Dissecting the minutes of the Fed meeting offered a fresh opportunity to dollar-sellers to do more of the same overnight. The surprisingly dovish language that was contained in the notes ignited expectations of the Fed easing next month among the few remaining holdouts in the market.
This, despite Goldman Sachs’ cautionary finding that some $750 billion and up to $1 trillion worth of accommodation is already priced into the markets. Curiously, that was the same Goldman Sachs that envisions $1,650.00 gold within twelve months’ time; as if the metal – at $1,360.00 – has not priced in such largesse already.
And, yes, it was the same Goldman that sees the Fed’s expected easing as helping the U.S. avoid the “very bad” fallout from a renewed recession. Goldman sees the American economy as only “fairly bad” in the coming half-to-three-quarter of a year (a lot to say, all in a day, by one firm; a firm whose seat at the Fed is filled by…Mr. Dudley).
There is no telling what disappointment might result should the Fed come up short of such generous expectations. Meanwhile, the most vocal among those pushing for said accommodation, William Dudley, framed the Fed’s presumptively imminent action by stating that he is “…mindful that [the Fed’s actions] could be interpreted as a policy of monetizing the federal debt. However, I regard this view to be fundamentally mistaken. It misses the point of what would be motivating the Federal Reserve.” Well, we know at least that which is motivating the appetite among risk-takers despite such reassuring language: the fact that they pay no attention to it and see only the outcome of it in perpetually cheaper to play-with dollars.
Reflecting much of the above, but mainly the dollar’s sinking to very near the 77 level on the index yet again, gold prices opened higher this morning, notching an $8.70 gain and were quoted at $1,359.20 on the bid-side of spot. Similar conditions were manifest in the other precious as well as noble and base metals, as the trade got ‘carried’ away by the heady aroma of ultra-cheap greenbacks, and visions of more of the same, yet to come. Headlines that normally do not co-exist- “Stocks Get Lift From Fed Minutes” and “Gold Near One-Week High on Fed Signals” –continued to co-exist as asset shopping sprees continued among hedge funds.
Silver popped 24 cents higher and opened with a quote at $23.55 the ounce, while platinum added $23 for good measure, opening but one dollar short of the $1,700.00 mark. Palladium climbed $9 on the open, and was quoted at $590.00 per troy ounce. Not much to report in terms of change for rhodium, as the metal showed a bid at $2,200.00 per ounce, matching yesterday’s final quote. Crude oil was up. Copper was “seen at $4” (soon?) by RBC analysts.
That the dollar is now approaching certain solid, long-term support foundations [anywhere in the range of from 74 to 77 on the trade-weighted index], while the entire commodities complex is once again being wrested away from fair values that are based on supply/demand flows did not unnerve spec fund players in the least, judging by this morning’s action.
If the Fed needs any further validation as to the ‘timeliness’ of an easing move, well, it needs look no further than to the forecast that inflation will fall well short of its [2 percent] target for the next couple of years. Then again, the same projection for a lack of inflation is likely prompting the US central bank to try to induce Americans to expect that inflation will pick up the pace in the future; a prospect that could (hopefully) lead them to spend now (as in: yesterday, or sooner). Actively targeting higher inflation – what a concept. No stranger than the ‘desirable levels of inflation’ language we had heard from Tokyo, circa seven years ago. Problem is, it does not always materialize, despite one’s best efforts (see the same Japan).
As for the efficacy of the equivalent of a 50 basis-point rate cut, to be brought about by QE1.5 or 2.0, well, some see no chance of success for that. Not at a time when the US counts 19 million empty housing units and a $13 trillion household debt tally courtesy of that same housing bubble. The de-facto rate cut will be effective in other ways; ‘stimulating’ spending among speculators on other assets that will now form (or have already formed) their own bubbles.
On the other hand (there is always that pesky other hand to contend with) – that of Harvard’s Niall Ferguson – there resides the idea that the sizeable fiscal expansion will not only not make a difference, but that it will actually engender a ‘debt spiral’ complete with rising interest rates, a loss of credibility, and the popping of the bond bubble (among others). Mr. Ferguson cited Chinese criticism of US fiscal/monetary policy in cautioning that “markets are fine until they are not fine.”
Then again, China also found it proper to tell the G-20 that they should focus on that which is required by the global economic recovery, and ‘certainly not on any particular [wonder which one they had in mind] currency of any particular [guess which one] country.” No mention of the fact that the Chinese curbs on gains in the yuan might just be the very instruments, which are actually undermining that global recovery.
September’s Chinese foreign exchange ‘harvest’ was especially bountiful (to the tune of $194 billion) and have brought the country’s reserves up to $2.65 trillion – well in excess of some projections near $2.5 trillion that were made earlier. If it is any comfort to the rest of the world, China also said that its imports rose to a record $128 billion, and that the trade surplus was the smallest in five months. It’s about those exports that the others are worried (that, and the on-purpose weak yuan).
Back to the (downward) movers and shakers (out of the longs from the market) of the dollar. Hedge funds. That wonderful amalgam of profit-seekers-at-all-cost that could bestow upon us all a crisis to make other crises seem like a scene from the early frames of “Bambi.” Diamnond Oak Capital Advisors’ CFA Sara Grillo recently alluded to the fact that the species we identify as ‘hedgies’ may not only have been responsible for the ‘flash crash’ (never mind algorithms and such) but that they could, still, conceivably unleash a true cave-in in the dollar. Ms. Grillo relays the fact that she does not know of a single global macro fund that is long the US currency.
She then points out an effect – courtesy of said funds – that we have already noted as applying to the gold market; that they operate on momentum, on prevailing fear, and on emotions. Since the rise of high frequency trading, the market has tilted “towards momentum rather than fundamental orientation” – notes Mr. Grillo. When such a group is able to pull in some $11 billion in one month (August, for example) and when only three former Goldman (keeps coming up) execs are able to raise half a billion (not a misprint) dollars for more, yet-to-be-launched hedge funds, well, you almost know what might come.
One of the unintended consequences of the Fed’s compulsion to ease could be the crisis that hedge funds will bring about in the wake of speculation fueled by…the Fed’s easing. Michael Lewitt, the head of Harch Capital Management LLC said yesterday that the Fed’s monetary policies could lead to (yet another) financial crisis. This, as specs (h.f.’s) throw money at speculative assets (say, commodities?) in lieu of what Mr. Lewitt calls “productive activities.” Mr. Lewitt identified gold as a “play on the devaluation of paper currencies” and advised buying it while shorting T-bonds. No mention of what happens if central bankers derail the hedge funds’ best laid plans. Or of the fact that it is a “play” – the favorite word in the hedge fund vocabulary. Aside from ‘big, fat profit,’ that is.
Meanwhile, we plan to be here, at the same time, on the same channel tomorrow, but cannot guarantee it – travel schedules might derail such plans.
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America