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Central Bank Credibility, The Equity Markets, And Gold
Authored by Michael Pollaro, originally posted at Forbes.com,
Central bank credibility is at all-time highs. As a consequence, we suggest, equities are near all-time highs too while gold is scraping multi-year lows. A change though may be in the offing with all three. Not today, nor tomorrow. But perhaps sooner than most think.
Here’s how we see it…
In the context of five plus years of the most unconventional monetary policies the world has ever seen, there is a near universal belief that a group of Keynesian/Monetarist schooled, largely academic economists have got it all figured out; namely, that super-sized, well-orchestrated, easy money policies – zero even negative benchmark interest rates, a smorgasbord of essentially free lending programs and of course mega-size asset purchase programs (QE) – can produce sustainable, economic growth. In other words, central bank credibility and the efficacy of their policies are in the heavens.
No central bank is more revered in this regard than the Federal Reserve. As we discussed here, the Federal Reserve, it is said, is “pulling it off.” Because of its heroic, unconventional, all-in easy money policies, the Federal Reserve is said to have “saved” America from an almost certain depression and then, because of its continued easy money policies, is the driving force behind America’s now accelerating economic growth. Just look at the economic numbers, say the pundits. The Federal Reserve’s monetary policies are working. Yes, not as fast as we would like, but going in the right direction. Only one task left – a well-calibrated, data-driven exit from these unconventional policies. The strengthening economy can take it, they say. In fact, the exit should be welcomed because it signals a strong and growing economy, one that will no longer require any Federal Reserve support.
Of course, this is music to U.S. equity market investors and speculators alike, so much so that U.S. equities have become the asset class de jure. You can’t lose, proclaim one investment manager after another. Don’t “fight the Fed,” they say, embrace it.
This unwavering faith in the prowess of central banks is seen with greatest clarity in the Euro zone. Observe the near universal belief that if only the Germans would get out of the way and allow ECB head Mario Draghi to implement a Federal Reserve style, open-ended, sovereign debt based QE program, the Euro zone economy and especially its equity markets would boom. Isn’t that what the recent sell-off in Euro zone equities is saying, post the disappointing news that the ECB has no plans for a such a QE program. To us it’s obvious why so many people think this way. It’s because recent U.S. economic data seems to confirm that the Federal Reserve’s unconventional, all-in easy money policies are working. And if such policies can work in America why not in the Euro zone too?
We reject this unwavering belief in central banks and their policies, outright. As the Austrians teach, easy monetary policies sow the seeds of their own demise. Flooding the economy and financial markets with money (and credit) created out of thin air – thereby distorting interest rates and price signals and, in so doing, creating malinvestments – is no way to create sustainable, economic growth and ever rising equity prices. Sure, at first glance, the malinvestments and attendant booming equity prices look like genuine growth and wealth creation. But they are not. As we explored here, they are instead unsustainable bubbles that turn to bust when the growth in those money supply (and credit) footings decelerate; i.e., when the easy money abates.
Today we posit some questions we think every equity investor needs to answer. What if the Austrians are right? What if unconventional, all-in easy money policies do not produce sustainable, economic growth? Contrary to the expectations of nearly everyone, what if the next big event is in fact a bust? What will that mean to the equity markets going forward? And then, what will that say about the credibility of central banks?
Well, if the Austrians are right, as we wrote here, given the size of this monetary experiment, one can expect a pretty big swoon in equity prices if not an ugly crash. More important though is the very real possibility that a bust could put a dagger in central bank credibility, severely damaging if not destroying the belief that unconventional, all-in easy money policies can goose the economy and equity markets anywhere near as effectively as in the past. Maybe, in real terms, not at all. Truly a problematic situation the next time central banks step in to “save” us. This we think is especially true if a bust occurs right here in America. Consider this: The former Federal Reserve Chairperson Ben Bernanke (and world renowned expert on the Great Depression) and his closest adviser current Chairperson Janet Yellen birthed the largest, most heralded, monetary support apparatus in world history and it was found unable to produce sustainable, economic growth, unable to float equity prices ever higher. Instead, it did the exact opposite. How many investors/speculators will then put their unswerving faith in any central bank, at least for the foreseeable future? We’re thinking a lot, lot less than today.
