Global central banks have promised to pump an
unprecedented amount of money into the system. They are trying to mollify the
effects from a global contraction in GDP and the growing likelihood of a war
between Israel and Iran.
Bloomberg recently reported that Israeli Prime Minister
Benjamin Netanyahu told U.S. Defense Secretary Leon Panetta on August 1st
that "time is running out" for a peaceful solution to Iran's atomic
program. The Tel Aviv-based newspaper Haaretz also
reported on August the 10th that Netanyahu and Israeli Defense Minister Ehud
Barak are considering bombing Iran's nuclear facilities before the
presidential elections in the U.S. In addition, Shlomo
Brom, a former Israeli army commander said the
nation is now actively planning civil-defense measures including implementing
a text messaging system to alert the public to missile attacks, mass
distribution of gas masks for their population and bomb-shelter drills for
students returning to the class room, the newspaper Yedloth
Ahronoth reported on August 15th.
A war in the Middle East would send oil prices soaring
towards $200 per barrel, which would immediately usher in a severe worldwide
recession. Central bankers are preparing now to help ease the pain at the
pump. Unfortunately, their strategy to lower oil prices is to massively
depreciate their currencies. Therefore, that will only further exacerbate the
problem by sending energy prices even higher.
But even if another war in the Middle East can be
avoided, the global economy continues to suffer and that will cause further
central bank intervention. U.S. regional manufacturing surveys released this
week indicate a significant deterioration in economic activity is now
occurring. The Empire State Manufacturing Survey dropped 13 points and fell
into negative territory for the first time since October 2011. And the Philly
Fed Survey came in at -7.1 for August, which was the fourth negative reading
in a row.
Meanwhile, S&P 500 companies are reporting Year
over Year revenue growth that is barely positive and is predicted to post a
negative 0.7% in the third quarter. China's industrial production has now
contracted for seven quarters in a row, and Japanese GDP fell sharply to 1.4%
in Q2 from 5.5% in the first quarter. Europe is faring even worse as Italian
GDP dropped 2.5% YOY and their public debt jumped to a record 2 trillion
Euros. French GDP growth came in at zero and German GDP growth fell from 0.5%
in Q1 to just 0.3% in the current quarter.
Additionally, unemployment rates in Europe and the U.S.
continue to climb. Portugal's unemployment rate hit a Euro-era record 15% and
Spain's unemployment rate rose to 25%. The Federal Reserve has a mandate to
bring down our 8.3% unemployment rate and the European Central Bank feels
that the rising number of those without work is a deflationary threat, which
goes against their mandate of providing stable prices as well.
The stock markets in Europe and the U.S. have been
rising on the promise of more central bank easing and European bond yields
have come down in anticipation of those ECB purchases. "Help" has
been guaranteed by ECB head Mario Draghi in the
form of giving the European Stability Mechanism a banking license to purchase
insolvent government debt. And Boston Fed President Eric Rosengren
is urging the U.S. central bank to commit to an unprecedented amount of money
A growing possibility of war in Iran and the worsening economies
in Europe and the U.S. have caused central banks to prepare investors for
another round of money printing. The time has now arrived for the Fed and ECB
to either follow through on their threats or to sit back and watch as equity
shares plummet and bond yields in Europe soar. If central banks launch the
assault on their currencies, I expect gold and energy prices to increase
sharply. In that case precious metal and energy shares should fare the best.
However, in the unlikely event that the month of September ends without any
action on the part of the ECB and Fed, I would expect a significant
retracement in all global markets and especially in commodity prices.