GOLD AND CENTRAL BANKS

This is really an article about confidence or the lack thereof in central banks.

One might ask, is it just being sage or fearful to hedge one's own policy? We'll leave that up to you, but that appears what central bank policymakers are doing, hedging their own policies.

As pointed out in this article central banks up to about 2010 were selling gold. Remember, it doesn't yield anything. We recall a bit earlier when the German central bank sold a bunch of it claiming it had done so just for that reason. Now it seems things have changed a bit. They want to own this non-yielding asset. Apparently, they don't read MSM.

The author, Frank Holmes, has been running funds related to gold for more than a generation. This could be a positive or negative, depending on how one slices it. Here's how we slice it: We own gold.

Beginning in 2010, central banks around the world turned from being net sellers of gold to net buyers of gold. Last year they collectively added 483 tonnes—the second largest annual total since the end of the gold standard—with Russia and China accounting for most of the activity. The second half of 2015 saw the most robust purchasing on record, according to the World Gold Council (WGC).

Not every top bank is a net buyer. The Bank of Canada has liquidated close to all of its gold, mainly in coin sales, while Venezuela is in the process of doing the same to pay off its debts.

But most of the world’s central banks right now are accumulating, holding and/or repatriating the precious metal. As of this month, they reportedly owned 32,754 tonnes, or about 17.8 percent of the total amount of gold ever mined, according to the WGC.

It’s worth noting that this global gold-buying spree coincides perfectly with the rise of unconventional monetary policies following the financial crisis—massive bond-buying programs, rapid money-printing schemes and near-zero or, in some cases, negative interest rates. The jury’s still out on whether these measures have been a success or not, but for now, it appears as if banks are hedging against their own policies.

Investors would be wise to do the same. Confidence in central banks’ ability to stem further economic deterioration continues to deflate.

Below are the top 10 countries with the largest gold holdings...

.businessinsider.com/top-10-countries-with-the-largest-gold-holdings-2016-5?

A POLITICIAN'S POCKET

Don't know about you, but when I was a small kid my mother always warned: "Don't put money in your mouths. It's dirty and you never know where's it's been."

Part of that warning I always figured, since she was an RN, came from that side of her. But now that we're all facing what the power elitists want, a cashless society, my opinions have grown. Apparently, in their view, judging from this lead to a recent Bloomberg piece, it's even dirtier today than it was then.

"Cash had a pretty good run for 4,000 years or so. These days, though, notes and coins increasingly seem declasse; they’re dirty and dangerous, unwieldy and expensive, antiquated and so very analog.”

Now we're going to go out on a limb here. It's territory we don't mind occupying. It turns out dear mom was right. It was just at that early age one of the places then that never occurred to us was a politician's pocket.

To be sure there are some dirty places, rest rooms and kitchen floors, Colorado Boulevard after the annual Rose Parade. A business acquaintance runs a scrap iron business, one of the backbones of the global economy. It's a place with enough dirt and grime and dust that several times a year he gets a visit from the climate change police. They usually want some of that dirty stuff mother warned against. You and I know it as a fee.

So if you don't get hung up on the short term implications of things and focus on the long terms ones, you realize where this is headed and just how dirty it all is.

Yes indeed.  Cash is, as they say, “déclassé,” a characteristic of the lower classes. Hmm, what does that mean exactly? Anyone other than the 1% of the population?  Maybe they are concerned about us plebeians, who stalk farmer’s markets for non-GMO food and who dare to pay cash to support a local farmer. Or perhaps the Congressional lobbyists have discovered that envelopes with cash are just too blasé. 

Remember when those pallets of one hundred dollar bills – to the tune of $12 billion – were sent from the New York Federal Reserve Bank to Iraq?  They just lost track of it. This falls under the Bloomberg category of unwieldy and expensive. When digital currency is a way of life, funding illegal wars won’t be so messy. Bloomberg editors also compare cash to being analog in a digital world. 

Personally, I like individual freedom and the sound of vinyl records, but hey, I’m old school. This rise of digital currency is just one more step toward one world government and total domination. But hey, don’t worry your pretty little head about it, because the beast had already collected your health records, all transactions, emails, tweets and twitters, phone calls, likes, dislikes, social networks and anything else you’ve willingly yielded. 

prophecy.news/2016-05-23-your-dirty-cash-will-soon-be-extinct-for-your-safety-of-course.

CUTS TWO WAYS

Markets are touted as discounters. Buy on the rumor, sell on the fact stuff.

