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!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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:

  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...

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