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Inflation - we MUST achieve it Print
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Monday, 04 November 2019 12:44


Inflation "we MUST achieve 2%" (3-4-5-6%....)

 Stock markets pop first - Gold and Silver next.


Last Thursday, the day after the US Federal Reserve shaved interest rates again, this was the result...

Lower rates and more liquidity, what more does a stock market need?

The Dow Jones 30 hit a new all time high with the other major stock indexes snapping at it's heals.

And the fundamentals?

Technicals are great, I would never trade without them, but when the charts align with current Trumponomics, and recent history, it's a perfect combination.

Powell confirmed it all this week. On Wednesday the FOMC agreed with market expectations and trimmed another 1/4 point, bringing US rates to 1.75%. Stating "we must achieve 2% inflation", he also said "we see no risk of inflation...running away".

At the press conference, Fox news asked Powell, "When are rates likely to go back up?".

Powell replied, "We just touched 2% for a couple of months then it dropped back (to 1.8%). We would need to see a really significant move up in inflation, that's persistent, before raising rates"

Inflation is the only tool left to keep the show on the road.

QE was designed to reduce interest rates to bring back growth, save the banks and fuel the feel-good factor of rising house prices to get us all spending again.

It didn't work as designed.

The massive increase in QE and debt (it's now $23trln in the US) saved the banks short term, but low interest rates resulted in low profits, strangling them over the long term.

QE did achieve inflation in real estate and stock markets, but it increased housing costs. That killed off the feel good factor.

Consumers struggled with the cost of living rising faster than income. The already rich get richer as everyone else gets poorer....

Then the US federal reserve decided to attempt normalisation. QE was wound down and tapering began. Regrettably, that resulted in the next banking crisis.

Demand for the US$ in world trade is immense. Despite the global down turn, trade needs more and more dollars just when the Fed was cutting the supply with it's QE tapering.

This summer saw several liquidity problems in the interbank market. Banks wouldn't or couldn't lend to each other, they didn't have access to enough dollars.

Consequently the Fed stepped in, increased liquidity and effectively restarted QE by buying T Bills instead of bonds.

Non Farm payrolls

The numbers came out much better than expected +128k, instead of an expected +90k.

I'm sure these figures are never massaged, but does this set up the expectation that the US economy is still growing and confident?

Powell's Fed stance on inflation suggests they are ready to let inflation rip. The last few rate cuts are the fuel. But it'll be stagflation - plenty of inflation but no real growth.

Problem solved, inflate away QE and worry about real inflation later, much later.

Which markets to trade...

Short term, stock markets love low interest rates and more QE. They are already popping to new all time highs.

These are also almost perfect conditions for Gold and Silver to soar.

Almost perfect. It'll be helped along when the US$ weakens with these interest rate cuts. Right now the Forex market is shrugging off a dollar crisis, but give it time to catch on to even lower interest rates that are certain follow.

Also the unexpected - perhaps there will be a major monetary crisis that hits stocks and bonds, or tensions with the Russians or Chinese will go beyond a war of words.

Once (if) inflation rises above 2% for a few months, precious metals will be well on their way north. Gold currently hovering at $1,500, $2,000 could be it's first target. .

Silver is just $18 with the potential to run beyond its 1980 and 2011 highs of around $50. Could we see these levels again?

Of course we could, it's happened twice before.



From the blog

An opposing view

An opposing view

Conventional wisdom is a wonderful thing, particularly for herding creatures. In our herds we are social animals and so agreeing with others' points of view gives us the group acceptance that we crave.

It's safe, it takes no independent thought, it's comfortable and easy to go along with the majority opinion.

Questioning, by applying thought to the reality of what is actually happening, and stating those thoughts, risks being labelled a heretic and an outcast. Now, feeling unsettled, the herd is now longer safe and comfortable for us.

Those in control of "herd think", are those who shout loudest and the most often. And so it is with the US Federal Reserve, who have told us there is no alternative to their current policies in achieving economic growth.

They want us to spend our savings and then borrow and spend, borrow and spend more. The goal, they tell us, is so the economy will not collapse but will grow again and we will all achieve Nirvana.

This became the conventional wisdom and has lasted since at least the GFC in 2008.

Lower, then negative, rates will ensure we can spend even more than we can borrow. The banks will even pay us to borrow - as long as we spend of course.

Reality is turning out a little differently.

Bank of America recently published a chart showing what happens when savings rates drop below 4%. The opposite of what the Federal reserve were telling us they expected.

Spending does increase as rates fall, but this effect changes below about 4%. Consumers then worry about their future. Ever lower rates then reduce spending and increase savings, as BofA quote:

As low growth & inflation make low-risk-asset income scarce (e.g. from government bonds), households are forced to reduce consumption and increase savings in order to meet retirement goals.

Forced saving further depresses demand in a vicious cycle.

It's a doomed loop as the full article here explains.

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