That the Federal Reserve is completely dumbfounded, despite its defenders, should no longer be debatable. Much of this week, as nearly everyone now knows, they have their minions, voting members and otherwise, appearing in public, softening up investors for future rate hikes.

The fix to make the dollar stronger is already in as an apparent deal's been struck to have America and it's historical consumer-crazy hordes bail out other economies. Under the guise that the world's largest economy is doing better than most after it's long drenching in free money from the Fed, we'll buy the rest of the globe's crap. That's what we're good at.

Problem is these bureaucrats apparently never heard of yin or yang. As noted in today's WSJ, their dollar index is up 3.2% so far this month. Like everything else, however, the dollar doesn't exist in a vacuum. If it's going up, something else must be going down. Like for starters emerging markets currencies as in the Mexican peso, 7.1%, the Turkish lira, 5.1% and the Colombian peso 6.8%, to name a few.

Then there's the yen and the yuan and a gaggle of commodities like copper, silver and gold. The S&P GSCI Industrial Metals index is off nearly 9% this month also since many commodities have to go through the dollar to trade. Why is this important? Well, it's hard to engineer a global recovery without some demand for basic stuff.

Long suffering emerging markets surprised many so-called pundits by starting off this year on the upswing only now since March when the dollar rally began to reverse course. Money of late is exiting emerging market funds like a band of Chinese investors were pulling capital out of their homeland earlier this year before government officials stepped up the penalties. But here's another view, one investors might find interesting from Deutsch Bank.

But the problem, according to Deutsche Bank's global economics team, is that by preparing markets for future interest rate hikes the Fed potentially hampers its ability to actually carry out those hikes in the future. Said another way, the Fed appears stuck in a negative feedback loop wherein suggestions that higher rates are coming create the unsettled conditions that ultimately force the Fed to keep rates right where they are.

And so on. Deutsche Bank's latest note looks most closely at the Fed's relationship to financial conditions and whether a tightening of these conditions — basically, interest rates rising, credit issuance slowing — would prevent an interest rate hike. The short answer is maybe.
 
But in my view the main takeaway from the report is that right now there are a number of tides the Fed is swimming upstream against, making its prospects for carrying out future rate hikes a potential challenge. Almost the least of which are how tight financial conditions either are or are not.

 

Deutsche Bank Financial conditions matter except when they don't, according to this chart.

Here's Deutsche Bank (emphasis added):

The recent drumbeat of hawkish commentary from the Fed, along with last week’s release of the minutes from the April FOMC meeting, has triggered a sharp re-pricing of expectations for Fed rate hikes by the market. While the market was only pricing about 4% odds of a rate increase in June less than two weeks ago, those odds now stand close to one-third.

It is believed that this shift in rhetoric toward a more hawkish message will ultimately be self-defeating. By signaling rate hikes, interest rates adjust higher, the dollar strengthens, and risk assets may come under pressure. This produces tighter financial conditions, which ultimately prevent, or at least limit, the eventual rate increase. This natural tightening of financial conditions in response to rate hikes is expected.

But there are reasons to believe that this negative feedback loop may be more severe in the current environment: a stronger dollar is likely to increase pressure on China’s currency and weigh on commodity prices, thereby re-introducing the key elements of stress that led to a sharp tightening of financial conditions earlier this year.

If this view is correct, the scope for further rate increases by the Fed is reduced. 

So again, by saying higher rates are coming the Fed creates a sort of chain reaction in financial markets that lead, among other things, to tighter financial conditions, a strong dollar pressuring commodity prices, and stock markets potentially getting rattled.

This is the thinking that undergirds the idea that the Fed can never really raise interest rates.
If you view the Fed's ultimate goal as raising interest rates from current levels, this is a problem. But if you view the Fed's posturing as merely that, well, none of this is really a surprise.
In the end, Deutsche Bank's conclusion is really just mealy-mouthed economist speak (again, emphasis mine):

The evolution of financial conditions will be critical for whether the Fed will be able to raise rates in the coming months. Our analysis finds evidence that a negative feedback loop does exist between the market’s expectations for the Fed and financial conditions. However, we believe that, absent a shock from China in the months ahead – which is clearly difficult to predict – it is unlikely that a negative feedback loop that tightens financial conditions will prevent the Fed from hiking.

Alternatively: here is a problem for the Fed, except right now it isn't a problem, unless it becomes a problem. So as tends to be the case with Fed-related forecasting, whatever you were already thinking can probably be justified. 
It cuts both ways. So we will see.