The Federal Reserve is in the process of exiting its grand experiment in unconventional monetary policy. QE3, a two plus year asset purchase program that at its peak injected an annualized $1 trillion of monetary fuel directly into the financial markets, has been wound down. What’s more, though “data dependent,” the Federal Reserve is signaling that it will begin raising interest rates in mid-2015. Of course, nearly every economist and nearly every investor expects this plan to work. Yes, a bit of transitional weakness in the financial markets – like we are seeing now – but after that, up and away.
We of course say not so fast. Given the fact that this exit means a further deceleration in the already decelerating trend in the rate of monetary inflation, the risks are growing that the next big move in the economy and the equity market is not up but down. In fact, if the banking system does not step up and fill the monetary inflation void being vacated by the Federal Reserve we think a bust could begin rearing its ugly head sooner than anyone thinks.
Enter gold, the much maligned, near universally hated asset. It’s presently on no one’s radar screen, except maybe the shorts. And why should it be. Thanks to supposed central bank infallibility, economic growth appears to be strengthening and the equity markets are in a major bull run. As James Grant, editor of Grant’s Interest Rate Observer likes to say, gold is the reciprocal of central bank credibility. We agree. Central bank credibility is at a peak, so gold is in the dumps.
Gold wasn’t always in the dumps. It rose right along with equities, indeed outperformed equities, from the 2009 Great Recession bottom – when central banks the world over first began implementing their unconventional monetary policies – straight through to its September 2011 top. The reason we think it did is quite simple. Coming out of the Great Recession, central bank credibility – their ability to “pull us out” of the Recession – was being severely questioned by investors. Thus, a good portion of investor money found its way into gold. That changed in 2011. Underwritten by these same central bank easy money policies, the as yet unresolved malinvestments of the Housing Bubble turn Credit Bust turn Great Recession, which were in the process of a healthy liquidation, were short circuited, while new, yet to be revealed malinvestments (we think the largest being anything in and around financial engineering) were starting to bear fruit. The belief took hold that the heroic policies of these central banks were finally working, finally restoring long term vitality to the economy. Gold then sunk while equities marched ever higher.
So here we are…
In our minds, get that bust in America (or even a real scare playing out in the U.S. financial markets in anticipation of a bust); then, get the near certain response from the Federal Reserve; i.e., another perhaps even bigger round of easy money policies, and maybe investors will be looking to overweight their portfolios with the reciprocal of central bank credibility instead of equities, forthwith.
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We forthwithed some folks
Central bank credibility is at all-time highs
Well, if you control everything, you can create the illusion of credibility. They create money, which is a total creation out of thin air. Credibility can be manufactured too.
Fake it till you make it is not working, and thats all the CB's can do now.
Since they legalized weed in DC, yes a all time high for all!!!!
As long as the FR reinvests it's bond holdings' interest in new bonds and S&P futures the charade continues.
I fucking LOVE GOLD!
And yes, you CAN eat it!
https://www.youtube.com/watch?v=IGYaFMFU63U
Why don't you guys ask Bill Buckler to contribute a post? That would be a nice antidote to the same old noise.
Buckler has folded The Privateer for good. Even he has a limit. I enjoyed and subscribed since the late 1990s and was well rewarded due to his efforts. No way I could have stood the pressure without his fortnightly newsletter bolstering my weak-willed efforts. I still have rolls of 1/10th ounce AGEs (5 ounces per roll) that cost under $350 per ounce. Hefting one of those now and then keeps my spirits up!
Yup. His was the only newsletter to which I ever subscribed. While fully understandable, I am sorry to be without his writings.
If he can't keep a little white ball from rolling between his legs, I hardly think he can be expected to write anything worthwhile about economics. Sheesh...
