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