meat prices were up." So in essence the drop in the volatile energy component has been transitory, courtesy of WTI and Brent now at 30 month high, and the April number will be yet another surge. Reuters agrees: "new increases are in sight as demand grows and supplies tighten, the UN Food and Agriculture Organisation said. Rising food prices have climbed to the top of the
international political agenda after contributing to protests that
toppled the rulers of Tunisia and Egypt earlier this year, with unrest
spreading across North Africa and the Middle East." The spin: ""The decrease in the overall index this month brings some welcome respite from the steady increases seen over the last eight months," David Hallam, director of FAO's Trade and Market Division, said in a statement. "But it would be premature to conclude that this is a reversal of the upward trend," he said." It isn't. And with loose monetary policy expected out of the US for as wide as the eye can see, little if anything will change for a long time.

Gold’s two consecutive days of nominal record highs have seen some profit taking as oil is flat, the dollar is marginally higher and the euro has fallen. The ECB’s 0.25 % interest rate hike may lead to further profit taking today but rising interest rates in an increasingly inflationary environment will be positive for gold as it was from 1965 to 1981 (see charts below). It is only when real interest rates turn positive (nominal interest rates are again above the nominal rate of inflation) that gold and silver’s secular bull markets may be challenged. Inflation in the eurozone is 2.6%. Today’s interest rate rise will leave eurozone interest rates at 1.25% well below the 2.6% rate of inflation meaning that savers continue to lose out due to very low yielding deposits. Negative real interest rates will likely lead to precious metal prices continuing to rise or rather very low yielding fiat currencies falling in value versus non yielding finite gold. Rising interest rates are bullish for gold also as they may see the primary asset classes of equities, bonds and property come under pressure again.

Following weeks and months of lies that Portugal does not need a bailout, that is is not Ireland, Greece, Algeria, Tunisia, Egypt, Middle Earth, Uranus, etc, the country finally realized it is bankrupt, unless it comes, hat in hand, bagging for a bailout from Jean Claude Trichet (who now is scratching his head how to spin this latest sovereign default as bullish ahead of tomorrow's rate hike). Which it just did. Reuters has compiled the reactions by those who felt like sharing their views on this foregone conclusion.

Congress, you need to wake up. The people who are acting as your financial advisors are lying to you about the economy and our financial system. They’re also lying to you about the effectiveness of their policies. You are supposed to represent us. You are supposed to defend us against threats both internal and external. Bernanke is lying to you and all of us. He is an internal threat to our financial wellbeing.

DO SOMETHING ABOUT IT.

The REAL Crisis (of which 2008 was the warm-up) is fast approaching. When I say REAL Crisis I mean full-scale systemic meltdown, a situation in which the market accomplishes what the Fed, regulators, and US Government at large have failed to do: clean house. The plain facts are right in front of us. The US is broke on every level: Federal, State, Local, and individual/ consumer. We all know this, but we don’t want to admit it because doing so would likely mean wiping out at minimum 30% of what we have today.