The author reminds me of F. Scott Fitzgerald.
Well dont chap!
happy turkey day Tylers, take the rest of the day off
and thanks for all you do
Bought a little today, beats Fiat, $1199
Gold Bitches.....I pick up pennies
I don't understand why they keep manipulating gold on the downside while losing more and more each day. Why did they not let it crash while holding the majority of Phyzz? At least then they would of had some sort of hand to play. I really can't believe they are being/have been so fucking dumb or am I missing something?
The vile swine at JPM have a huge position LONG in gold. There is your answer.
They are making money at whatever manipulations they are executing. If you can't find the profit, then you are not looking at the right part of the transaction/trade.
Fiat money needs confidence. Soaring gold prices kills confidence. Central Banks have full control of prices. Creating something out of thin air and using it to purchase goods and services. Manipulation of gold benefits the bigger picture and is done with at no cost. That said, buy it. The music will stop eventually.
Monday... the S starts to HTF. You heard it here first.
Yes I now have heard it hear first. This is only the 101st time I have I heard it somewhere first , only for it to wind up being false. Good luck !!
Do tell...
well if Nobody does much spending on Black Friday he may be right.. remember last year though, people spent for Christmas, refusing to give up their family and then clammed up right after for a long time after i might add.
they will never exit
Buzz they will NEVER exit. This is just like the BOE last summer. Jawboning, and nothing MOAR.
Look at food prices. They keep going higher and higher and the Fed. balance sheet is still growing. WTF?
You CAN'T have growth without demand<> You can't have growth without savings, and confidence.
You can't have growth on stagnant wages, and no manufacturing base. The United States will not survive as a service based economy. Our enemies know that.
Tick tock.
"Our enemies know that."
Who do you think our enemies are YC?
Of course our enemies know what's up. They're driving the boat.
The enemies do know it. That's why they have unleashed it in the first place.
Know who the real enemy is.
In the mid-70s, during one of Johnny Carson’s Carnac the Magnificent sketches:
Ed McMahon: “In your borderline divine and mystical way, you will ascertain the answers having never before seen the questions.”
Carson: “Central Bank Credibility, The Equity Markets, And Gold”
McMahon: [in a loud, booming voice] “Central Bank Credibility, The Equity Markets, And Gold!”
Carson: [Scowls at McMahon, tears end of envelope, blows on end to separate and reads aloud the printed question]
“Name something old, something borrowed and something blue.”
Central Bank credibility... ahahhahaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaahhhhahahahahahhahahahahah
thats a real knee slapper
Timmah is that you?
All time high....... quit, im wiping tears now.
Who writes this stuff? lol. What is this comedy hour? Does he altually get paid for writing this drivel? wow
>>>
...while gold is scraping multi-year lows.
<<<
No it isn't. Lows for recent years, perhaps.
Looking at Kitco's 1975-present graph, looks like exponential blow-off from 2007, double-topped (classic sign of a bust-to-happen) and is now falling back.
Just a much longer timescale than normal bubbles and busts (probably because last guys in were central banks who are not usually forced sellers).
If the grossly excessive levels of debt all around the world really do implode, gold is certainly going sub USD 350=00, and possibly sub USD 250=00.
The smart money will be the guys with cash, outside the banking system, small notes in a deep hole.
Watson
Your argument runs counter to all of known history regarding debt defaults and currency debasement, but we can agree to disagree.
Currency debasement:
A depreciation rate less than 4% a year is not going to hold up a gold price that went up 100's %,
and has only given back about a 1/3 from the top.
Debt defaults:
If these are widespread there will be an almighty scramble out of all assets into cash
(moreover, cash as cash - currency notes - bank deposits will be at serious risk).
'All assets' includes gold.
The gold rise was a bubble. It has burst. But unlike retail (usually the last in and borrowed to take the position),
the last in this time were central banks who can't really be sold out. So the bubble deflates slowly.
But deflate it will.
