Central Bankers on the Brink

Posted On Mar 11, 2016 By Dave Gonigam

  • Janet Yellen decides how much credibility she can afford to sacrifice
  • Yellen’s European counterpart went all out, no one impressed
  • Your best defense when confidence is lost in central bankers, in one word
  • A stellar one-month stock rally… but what about earnings?
  • Will California abandon the useless daylight saving time?
  • A risk-on day… your best defense against the elites, no matter who they are or what their motives… the perils of drinking before writing to The 5… and more!

At some point, you have to bow to the inevitable. “By now,” says Jim Rickards, “it’s clear that Janet Yellen will not raise interest rates when the Fed meets next Wednesday.”

Yes, we know. For nearly three months, Jim said the Federal Reserve had to preserve its credibility by raising the fed funds rate in March — a follow-up move to the increase in December.

Jim’s in Switzerland this week, presenting to a group of the biggest and most sophisticated institutional investors hosted by a leading Swiss wealth manager. But he’s still keeping a pulse on events back home. And those events have clearly shifted within the last couple of days.

“My expectation was that the market rebound since Feb. 11 would give the Fed a green light to raise rates,” he reminds us. It’s been an impressive rebound from the minor meltdown that began as soon as the calendar flipped to 2016…

“It seems the Fed was more spooked than I expected, and they are literally afraid to raise rates for fear of another meltdown.”

No doubt: Traders in futures tied to the fed funds rate have been pricing in a 0% probability of a rate increase next week.

Hell, this morning they’re saying there’s a 4% probability the Fed will cut back to “near zero” rates — reimposing the seven-year state of monetary emergency that was lifted only last December!

This is Janet Yellen’s dilemma: Which is worse for the Fed’s credibility? Pausing the rate hike cycle she began only three months ago? Or massively violating market expectations reflected in the chart above?

Markets don’t like surprises. She’s opting for the less-worse choice and pausing. The Fed’s credibility will be torn only to shreds, not bits.

But then what? “All that happens is the rate policy debate now shifts from March to June,” says Jim.

“At that point, they will either have to raise rates (causing a train wreck with market expectations) or wait again. And at that point, we’ll be into election season and rate hikes will become difficult for political reasons.”

Speaking of damaged credibility, how about the market reaction to the European Central Bank’s “bazooka”?

As we noted yesterday, the ECB over-delivered on market expectations — doubling down on both negative interest rates and “quantitative easing.” Yet European stocks took a spill by the end of the trading day… and the major U.S. indexes were flat once the closing bell rang.

“Markets brushed off the efforts,” says the Dow Jones newswire, “raising questions about whether [the ECB] and other central banks still have the tools to bolster weakening growth and inflation after years of easy-money policies.”

We’ll answer the question right here and now: They don’t.

“Evidence is beginning to accumulate,” says Jim, “that negative interest rates produce the opposite effect that central bankers intend.”

We’ve already told you how negative interest rates are backfiring in Japan, mere weeks after they were imposed. In theory, negative rates spur people to borrow and spend, rather than lose money keeping their savings in the banks. But in reality, everyday Japanese have been pulling their cash out of banks… and stashing it home safes, of which there’s now a shortage.

Makes sense: Negative interest rates are a desperate measure, a signal of trouble ahead. What do people instinctively do when they sense trouble ahead? They sock away cash for a rainy day. Besides, why go out and spend your money if deflation is a bigger risk than inflation?

“The effectiveness of QE is also being called into question by recent academic research,” Jim adds.

When a central bank implements QE and buys government bonds, it drives up the price of those bonds… and drives down the rates on those bonds.

“The idea,” Jim explains, “is that if long-term rates are lower, investors will seek higher yields elsewhere by bidding up the prices of stocks and real estate. These higher prices in stocks and real estate create a ‘wealth effect’ that makes investors feel richer. Based on this wealth effect, investors should spend more money and stimulate the economy.”

That’s the theory, anyway. In practice, the Fed engaged in QE on and off for six years, to the tune of $4.5 trillion… and economic growth has remained stuck in low gear, barely 2% a year.

“The entire edifice of the Federal Reserve and the dollar rests on a single point of failure — confidence.”

So Jim writes in his latest book, The New Case for Gold — and talk about auspicious timing. Whether in Europe or Japan or the United States, confidence in central bankers is being lost.

Not coincidentally, gold put in a six-year low at $1,050 late last year. It’s already up more than $200 since then. As Jim said in this space last month, gold is no longer acting like a commodity or an investment. It’s acting like money. “It is competing with central bank fiat money for asset allocations by global investors,” he said.

“That’s a big deal because it shows that citizens around the world are starting to lose confidence in other forms of money such as dollars, yuan, yen, euros and sterling.”

Chances are if you read us regularly, you know that story. But did you know about…

  • … Jim’s “mystical” gold buying formula? Use this formula and you’ll know how much to buy. “Whether you have $5,000 or $5 million,” says Jim, “follow this simple formula and you’ll be more than ready to weather the coming storm”
  • Or about China’s “gold warfare” plan? If you have any traditional stock and bond investments, you must be in the know
  • Or about the No. 1 mistake people make when they buy gold?

Jim talks about it all in The New Case for Gold — due for publication April 5. If you have a valid U.S. mailing address, we’ll send you a free copy signed by Jim — as long as you can spot us the $4.95 shipping and handling.