DEFLATION DEAD?

Ding, dong, ding--the big bad boogyman deflation is dead. Says who?  This global strategist from BlackRock, the globe's largest money manager.  If so can anyone spell TIPS?

U.S. deflation is no longer an imminent risk. This week’s chart helps illustrate why.

The BlackRock Blog

U.S. inflation has been picking up, following a prolonged period of subdued price rises, as evident in the chart above. The U.S. Consumer Price Index (CPI) in April posted its largest increase since February 2013. The inflation upturn is even more pronounced in forward-looking prices-paid surveys, such as the Institute for Supply Management’s Price Index, our analysis suggests. A greater number of purchasing manager survey respondents reported paying more for products and services in March and April, as the chart above shows.

U.S. deflation is no longer an imminent risk. This week’s chart helps illustrate why. The BlackRock Blog U.S. inflation has been picking up, following a prolonged period of subdued price rises, as evident in the chart above. The U.S. Consumer Price Index (CPI) in April posted its largest increase since February 2013. The inflation upturn is even more pronounced in forward-looking prices-paid surveys, such as the Institute for Supply Management’s Price Index, our analysis suggests. A greater number of purchasing manager survey respondents reported paying more for products and services in March and April, as the chart above shows.

businessinsider.com/deflation-is-dead-2016-5?

ENLIGHTENED VERSUS ACCESS

To pay for enlightenment is one thing, access another. Though some will argue they are one and the same, they are not. Especially in politics. It is common knowledge that without funds or position or both, access for the common rabble to their elected officials, most particularly those in Washington, is near impossible.

Our own recent experience less than a few years ago is a case in point. Contacting either the Washington or local office we got the same canned run around by staff members barely old enough to vote. What a lot of those in power don't understand or don't want to understand, this is part of the current pushback. Politicians of all stripes have come to believe the folks are here to serve them, not the reverse.

It is more obvious than the looks on the faces now of the elitists given Trump's refusal to disappear. It's the "What the hell happened?" look in light of Trump's persistent and increasing traction with voters. At the basis of this, as it nearly always is, lay a deep-seated, we're-entitled corruption. This is not new.

The difference between paying for enlightenment and paying for access is like that between a "security inquiry" and a "criminal investigation." Which one do you think best describes the function and purpose of the Federal Bureau of Investigation? Lobbyist are well known and despised for paying for access. And rightfully so. The next time you see an enlightened lobbyist will be the first time.

A New York newspaper recently published a list of funds for so-called "speaking engagements" one of the current presidential aspirants received in just the past two years. Forget the common folk, even to a big time hedge fund runner the amount is hardly chicken feed.

One can only hope those who forked out the big fees, given the changes coming, get more enlightenment and less access in the future as the masses, thanks to the Internet, get more enlightened. To quote a noted biblical line the masses need to comprehend seriously: "Above all get understanding."

OVERNIGHT

Across Asia Wednesday shares rallied as oil prices jumped to level not seen in nearly eight months as investors seemed to take the prospect of higher U.S. interest rates in stride and move more money into riskier assets.

Gold languished near a seven week low down $22.20 at $1228.60 as the threat of higher U.S. interest rates looms over the market. A stronger dollar usually translates into weaker gold prices.

Australian market up 1.8%, the Hang Send jumped 3.34%, the Nikkei moved 1.8% higher on a weaker yen and the South Korean Kospi edged up 1.1% and the Shanghai Composite eked out 0.3% gains in early trading.

Strong U.S. housing data gave markets a boost that investor further interpreted as giving the Fed room to hike rates. Sales of new homes in April hit the fastest pace in more than eight years, boosting the S&P 500 1.4%, it's largest gain in two months, the WSJ reported.

All was not good, however, as some pointed to Asian investors' skepticism that previous bout of volatility are a thing of the past. These analysts cited a recent increase in negative bet on the Hong Kong Hang Send.

The MSCI Asia Pacific benchmark of stocks has slumped nearly 5% from April as a rising U.S. Dollar rattles investments in many commodity and emerging-market assets. In Hong Kong, daily trading volumes have fallen to their lowest levels this year on uncertainties over the pace of U.S. rate increases, according to the WSJ.

Also on Wednesday, China's central bank led the yuan to its lowest rate against the buck in over five years, helping slow down gains on Shanghai equities as the dollar hit its highest level against the yuan in two months. Higher U.S. interest rates are expected to push the yuan lower still.

