The FED has not followed through on their numerous promises of a rate increase
that Yellen and other FED officials have made over the past several years.
She spoke about purchasing assets of private companies and also mentioned that
the FED could modify its inflation target.
Investors will most likely purchase shares in companies whose assets have
been purchased by the FED since it is likely that Congress and federal regulators
would treat these companies as "too big to fail." Federal ownership of private
companies would also strengthen the movement to force businesses to base their
decisions on political rather than economic considerations.
Politicians will never restore sound money policies unless forced to do so
by either an economic crisis or a shift in public sentiment,
not because a crisis leaving Congress with no other choice!
The failure of the FEDs' eight-year spree of money creation through quantitative
easing and historically low interest rates have failed to "restart" the failing
economy. They continue to add new tools to "artificiality inflate" the stock
bubble. They will stop at nothing as they discuss implementing NIRP.
The collapse of the "fiat system" will not only cause a major economic crisis,
but also the collapse of Capitalism as we knew it. Congress has also failed
the American people and its' economy by refusing to consider meaningful spending
cuts, it will not even pass legislation to audit the FED.
The FED has lost even more of its 'Credibility'!
Governor Fischer has lost all his credibility. He predicted four rate hikes
at the beginning of the year for 2016. His speech on August 21th, 2016 on the
slowdown in productivity: "We just don't know." Last week, he was down to two
rate hikes for the year.
The perceived first takeaway on the meeting at Jackson Hole was the one that
made all the headlines. She is joining the "chorus" of FED officials who have
been saying it is time for another rate hike: "Indeed, in light of the continued
solid performance of the labor market and our outlook for economic activity
and inflation, I believe the case for an increase in the federal funds rate
has strengthened in recent months." This appears to be the FEDs' new "mantra".
She added, "And, as ever, the economic outlook is uncertain, and so monetary
policy is not on a preset course. When shocks occur and the economic outlook
changes, monetary policy needs to adjust. What we do know, however, is that
we want a policy toolkit that will allow us to respond to a wide range of possible
conditions." The FED now calls that "forward guidance." In other words, they
just do not know!
She did mention that QE purchases could be broadened to other assets. The
real FED FUND rate has been trading deeply "negative" since 2008.
Negative Interest Rate Policy (NIIRP) Is Dangerous!
Yellen has now established the fact that it is legal for the FED to authority
the use of NIRP. She has now put it into her tool box and is developing specific
plans for implementing it.
The consensus is dangerously wrong by relying on flawed theory and flawed
policy assessment. NIRP draws on fallacious pre-Keynesian economic logic that
asserts interest rate adjustments can ensure full employment. The consensus
is dangerously wrong, resting on flawed theory and flawed policy assessment.
A negative nominal rate on money being held by your bank, can be thought of
as a form of a tax on deposits that lowers "real wealth" and negative wealth
effort on consumer spending and "aggregate demand".
Conclusion:
Gold in your portfolio:
Investors should consider doubling their gold allocations amid negative interest
rates. The long term effects of these policies are unknown, but I see discouraging
side effects: unstable asset price inflation, swelling balance sheets and currency
wars to name a few. Looking forward, government bonds are likely to have limited
upside, due to their low-to negative yields
Amid higher market uncertainty:
We have entered a new and unprecedented phase in monetary policy. Central
Banks in Europe, Japan and soon in the United States have implemented Negative
Interest Rate Policies (NIRP). Investors, including long term investors, should
assess the implications of holding bonds with negative return expectations
on portfolio composition and risk management.
My analysis shows that Investors will benefit from increasing their gold holdings
up to 2.5 times, depending on the asset mix, even under conservative assumptions
for gold. In addition, we expect that demand for gold as a portfolio asset
may structurally increase due to NIRP.
The only "recovery" that we have experienced has been an artificially inflated recovery
on Wall Street. For the rest of the country, our long-term economic decline
continues.
Secular investors should start turning their attention to commodities and
precious metals. Golds' bull market is far from over. The volatility in gold
in recent days is principally due to sharp fluctuations in the expected path
of US rates amid surprises in the macro data and diverge ring comments from
FED officials. The recent consolidations were fueled by profit taking will
end shortly. The next FED meeting will result in more dovish FED speech resulting
in new and more purchases.
When investors realize that they are holding potentially worthless currencies,
the big money will rush into the precious metals sector. Consider this, the
total world's investment holdings in silver are a paltry $50.8 billion, compared
to $3.04 trillion in gold, as shown in the below.
Did you know that the hedge funds alone manage around $2.7 trillion, according
to Barclay Hedge data? Even if a small portion of the trillions sloshing around
out there, decides to enter into silver, the "white metal" will shoot through
the roof.
The difficulty in identifying "asset bubbles" is directly related to credit
expansion. The problem is not the asset bubbles, whether they be in stocks,
housing or student loans. This is merely a symptom of a deeper condition. The
real threat is the underlying credit expansion by easy monetary policies that
has created these "asset bubble" problems in the first place.