Watson
When debt bubble explodes gold will benefit like never before. 1st. The market has been bearish for 3 years with shorts piling on to push price down. Can they afford to hold those positions in that scenerio. 2nd rates will go up in bubblesplosion. That would make it harder to leverage shorts for little cost. 3rd physical is already tight, do you see more buying when confidence is being lost in FIAT, Keynsian debtsplosion. 4 do you want you money in a currency with no debt tied to its value or Dollars that need growth and QE to maintain the confidence it'd not risky? Debt bubble kills currency too. They need tax revenue to service bonds. Do they get that in contracting economy? Only option is print more..Fuel on fire! Stop over thinking it! And throw the charts and 19 70's references out the window.
Another manipulation denier. Manipulation of the gold price by bullion banks/central banks has been charged, proven, admiitted, over and over and over. This asshole should do some reading. Fuck this guy.
Stocks have a lot of room to fall to catch up with reality.
Dozens of little Chinese maids are vacuuming up $US intelllectual property.
Central bankers know all that! They are only concerned with the bubble, bust and "rake," everything else is smoke and mirrors.
Gold-silver ratio is around 72, when the historic average is 12-16.
To get to just 20, gold at 600 silver at 30, or, gold at 400, silver at 20.
How about gold at 2000, silver at... wait for it... 100.
Even if the ratio falls only to 60, and gold retains most of its value, falling to say 1000, silver would be 16.66.
Almost any way you slice it, silver under $20 an ounce is an outright BUY BUY BUY (cue asshat Kramer).
I don't know about you out there, but, once I felt the heft of just a 10 oz. silver bar, I was hooked. Been buying since $7/ounce and paid as much as 32/ounce, my basis is around $17, but, I long ago stopped looking at it in currency terms, but rather in ounces.
Again, maybe I'm just too dumb for my own good, but I've always felt that the real value of silver (or gold) is as collateral.
Some day, maybe, I'll look at a house with some acreage, show the potential seller a verified statement from a CPA of the number of ounces of silver I hold and then negotiate a mortgage. Since the real estate normally would be the collateral, the silver would be a substitute collateral, doubly protecting the seller from default. I would then negotiate terms in currency, like US$$.
Same thing with buying a car, farming equipment, etc. PMs are the ultimate base collateral.
I'm a dreamer, I know, but I will keep stacking, and, maybe even more importantly, being free of debt, I sleep like a baby every night.
How is the silver/copper ratio doing ?
It used to be reliable once also.
That ratio hasn't been relevant since 1963. Can't we put it to rest and use real benefits while explaining benefits.
and werent these ratios set by .gov not the free market. I thought England muffed its Gold/Silver ratio way back in the day and got drained of Au because of this.
You meant to say central bank incredibility, right?
Withe a Federal Reserve balance sheet of $4 to $8 trillion dollars and climbing what could go wrong.
And now the banks are doing the QEing. Back door style to run up their balance sheets.
Stuff every crevice with debt.
It would be a big boost to the economy to have gold double or triple.
Create a whole bunch of wealthy people.
Dumbest thing I have heard. Gold represents maybe 1% of wealth in this country, not much wealth created if it quadruples, also in that scenerio every other asset would be worth way less (crash) or your paying $50 (inflation)a bud light.
Dumbest thing I have heard. Gold represents maybe 1% of wealth in this country, not much wealth created if it quadruples, also in that scenerio every other asset would be worth way less (crash) or your paying $50 (inflation)a bud light.
Agree. When Gold starts to take off it means that the dollar starts to crater. Gold is only a way to maintain purchasing power. I don't think it will appreciate in realative terms much.
When all you listen to is people who say what you want to hear, suprise, all you hear is what you want to hear.....
Funny that...
How true---like all of the equity Bulltards thinking stawks only go up. Good perception!
"The former Federal Reserve Chairperson Ben Bernanke..."
Watch out for that 'person-hole' cover when you cross the street...
I stopped reading at "U.S. equities have become the asset class de jure".
Though I can see how it passed the spelling check.