WATCH YOUR STARTING ASSUMPTIONS

We have argued for sometime now that one of the more common human frailties is being able to see and perhaps even understand immediate implications but not longer term ones. It's like a spillover effect that actually happens. Call it macro or micro or whatever you want.

This deficit could be owing to many things like confirmation bias or just plain old linear thinking. But that 's for another time. Sinking oil prices the last couple years, to many, was expected to stay confined to that sector. Some research, however, shows that's not always true.

davidstockmanscontracorner.com/its-not-different-this-time-junk-defaults-spreading-beyond-energy

As noted below, apparel is a case in point. Most of us know about some of the larger retailers like Macy's and it plan to dump a bunch of jobs owing to  poor sales and depressed earnings. But there is no such thing as a complete vacuum.

“Default cycles of the past have never been about a single sector, or small group of sectors,” Oleg Melentyev and Daniel Sorid, Deutsche credit strategiests, said in the note. “Yes, cycles were always driven by concentrated distress but they always found their way to affect other areas of the market.”

The strategists highlight recent pressure in the retail sector, including the travails of Quicksilver Inc., American Apparel LLC, and Aeropostale Inc., as evidence that defaults have already taken place outside of the commodities realm.

While pervasively low interest rates around the world offer some hope to the exceptionalists, by potentially helping to ease corporate funding pressures and allowing companies to refinance their debt. The European Central Bank’s planned corporate debt-buying program has helped boost already hefty demand for corporate paper.

Still, Deutsche reckons that this time the debt cycle isn’t that different.

“A frequent argument is being made here how all problems are going to stay limited to commodity sector,” the analysts concluded. “Evidence like this, coupled with emerging credit pressures in retail and capital goods sectors, suggest a contained cycle to be a weak starting assumption.”

Source: Defaults Have Already Spread Outside Commodities – Bloomberg

UPCOMING FED RATE HIKES

To some it's a done deal, the Fed hiking rates 25 basis points next month, most likely at their June 14-15 meetings.

After all, they have their troops out much of this week, spreading the gospel, ending with two heavy hitters on Friday, Chairwoman Janet Yellen and former Chairman Ben Bernanke. So what do investors think will be the ramifications of that hike and perhaps a follow-up hike in July.

Well, here's one opinion, "a rise in the prices of investment-grade bonds and a decline in the prices of riskier assets," from Paul Kasriel of The Econtrarian, coupled with a late summer, early fall stall in the economy.
advisorperspectives.com/commentaries/20160524-the-econtrarian-a-june-fed-funds-rate-hike-risks-a-september-economic-stall

A June Fed Funds Rate Hike Risks a September Economic Stall

Recent economic data, e.g., retail sales, housing starts and industrial production, suggest that the U.S. economy has awoken from its winter slumber. In addition, growth in consumer prices has accelerated of late (see Chart 1). The consensus of the Federal Open Market Committee (FOMC) is that the federal funds rate will be hiked twice by 25 basis points each time in 2016. Time’s a wastin’. The behavior of short-term interest rates indicates that investors have been skeptical that the Fed will pull the fed-funds trigger at its June 14-15 FOMC meeting. But about a month ago, comments by Boston Fed President Eric Rosengren, no Johnny-One-Note policy hawk like Richmond Fed President Jeffrey Lacker, were interpreted to imply that financial-market participants were underestimating how soon the Fed might hike the federal funds interest rate.

Chart 1

Despite the recent acceleration in the pace of U.S. economic activity, I believe that the Fed runs the risk of causing the pace of U.S. economic activity to stall out in the late-summer or early-fall of 2016 if it raises the federal funds rate at its June 14-15 FOMC meeting. The reason I believe an economic stall would occur is, you guessed it, because of the negative effect a fed funds rate hike would have on growth in thin-air credit (the sum of the monetary base and depository institution credit).

Allow me to elaborate. The federal funds interest rate is the price of overnight credit in immediately-available funds, or reserves, created by the Fed. This price, like any price, is determined by supply and demand. The demand for reserves is determined by the amount of reserves depository institutions (primarily commercial banks) are required to hold in relation to their deposits. Depository institutions also have a demand for reserves in excess of what they are required to hold. Now that the Fed pays interest on reserves held by depository institutions, this excess demand for reserves is much higher than was the case when no interest was paid by the Fed on reserves. The supply of reserves is determined by the Fed. For example, if the Fed sells securities in the open market, the supply of reserves will decrease, all else the same. If the Fed wants the federal funds rate to rise, it needs toreduce the supply of reserves relative to the demand for reserves. When the Fed raisedthe federal funds rate in late December of 2015, the monetary base – the sum of reserves and currency in circulation – declined (see Chart 2). And, although the level of the monetary base rose subsequent to its dip coincident to the increase in the fed funds rate, the level of the monetary base has not returned to its level prior to the increase in the fed funds rate.

