Monetary Policy

You’re doing yourself a disservice if you don't have a basic working knowledge of what, say, a volatility surface means. We're not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff. Ignorance is not bliss...

The Fed's Bill Dudley is out on the speaking-circuit today and dropped some clangers during the Q&A. Initially proclaiming that monetary policy should be independent from politics he then admitted that "The Fed can't be completely walled off from politics." Then he spooked stocks with his comment that "actual inflation is not needed for confidence on the 2% goal," or roughly translated - we'll hike no matter what the data says...

We can however state with confidence that the bubble will eventually burst and that the greatest monetary policy experiment of the post WW2 era will fail – in all likelihood quite spectacularly. So we have every reason to remain long term bullish on gold and gold-related investments. Moreover, by looking closely at past lows of significance we have hopefully been able to provide a bit of a road map in case the recent low does indeed represent a major pivot point.

Brazil's economic recession is likely to be deeper and longer than Fitch's earlier expectations and its performance has diverged materially from those of its rating peers. Medium-term prospects also look weak compared to peers and most other large emerging markets. Fitch forecasts that Brazil's economy will contract by 3% and 1%, respectively in 2015 and 2016 before recording modest growth in 2017, with risks skewed largely to the downside.

The “smart money” and by that we mean the more informed, aware and prudent investors and institutions internationally continue to have an allocation to gold and or add to existing allocations. The less informed continue to not understand or disparage gold and focus almost solely on gold’s short term price action rather than gold’s long term attributes as a hedging instrument and a safe haven asset.

Aside from Chinese monetary data, it was a relatively quiet session in which traders were focusing on every move in the suddenly tumbling USD, and parsing every phrase by central bankers around the globe, as well as the previously noted piece by Fed mouthpiece Jon Hilsenrath which effectively ended the debate whether there will be rate hikes in 2015. Adding to the overnight froth were ECB speakers first Ewald Nowotny and then Spain's Restoy, who said that euro-area core inflation "clearly" below goal, remarks which were immediately assumed to signal increasing pressure to boost stimulus, and which promptly translated into even more weakness in EUR and equity strength, pushing US futures up about 15 points from yesterday's close.

For anyone curious to know whether German FinMin Wolfgang Schaeuble had reconsidered his stance on the need for ultra accommodative policies now that the Volkswagen emissions scandal looks set to present a very serious threat to Germany's economy, the answer is "no."

Way back in June we documented the “curious” case of Sweden’s broken QE and when we used the term “broken”, we didn’t just mean that inflation expectations weren’t moving higher. We meant that bond yields were rising as the adverse impact from the illiquidity "premium" surpassed the price appreciation benefit from frontrun central bank buying. Fast forward three months and Sweden looks set to “solve” the broken QE problem and by extension ensure it can stay in the currency war games by expanding the list of eligible assets to muni bonds.

“In a world where the value of paper money is affirmatively aimed at being degraded by central bank policy, it’s kind of surprising to me that gold can’t catch a bid...I like gold. I believe its under-owned. It should be a part of every investment portfolio, maybe five to ten percent."

Since inception in June 1998, UBS' Managed High Yield Plus Fund survived through the dot-com (and Telco) collapse and the post-Lehman credit carnage but, based on the press release today, has been felled by the current credit cycle's crash. After 3 years of trading at an increasingly large discount to NAV, and plunging to its worst levels since the peak of the financial crisis, the board of the Fund has approved a proposal to liquidate the Fund. While timing is unclear, this is the worst case for an increasingly fragile cash bond market as BWICs galore are set to hit with "liquidty thin to zero."

A confluence of circumstances have conspired to make asset allocation a somewhat vexing task these days. The so called “tricky trinity” is comprised of the following three factors: decelerating global growth, the absence of a policy put, and risk premia offering but a limited buffer. For HSBC, this means "remaining highly risk averse" going forward.

One of the primary arguments by the more "bullish" media is that the current setup is much like that of 2011 following the "debt ceiling" debate and global economic slowdown caused by the Tsunami in Japan. While there are certainly some similarities, such as the weakness being spread from China and a market selloff, there are some marked differences.

No professional or successful investor every bought and held for the long-term without regard, or respect, for the risks that are undertaken. If the professionals are looking at "risk" and planning on how to protect their capital from losses when things go wrong - then why aren't you?  Exactly how many warnings do you need?

For the past two weeks, the thinking probably went that if only the biggest short squeeze in history and the most "whiplashy" move since 2009 sends stocks high enough, the global economy will forget it is grinding toward recession with each passing day (and that the Fed are just looking for a 2-handle on the S&P and a 1-handle on the VIX before resuming with the rate hike rhetoric). Unfortunately, that's not how it worked out, and overnight we got abysmal economic data first from China, whose imports imploded, then the UK, which posted its first deflation CPI print since April, and finally from Germany, where the ZEW expectation surve tumbled from 12.1 to barely positive, printing at just 1.9 far below the 6.5 expected.

Fed chief Janet Yellen’s hesitations and the market turmoil since August seem to validate that it is impossible to stop the accommodative monetary policy, unless you accept that doing so would trigger a new global crisis. The Fed is aware that raising interest rates too fast and too high could have the same effect as pressing the nuclear button. The whole system could collapse and it cannot be taken for granted that the central banks would be able to extinguish the fire this time. Their strike force has weakened because their balance sheets are exposed to market fluctuations and their credibility was seriously damaged because the measure they have taken have failed to strengthen the economy.