Not Much To Do for Kremlinologists

Yesterday's FOMC statement was, as so often, almost a carbon copy of the one preceding it. It takes note of the recent economic improvements and the fact that they don't amount to a whole lot yet, while continuing to promise ZIRP until 2014. The pledge not to allow the Fed's balance sheet to shrink has been renewed as well, and 'Operation Twist' is of course to continue. Once again, Jeffrey Lacker – the sole hawk with a vote on this year's FOMC board – has been the lone dissenter.

 

The statement in all it bureaucratese pablum glory can be read in its entirety here.

 

One perhaps noteworthy comment was the one on energy prices, contained in the snippet below:

 

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

 

(emphasis added)

It's not that we necessarily disagree that the rise in the price index due to higher energy prices will prove 'temporary' – this may well turn out to be correct. The point we want to make is merely this: central banks on a mission to pump always have excuses ready when prices rise as to why that is 'meaningless' or 'temporary'. The history of past central bank interventions is replete with similar examples. In reality, this is just a guessing game however. The Fed can not predict the future demand for money and hence can not predict when the vast increase in the money supply it has engendered will impinge on the so-called 'general price level'.

Moreover, it is in any case vain to focus on a specific type of 'consumer price index' (the Fed watches the PCE, the 'personal consumption expenditure' index, which perhaps not surprisingly is the price index displaying the lowest 'inflation rate' of all the currently extant price level measurement attempts). High energy prices are in fact a symptom of the inflationary policy, no matter how strenuously the Fed may deny it.  What happens when a highly inflationary policy is pursued is what Ludwig von Mises called a 'price revolution'. It is the entire structure of prices in the economy that is altered in a manner that would not have been evident absent the inflationary policy.

 

Illusory Prosperity and Capital Consumption

This 'price revolution' – the alteration of relative prices within the economy – has very real effects. As we have pointed out numerous times in these pages on the occasion of previous Fed decisions, on the surface, these effects will often register as an 'economic recovery' or as 'economic growth'. The data the government collects, such as GDP growth and unemployment data will show an improvement. However, as the bulk of this economic improvement has been 'bought' with money from thin air (as opposed to genuine savings out of preceding production), what we are really witnessing is capital consumption masquerading as 'growth'. There was no better example illustrating this concept than the housing bubble. All those who were calling the economic upswing a dangerous illusion in the period 2004-2007 were derided as curmudgeons and even cranks. And yet, who can doubt for even a moment in hindsight that they were correct, and that the boom in fact consumed scarce capital, instead of, as the Fed and the economic mainstream maintained 'creating wealth'?

In hindsight we know for instance beyond a shadow of doubt that the vast accounting profits recorded by real estate developers and banks were merely masking the losses that would later be realized. The reality of the matter is that these accounting profits were a fiction: numbers that had no meaning, as economic calculation had been falsified by the Fed's easy monetary policy. Why would anyone think that today is any different? Are our memories that short?

 


 

The ratio of spending on business equipment (capital goods) vs., spending on consumer goods production. It has never been more out of whack than today. Note that the economy tries to adapt whenever recessions hit – the ratio tends to decline during downturns, as the production structure is shortened again – click chart for better resolution.

 


 

The chart depicted above is the best way we can illustrate what we have said above. The price revolution has led to resources increasingly being allocated – on a relative basis –  to the production of capital equipment while being withdrawn from the production of consumer goods.

Of course this is only a very rough way of looking at things. Since these are aggregations (we don't know which capital goods are produced, or the production of which consumer goods precisely is being neglected), they tell us less than we would like to know.

However, as a rough guide this ratio chart remains quite useful: it conveys the information that the productive structure has been lengthened due to the credit and money supply expansion and the low interest rate environment the Fed has engendered. Since this lengthening of the production structure has not been supported by an increase in real savings, it will prove unsustainable: in all likelihood more final goods are now tied up in production than this altered production structure can actually provide.

You will notice on this chart that the ratio tends to make peaks close to the beginning of recessions. Since its current peak is above even the year 2000 and year 2007 peaks, the economy is likely dangerously imbalanced. In short, the balance between savings, investment, production and consumption is discoordinated due to the Fed's easy money policy.

 

Market Reaction – Risk Remains High

Titles to capital – i.e., stocks – tend to 'like it' when this happens. Their prices rise sharply, which is yet another effect of the 'price revolution'. It would be a serious error however to interpret this as evidence that the economy is truly improving on a structural level. It is simply an off-shoot of the same effect that leads to the misallocation of capital depicted above.

Nevertheless, the stock market 'broke out' yesterday following the FOMC announcement, the publication of the 'bank stress test' (which saw 15 of 19 TBTF banks tested pass, which will enable them to raise their dividends and increase share buybacks) and a 'better than expected' reading of economic confidence data in Germany. Moreover, European credit markets continued to enjoy easier conditions, in conjunction with Fitch upgrading Greece's government debt to 'B-' from 'restricted default' following the PSI deal.