Chart 2

Now, let’s look at the recent behavior of a variant of thin-air credit, i.e., the sum of the monetary base and commercial bank credit. Chart 3 shows the annualized growth in this variant of thin-air credit on a three-month basis. In the three months ended October 2015, thin-air credit had grown at an annual rate of 6.7%, close to its long-run median annualized growth rate of about 7%. By the three months ended January 2016, annualized growth in thin-air credit had slowed to just 1.1%. In the three months ended April 2016, annualized growth in thin-air credit had recovered to 3.8%. But that was still well below its long-run median annualized growth of 7%.

Chart 3

Now let’s reproduce the data in Chart 3, the three-month annualized growth in thin-air credit, but also show the three-month annualized growth in its components, commercial bank credit and the monetary base. This is shown in Chart 4. We can see that in March and April 2016, the three-month annualized rate of growth in commercial bank credit has moderated (6.0% in the three-months ended April 2016). Although the monetary base still is contracting, its rate of contraction has become less, only minus 2.5% annualized in the three months ended April 2016. If the Fed raises the federal funds rate in June, the contraction in the monetary base will likely become more severe, as it did after the December 2015 hike in the federal funds rate. Unless growth in commercial bank credit surges for some reason, a June increase in the federal funds rate implies further slowing in the growth to total thin-air credit from an already slow rate of growth. In turn, this would imply future slowing in the pace of nominal economic activity from a none-to-robust current pace.

Chart 4

OVERNIGHT

We said this was the week of the Fed and it started Monday with St. Louis Fed President James Bullard telling investors that their increasing expectations of a rate hike were "probably good," and warned a "relatively tight U.S. labor market might put upward pressure on inflation," Reuters reported.

In what could be described as a good cop-bad cop role, San Francisco President John Williams noted:
"Over the rest of the year two or maybe three rate increases, maybe one or two more (than that) next year so maybe three or four next year - I think that's still about right."

Of course what these spokespeople are doing is preparing investors for the hikes to avoid a mini-meltdown like what occurred the last time. It will be interesting to see if it works. Meanwhile, it was a downward mood for most Asian markets. CNBC reported.

Asian markets traded broadly lower on Tuesday, led by declines in Japan and China, as investors await further cues from the U.S. Federal Reserve ahead of its monetary policy meeting in June.

The Nikkei 225 was down 0.69 percent amid pressure from fresh strength in the yen against the dollar. Across the Korean Strait, theKospi was off by 0.58 percent. In Hong Kong, the Hang Seng index was down 0.16 percent. Chinese mainland markets fell, with the Shanghai composite down 0.86 percent, while the Shenzhen composite was off by 1.05 percent.

Australia's S&P/ASX 200 dropped 0.13 percent, weighed by a 0.66 percent decline in the energy sub-index. The dollar rebounded against the yen after Monday suffering nearly 1% losses trading in the 109.40 range off from its previous low of 109.12. Last Friday it changed hands at a three-week high of 110.59. It appeared as if investor blew off the Fed's hawkish warnings as investors pushed the yen up in what some called risk aversion trades.

ECONOMETRIC ASTROLOGY

How do you recognize bad advice? Well, here's an example from Dr. Michael Ivanovitch, an economist and former academic talking head who now runs a private consulting firm and consults for CNBC.

China's much in the news lately, the second largest economy casting a giant global economic shadow. Discussing China and it's economic woes in a recent piece, "Why you should take a broader view of  China's economy," the former OECD economist writes:

I know that there will be people screaming that the Chinese numbers are fabrications. I would stay out of that, and so should you, as long as these numbers have the imprimatur of official international organizations which examine the Chinese economy.

Most likely the last thing you want to rely on to get any semblance of an accurate economic picture of any nation--let alone one as large as China--is these huge bureaucratic international miasmas passed off as official international organizations larded with layers of econometric-trained, myopic economists.

Trusting numbers that have their imprimatur is much like astrology: guaranteed to give you mostly wrong answers.