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Friday, March 29, 2024

Fear And Greed’s Chris Wood Discounts The Fed Fetish

Courtesy of Tyler Durden

Somehow, CLSA’s Chris Wood is always correct in the end. The only prediction where he has been wrong, for now, is in his $3,400 gold price target by the end of 2010 (which was set back in 2002). But have no fear: as he explains “There is some surprise here that gold has not already gone higher given everything that has been going on and given Billyboy’s evident willingness to keep interest rates at zero for a long period. That gold is not higher shows that the consensus has not yet appreciated that the real reason to own gold is not “inflation” but rather the growing risk that the endgame of the present policy response is the collapse of the Western fiat paper system.” And considering that there is a trader meme going around that every fake bomb is equal to $100 billion in QE, and we are up to something like 8 or 9, not to mention that the T(eleprompter)OTUS is about to make a speech post market close, the dollar is almost certainly about to get the Friendo treatment by the chairman.

Greed and Fear – The Fed Fetish

All attention remains focused on what the Fed will decide next week. With talk in the market that the Fed could do up to US$2tn in terms of purchases of fixed income securities, there is clearly room for a further rally in risk assets as well as major disappointment for risk seekers if the Fed does not live up to expectations. GREED & fear’s view would still be on a disappointment in terms of the action announced.

The result of next week’s mid-term Congressional elections is likely to lead to more political paralysis not less. Another major fiscal stimulus next year is only likely in the event of further major disappointment on the economy which then creates the political need on the part of both parties to be seen to be doing something.

US Treasury Secretary Tim Geithner has sought to stem the “currency wars” over the past week with a proposal for the G20 to limit current account surpluses or deficits to 4% of GDP. Still Geithner’s formal position that the US is still for a strong dollar is obviously deeply compromised by recent Fed rhetoric.

Market action has begun to price in expectations of higher inflation. Still the issue here is how much this action is a case of the market discounting what the Fed is about to announce in a typical reflexive manner rather than reflecting real inflationary pressures rising.

For now GREED & fear has a hard time seeing how inflationary pressures will rise short of the sort of outright currency debasement that leads to hyperinflation. The latest US housing data would appear to confirm that this all important market is weakening again.

Another sign of deflationary pressures is the ongoing decline in US bank revenues as reflected in the recent set of bank results. GREED & fear would advise investors to focus on this revenue line when looking at banks, at least as much as the profit line which can be manipulated so extensively via discretionary accounting techniques.

About one area on which the political extremes of both right and left in the US can agree is their anger at taxpayer funded bank bailouts. There is a shared sense of anger that the “too big to exist” banks not only caused the crisis but have emerged from it remarkably unscathed via aggressive lobbying in Washington and via their astute manipulation of the over hyped issue of systemic risk.

There is an ongoing effort by a defensive Obama administration to spin how successful TARP and other such programmes have been in terms of making money for taxpayers. GREED & fear views such self congratulatory behaviour as way too premature financially; most particularly as the all important housing market has continued to be artificially propped up by massive intervention via Fannie Mae, Freddie Mac and the Federal Housing Administration.

The continuing activity of these mortgage monsters is causing major distortions to the American economy. Yet with hardly anyone in Washington questioning this insane policy, it looks like American could be stuck with a socialised mortgage market for years to come. 

The continuing momentum behind the Asian asset reflation story can be seen in the renewed pick up in secondary residential property sales in Hong Kong. It would seem that it is fast becoming time for the Hong Kong government to draft yet another “cooling down” package for Asia’s most hot-to-trot residential property market.

The property market in Jakarta is also heating up. There is growing demand for small condos in central Jakarta for an emerging middle class while land prices are also surging in central Jakarta where land is being purchased as a store of value. 

If there is real momentum in the Indonesian property story, one major hoped for reform still looks unlikely. That is foreigners being allowed to buy property. The issue is way too sensitive politically for Indonesian president Yudhoyono, a man never known for his decisiveness.

GREED & fear has always had more faith in the ultimate gold price target of US$3,400/oz first set here in 2002 than the exact date when that target will be reached, which was originally set as the end of 2010.

There is some surprise here that gold has not already gone higher given everything that has been going on and given Billyboy’s evident willingness to keep interest rates at zero for a long period. That gold is not higher shows that the consensus has not yet appreciated that the real reason to own gold is not “inflation” but rather the growing risk that the endgame of the present policy response is the collapse of the Western fiat paper system.

GREED & fear will be wrong on the gold bullion price target if there is a sudden change of heart in Washington and a decision made to take the pain rather than continuing to follow a policy of trying to inflate another asset bubble via yet more leverage. One of the key variables for gold bullion, if not the key level, is the level of real interest rates.

h/t arnaud

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