Central Bank credibility is an oxymoron
The above article was an advertisement for the Fed and Central Banks all around the globe.
I read a very thoughtful article that essentially said that the USD will actually go up first as other countries start to implode and we're the best horse in the glue factory. After that the worldwide blow up (Japan, EU, emerging markets, etc.) it will then circle around to the US and folks will lose faith in the almightly dollar as a safe haven. That's when Gold starts to take off. Sadly, it will probably make the Great Depression look like a picnic. Interesting that the USD is rising right now...
Same dumb Goldbug/anti gold cases being made. Everybody should own some. It's a currency without debt tied to it and it's private. I have a message for Anti Gold guy Gold was at $1900 for 1 day it was only above $1,500 because Congress had a pissing match over Debt Ceiling. Do i really need to remind everyone of the highs and lows in Nasdaq, Dow, ect last 20 years. Stupid debate! The same factors fueling most markets are holding gold lower. We can agree QE isn't natural right? ZIRP isn't normal either, right? It's never been done here! No references on how it shakes out. Diversifying makes sense and acting like you know everything doesnt.
"Central bank credibility is at all-time highs"
He obviously doesn't read Zerohedge. Doesn't he realise that the Obama-Bernanke-Yellen socialist islamic atheistic axis is debasing the dollar and causing hyperinflation?
As the Austrians teach..
stopped reading there
The BRICS and especially China can pull the rug under the feet of the We$t anytime they want. Why can they load up (+)1500T of aurum through imports, while Germany, legal owners of lots of aurum supposedly helf by the fed, get 30T in like 2 years? Think about it. This is scripted, and for now it's the best of all worlds for the west and the east. China gets the gold (and thus the future power), while the West enjoys it's last (not necessarily so) glorious days. What the big players do has already been decided long ago (likely at the BIS).
The West’s bankers are anti-Capitalist.
In 2008 we saw Wall Street’s investment bankers try and bring down the Western financial system after spending many years building a financial house of cards on the shaky foundations of sub-prime and exporting this toxic waste around the world.
Then they escaped the natural consequences of a Capitalist system by pleading for bailouts from Governments and getting years of QE to repair their balance sheets in taters from years of incompetent trading.
The individual bankers that made the losses were never identified and removed from the system, leaving the banking industry still at the mercy of the idiots that had caused 2008.
Investment bankers are without a doubt anti-Capitalist.
The Central Banks have been trying to stop the creative destruction of a capitalist system since 1999, when the dot.com bust should have woken the finance industry up to its own incompetence and the realisation that modern markets are no more sophisticated than the Tulip markets of 1600s Holland. The new internet had caused exactly the same reaction as the new tulips in 1600s Holland.
Since 1999 the Central banks have been using loose monetary policy to ensure the financial sector never undergoes the creative destruction so necessary in Capitalism where the old, inefficient and incompetent get wiped out making space for new more efficient firms.
The creative destruction of recessions also removes bad debt from the system but this hasn’t been allowed to happen since 1999 and the world is now drowning in bad debts with a banking system chock a block full of the idiots behind the “Internet mania” and 2008. These idiots are now busy blowing bubbles with the Central bank QE money.
Central Bankers are without a doubt anti-Capitalist.
Now most of the anti-Capitalist Central banks are tapped out and can no longer stop the next recession, it will be the sum of all the recessions they have stopped since 1999.
Investment bankers are at last going to get a rude awakening into how Capitalism is supposed to work.
It is not going to be good.
What if unconventional, all-in easy money policies do not produce sustainable, economic growth?
Markets are the result of FED software applications. The charts can be produced at will. Economic growth depends on the definition that the bankers determine. It can have a sustained meaning by changing who the definition applies to and not what the definition is. By removing the masses of people from who the definition applies to now, before the physical removal of the population takes place, does not change the banksters economic growth in the future. Bankster economic growth can continue until the words economic growth become antiquated by the arrival of bankster utopia. Currently the words economic growth are words used as financial weapons against the populace by banksters. The war rages on M'Fers.