 


 

Economic confidence in Germany increases, with the 'ZEW' index rising a better than expected 16.9 points in March –  the highest level since June 2010.

 


 

The S&P 500 index breaks out above the lateral level of resistance established in 2011. However, the rally continues to be marred by the fact that trading volume has been steadily declining – click chart for better resolution.

 


 

Gold once again sold off – and as can be seen below, platinum has returned to trading at a slight premium over gold, which signifies an improvement in economic confidence. In turn, improving economic confidence is regarded as a negative factor for gold, as it reduces the likelihood of more monetary pumping. So it is currently held, anyway (we actually don't believe the likelihood of more monetary pumping has been significantly reduced, as the increase in economic confidence will likely prove ephemeral).

 


 

The platinum-gold ratio: platinum once again trades at a premium over gold, a sign that economic confidence is waxing – click chart for better resolution.

 


 

As a result of these developments, gold stocks have become the worst performing sector of the stock market, in spite of enjoying record profit margins. It seems the market expects further declines in the price of gold, as gold stocks are about to break below the lateral support line of an 18 month long consolidation:

 


 

Gold stocks are headed for their lowest weekly close in 18 months – click chart for better resolution.

 


 

Whether this assessment will prove correct remains to be seen – as noted previously, sentiment on the gold sector is extremely bearish at present and usually this means that a medium term low is not too far away. However, it is what it is for now – from a technical perspective, the sector looks very negative and sentiment after all simply follows prices to a certain degree.

A breakdown below the support that has been established over the past 1 ½ years would look very negative – it would likely signify that the consolidation period was really an extended distribution top.

The US dollar meanwhile – likely based on similar considerations, namely that US economic performance is strengthening relative to that of other nations – continues to rally. It sports a very constructive chart picture at the moment, but there remains a fly in the ointment, namely the fact that futures traders remain very much 'net long' the dollar.

 


 

The dollar index resumes its rally and the chart continues to look constructive – click chart for better resolution.

 


 

The bond market is also slowly beginning to reflect waxing economic confidence and rising inflation expectations, in spite of the distortions introduced by 'Operation Twist':

 


 

US treasury note: beginning to break down? – click chart for better resolution.

 


 

As to the recent stock market strength, we want to point out the following: in spite of the impressive move higher, there are a number of things that should concern bulls. Apart from frothy sentiment, there continues to be a Dow Theory divergence, as the Transportation Average fails to confirm the new highs in the Industrial Average. Even bigger divergences exist with overseas stock markets. Europe, Australia, Canada as well as the MSCI World index all fail to confirm the breakout in the SPX.

 


 

Contrary to the SPX, the Australian All Ordinaries index not only has failed to break out,  but actually looks like it's about to break down – click chart for better resolution.

 


 

The IEV Europe 350 ETF – it too fails to confirm the breakout in the SPX – click chart for better resolution.

 


 

The Transportation Average fails to confirm the breakout in the Industrial Average – click chart for better resolution.

 


 

We conclude that in spite of the breakout in the SPX and the impressive stock market rally following the FOMC decision, risk in the stock market remains extraordinarily high. This is no time for complacency, even though the breakout will likely produce some 'follow through' buying on technical grounds.

Caveat Emptor. 

 

 

Charts by: StockCharts.com, ZEW, St. Louis Federal Reserve Research


 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “The FOMC Statement – A Comment on Current Policy and its Effects”

  • rodney:

    Pater,

    Can you explain why ‘Inflation falsifies economic calculation’?

    In a previous article you said:

    Rapid inflation makes it impossible for entrepreneurs to correctly appraise the future. As a result, they pull back from productive investment and begin to hoard cash, precisely what we have observed in recent years.

    Can you explain how this works?

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Ulpian (1)European Banks and Europe's Never-Ending Crisis
      Landfall of a “Told You So” Moment... Late last year and early this year, we wrote extensively about the problems we thought were coming down the pike for European banks. Very little attention was paid to the topic at the time, but we felt it was a typical example of a “gray swan” - a problem everybody knows about on some level, but naively thinks won't erupt if only it is studiously ignored. This actually worked for a while, but as Clouseau would say: “Not...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • croesus_av_stater_1Gold – Eerie Pattern Repetition Revisited
      Gold Continues to Mimic the 1970s Ask and ye shall receive... we promised we would update the comparison chart we last showed in late November in an article that kind of insinuated that it might be a good time to buy gold and gold stocks (see: “Gold and Gold Stocks – It Gets Even More Interesting” for the details). We are hereby delivering on that promise.   A Lydian gold stater from the time of the famously rich King Croesus, approx. 570 BC. It seems they already had this...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com