The markets got quite excited about incoming Fed chief Janet Yellen’s inaugural appearance in front of Congress this week. And I have to confess – through morbid fascination, I watched the whole thing over a live webcast.
As always, it’s not quite what she said that gee’d the markets up (especially gold) – it’s more what she alluded to.
And what she alluded to was that the economic recovery is by no means in the bag. That while it is her intention to continue with this tapering bluster, the fact is that the policy could be reversed at any time.
This all fits very neatly in with my personal prediction about what these powerful central banks are up to. I’ve said it before and I’ll say it again, quantitative easing (QE) is going nowhere.
Yellen’s speech was all about buttering up the banks – buttering up the markets – and most importantly, making sure the government has enough cash so they can spend with impunity.
It’s little wonder the markets – and specifically gold – reacted positively to the show. Yellen was telling them everything they wanted to hear. She knows that the Fed can’t take the amphetamines out of the punchbowl just yet. Not without causing an almighty mess.
Today, I want to look at the beautifully choreographed moves the Fed is making to keep the QE charade going, and what’s happening now that the markets have noticed.
The cat is out of the bag
Should we feel sorry for Yellen? I mean, she stepped into the Fed’s chair just as the painful effects of QE tapering were taking effect. The pains of the emerging markets are drawing closer to home as stock markets have tumbled over weeks.
Feel sorry for her? No chance. Yellen has been involved with Fed policy for many years. She was the vice chair for the last four years – and deeply involved in the Fed for at least ten years.
She’s very much a part of the broken banking system at the root of what’s wrong with the world.
I sometimes wonder why the Fed, and for that matter our own monetary policy committee, bother with the charade. The supposedly considered policy meetings, the well-rehearsed submissions to parliament, or the guys on Capitol Hill.
I mean, we all kind of know that what the central banks want to do. It’s what the planners always do – they want to pursue loose policies to artificially stimulate the economy and stimulate government spending. The only thing is, they have to make it look like they’ve got a plan and are acting prudently.
To make things look straight and above-board, they offer ‘guidance’ – you know, things like, “We will start to raise rates once unemployment falls to a certain level”. In the case of the States, it was 6.5%, in the UK, 7%. “We’ll tighten up policy just as soon as it’s safe to do so.”
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Don’t like the game? Just change the rules
And wouldn’t you know it, now that unemployment is just at the cusp of reaching its ‘guidance’ level, both these powerful central banks have come out and changed the rules.
Yes, this week, Mark Carney joined Yellen in moving the goalposts. Carney said words to the effect of: “Oh, don’t worry about all that guidance stuff we talked about in the past. Even if unemployment falls back to 7%, we’ll keep rates on hold for years anyway!” The Fed’s promise was similarly batted away.
You just know what the plan is here. Keep rates low. Keep the banks in clover and jolly up the markets, and if there’s some sort of a crash, then use it as an excuse to slap on more QE.
But the serious players in the financial markets are starting to see the plan. And that’s good for gold.
The market is nobody’s fool – gold miners soar 25%
Ever since this silly tapering talk hit the newswires, the effect on gold has been staggering.
Gold crashed. And that’s fair enough. After all, the multi-year rally in gold was in many ways down to all this unconventional monetary policy. Given the perception of QE to infinity, gold went stratospheric.
So, when the recent talk of reining in QE came to light, it took many of the gold bulls by surprise. Hmm, didn’t see that one coming!
But right now, the gold market is back on form. Having spent Christmas in the doldrums, gold is trading back over $1,300. That’s up about 8%. And as for the miners – they’re up nearer 25%. Good job I recently decided to top up on my miners.
This is all down to the central banks reaffirming their intent to pursue ultra-loose monetary policy. It’s what I like to call the ‘tapering con’. You’ve heard it from me before – what it essentially means is that the central bank’s cash boosters are going absolutely nowhere.
Of course, they don’t make it easy for you. They don’t come straight out and say it. They shilly-shally around pretending they’re pursuing one policy, then back down and go the other way.
But I believe the markets are waking up to the ruse. And so are we at The Right Side.
It’s business as usual at the central banks. So, place your bets accordingly.