You’ll also have the chance to listen in on an exclusive intelligence briefing drawn from the information Jim is picking up in Switzerland. “A major event will soon take place that is going to shake the very foundations of the gold markets,” he says — and you’ll be among the first to know.

Get your free hardback copy right here. There’s no obligation. Not even one of those long videos to watch. Sign up now and we’ll ship it to your door as soon as it comes off the press.

As the week draws to a close, markets are in risk-on mode, and for no obvious reason. The Cleveland Browns waiving Johnny Manziel? Chatter that Condoleezza Rice might run for president as an independent?

In any event, every major U.S. stock index is up at least 1%. Small caps are outperforming blue chips. The S&P 500 has powered past resistance at 2,000 — at last check, it was 2,016.

Treasuries have been knocked back, sending yields higher. The 10-year note is up to 1.98%, the highest since late January.

Gold’s been knocked back to $1,258. It’s been oscillating near $1,260 all month.

“The gravity of falling earnings is too powerful to resist,” says Dan Amoss of our macro research unit.

Yes, the S&P 500’s rebound off its lows a month ago today is impressive. But “fourth-quarter earnings are nearly in the books,” says Dan. Official 2015 earnings will come in around $86 for the S&P 500 as a whole.

“So the S&P 500 now trades at a nosebleed P/E multiple of 23. Such a high multiple would be justified if earnings were coming out of a cyclical trough and about to explode higher in an early-stage economic expansion.

“But there is no evidence of that scenario in sight. Rather, with this economic expansion coming to a close, there is much more downside to earnings. So many of the balance sheets I review are bloated with excess inventories, plant and equipment and goodwill. When balance sheets are bloated late in an economic cycle, it’s a classic warning sign that earnings are heading lower.”

Meanwhile, “even if the Fed elects to not hike rates next week, odds favor a ‘Sell on the news’ reaction,” Dan goes on.

It comes back to that second chart we shared today — the fed funds futures market pricing in a 96% probability the Fed will leave rates alone next week.

“The market has screamed higher on expectations that the Fed will not hike rates in March. So if the Fed doesn’t hike rates, a risk-off trade is much more likely than a continuation of the rally.”

If California is a trendsetter, we might soon be rid of the bane of daylight saving time.

“I heard some complaints last year from some of the senior citizens [in my district] and their care providers, who say this one-hour difference really impacted their lives,” state Assemblyman Kansen Chu (D-San Jose) tells The Sacramento Bee.

He did a little research and found what we did a while back: Daylight time does not help save energy. What’s more, the shift is correlated with an increase in workplace accidents, to say nothing of heart attacks.

So Chu’s submitted a bill that would take California off daylight time — which would put the Golden State in sync with next-door Arizona. We’ll see whether it gets anywhere.

“You better do some homework,” a reader writes after we casually observed yesterday the banks want nothing to do with marijuana businesses.

“The worldwide drug trade is around a $500 billion business. How do you think they launder the money?”

The 5: Heh, excellent point — and one we’ve slyly made ourselves every time we bring up HSBC and its cost-of-doing-business fine for laundering money on behalf of Mexico’s Sinaloa cartel — a sweetheart deal cooked up by Loretta Lynch before she became U.S. attorney general.

“Great question,” a reader writes after we said yesterday that even if someone is pulling central bankers’ strings behind the scenes, there’s no guarantee they know what they’re doing either.

“No, there’s no guarantee. Just a defensible theory: The private banking elites at the head of the food chain are the really smart money. It seems unlikely they landed on top of the mountain by falling there, or they don’t have a game plan.

“Jim Rickards’ insights are wonderful. He convincingly points out that the Fed is now broke as well as out of ammo! So we have to wonder where all the money keeps going. Perhaps it’s flowing to the same place it always seems to end up: private banks. Central bankers may just be the plumbers — and their task is simply to transfer our wealth to the cartel at every opportunity.

“Is it possible that this is all one big accidental mess? Perhaps. Or could it be planned theater where the actors put on a show while the executive producers line their pockets? Ya gotta wonder…

“Thanks again for all the great work you do! Agora Financial is a terrific resource.”

The 5: We may never know the answer to the question. But whichever it is, the remedy is the same.

“Sorry, Dave, apparently, I didn’t make the ‘if’ pronounced enough,” writes a fellow whose note we published yesterday. ”It was supposed to be tongue-in-cheek about ‘I have no problem with a guaranteed retirement account program’

“It was late, my wife was bugging me to come to bed and I had a few drinks under the belt. Of course I would be dreaming!

“I assume Social Security would not come into play with the GRA plan and we would have our money confiscated for two different programs for our retirement, and the government would have full control over both.

“Again, love The 5.”

The 5: You’re writing to us after drinking?

Considering our oft-depressing content of late, we’re half-tempted to consider doing likewise…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. “The price [of gold] is a reciprocal of the world’s faith in central bankers,” says the bow-tied Jim Grant of Grant’s Interest Rate Observer.

As we said above, that faith is evaporating here in 2016. The Federal Reserve looks clueless. The European Central Bank’s “bazooka” looks ineffective. And the price of gold is up nearly 25% in less than three months.

Jim said gold was at or near a bottom six months ago. Now he’s making The New Case for Gold in a book of that title. You can get a signed copy FREE, as long as you can cover our shipping costs. Be among the first to claim yours when you click here.