Last week was a most interesting one for the Federal Reserve and its new standard bearer Janet Yellen, who caused a bit of controversy by spelling out—in more detail than Fed watchers are used to—a timetable for not only tapering but when the Fed will actually begin to tighten. (Please no comments on the taper/tighten debate, let’s just say the Fed has begun the unwinding process and leave it at that).
Yellen was championed by the left because she was thought of as the most dovish option but her comments last week seemed downright hawkish. I don’t think Yellen has changed her stripes but she is committed to providing stable forward guidance to a marketplace that has been whipsawed by a risk on/risk off world over recent years. She may be pinning too much hope on the belief that the recent economic downturn is simply weather related and not a sign of a more significant slowdown.
Gold guru Jim Sinclair in a recent post on Minset.com indicated that Yellen may be in for a surprise. “Chair Yellen has placed herself between the rock of recession and the hard place of playing the hawk,” Sinclair notes, “A global recession cannot produce an isolated USA, but rather underscore the heart of the recent U.S. economic figures as a reflection of an insular American economy following the world back into recession, not entirely extremely cold weather related.”
He points to China’s declining growth as proof of a global economic slowdown that will force Yellen to revert to form. “The idea that stimulation can be withdrawn without draconian economic results is simply false,” Sinclair writes. “Yellen is truly dedicated to full employment and is going to go into shock over the next few short months at the divergence between her economic modeling, the behavioral economic projections and the degree of economic contraction in the US. She will revert to her long standing dovish viewpoint of the mandate of the Federal Reserve and move this hyper stimulation ($4 trillion) into a higher gear than before.”
This is similar to the viewpoint of hedge fund manager Mark Spitznagel, who we talk to in our April cover story. Despite signs to the contrary, Spitznagel doubts the Fed’s ability to carry on a taper.
It is somewhat of a depressing outlook as his ultimate prediction is for a market crash at some point due to the misallocation of resources. It is one thing to carry on a boom and bust cycle but this time we really didn’t get a boom.
Sinclair indicates that folks in the East are buying gold for this inevitable rainy day and there are some anecdotal signs that he is right. He states, “QE to Infinity, followed by Gold balancing the balance sheets of the sovereign balance sheet disasters. Just as there is no tool other than QE to feign financial solvency, there is no tool to balance the balance sheet of the offending entities other than Gold.”
Here’s hoping it is just the weather.