In the 2011 film Take Shelter, Michael Shannon plays Curtis, a blue-collar everyman who begins to suffer from terrifying nightmares and hallucinations. The family dog attacks him. Storms rain down thick discoloured liquid, like motor oil. Even as he worries about his mental state (it transpires his mother was diagnosed with schizophrenia at a similar stage in her own life), Curtis starts building a storm shelter in the back garden of his Ohio home. He feels compelled to. Are the hallucinations real? Are they visions of what is to come? Are Curtis’ fears justified? Are his wife and deaf young daughter safe? (You’ll just have to watch the film to find out!)
We are now some five years and counting into the financial crisis, or the ‘long emergency’ as I sometimes call it. There is no light at the end of the tunnel. Banks have been seemingly shored up and bailed out by quantitative easing (QE), but all sorts of toxic nasties continue to pollute their balance sheets, which is why they’re reluctant to lend. Zero percent interest rates – the lowest in history – tell you all you really need to know.
Economies remain on their knees. Government finances throughout the Western economies are shot, so any further bail-outs are out of the question. The eurozone is still a mess. And yet there are plenty of investment advisers out there who see the mythical green shoots, and of course several stock-market indices are close to, or at, new all-time highs. So what gives?
Three reasons are commonly offered for the dramatic sell-off in gold this year: more economic certainty, lower inflation pressure and a less accommodating Federal Reserve. There are hopes (or fears) that hedge funds have been inspired by a stronger dollar to renew their selling of (paper) gold, ie, gold futures, which are rarely held for delivery of the physical metal but ordinarily settled for cash.
Others talk darkly of a conspiracy to depress the price of gold. Certainly, recent talk of tapering in the Fed purchases of assets has dominated sentiment in the markets, and caused a substantial blow-out in the yields of US Treasuries and other bonds.
But the reality is altogether different.
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They can’t undo all this money printing
Ben Bernanke is not Paul Volcker, the only Federal Reserve chairman in my lifetime that I believe has ever done the difficult thing for the sake of the US economy. Volcker broke the back of inflation in the early 1980s by raising interest rates. Note that all his successors have taken to slashing US interest rates whenever the markets even threatened to wobble.
Easy monetary policy has been standard operating procedure at the Fed for well over a decade. The Fed badly misjudged the market when it hinted at slowing its money printing programme in the mildest terms. It didn’t even come close to talking about reversing its policy of securities purchases.
So the Fed now finds itself boxed into a corner. Indeed, one Fed governor went as far as to remind the market that if inflation continued to undershoot the 2% target, money printing would be increased relative to its previous target. Any Fed escape from QE may now be almost impossible.
Funding trillion-dollar deficits requires more monetisation – covering deficits with the printing press. Without further QE, the United States will find it impossible to service a national debt of some $17trn. Let us not even think about what’s required to service the even more monstrous burden of off-balance-sheet liabilities (estimated by one observer at $164trn). The Fed cannot afford for market interest rates to rise much further than they already have.
Whether or not Bernanke continues at the Fed, and whoever replaces him, is irrelevant. Fund manager Tony Deden points out that America’s promises alone “are larger than the collective wealth of the nation. Furthermore, the country has no capacity to service such debt at zero interest rates, never mind anything rational. This is the kind of hole from which revolutions are made.”
Economic growth is an illusion
The apparent strength of equities is, in my view, solely a function of QE ‘lifting all boats’. Tony also points out, for example, that in America since 2001, more than 56,000 manufacturing facilities have been shut down as America ‘hollowed out’ its productive economy by outsourcing and offshoring.
America’s problems are not unique – they are shared, in some instances even more grievously, by the UK. Without further QE, there is the risk of social breakdown as the population begins to appreciate that social promises they have been given, along with their pensions, are going up in smoke.
There is no real economic growth – even assuming we can trust government statistics, which we can’t. Take, for example, the UK government’s deeply suspicious-sounding claims that the Olympics generated £9.9bn in “extra” business for UK firms – claims that were devoid of almost any hard evidence. “Seeing” evidence of recovery is entirely understandable: perhaps human beings are hard-wired to be optimistic. But when it comes to protecting our hard-earned capital, realism is the best policy.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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