Today a 40-year market veteran sent King World News an incredibly important piece that warns destructive forces are now being unleashed across the globe. This piece exclusively for KWN also cautions readers around the globe that the world faces a very dark future indeed.
January 26 (King World News) – Norm Crosby is an American comedian who is best known for his use of malapropisms in the routine. A malapropism is defined as “the usually unintentionally humorous misuse or distortion of a word or phrase”. When listening to the pronouncements of the central planners these days, it is reminiscent of listening one of Crosby’s routines, except that the central planners are not making us laugh. The malapropisms of the central planners are not jokes, just sadly conflicting and confusing statements attempting to cover up their predicament, their intentions and the destructive forces they are unleashing across the globe….
It is apparent that 2% seems to have a fascination for the central planners as a target for inflation. Wanting to understand the logic behind their objective, we searched the Web for anything that would enlighten us. After all, the central planners are the best of the best, the brightest of the brightest working from a sophisticated, historically based plan. It would be unthinkable that they would be running the world from the seat of their pants.
What turned up was a “backgrounder” put out by the Bank of Canada, “Why Has Canada’s Inflation Target Been Set At 2%?”, published in December of 2011. We eagerly anticipated our enlightenment. Sadly, it was another piece of central planner comedy.
The Bank of Canada said that their intention was to keep inflation “low, stable and predictable”. They then ask the question “Why does the Bank aim for a moderate amount of inflation rather than no inflation? “. Their answer was “Nominal interest rates cannot fall below zero (the zero lower bound on interest rates)”. They go on to explain “When interest rates are at or close to zero, the ability of the central bank to use its traditional tool, the policy interest rate, to stimulate the economy is limited since actual (nominal) interest rates charged by banks cannot be negative.”
Switzerland And Denmark Break Ranks
Evidently Switzerland and Denmark did not get the word. Both countries have recently moved to negative interest rates. We have crossed into a zone that the Canadian central bankers thought was improbable if not unthinkable. Rather than some grand plan, the 2% target really is simply a meme that will be readily adjusted for the sake of expediency as conditions demand.
Just like we have become accustomed to moving from “million” to “billion” and to “trillion”, the announcement last week by Mario Draghi that the ECB was going to print $70 billion per month to take toxic debt owned by banks at par off of the market barely raised an eyebrow. The world was shocked by Bernanke’s $85 billion per month for QE3 and the Japanese plan for unlimited QE, but Draghi’s announcement was almost a non-event. While the Swiss pulled away from the QE poker table the prior week, we still have the U.S., Japan and now the ECB firmly raising the ante. The three countries continue to “see” the others’ bets. The pot grows. There will be no winners at this table. They and the vast majority of those with any unprotected savings will lose.
Currency Wars Rage
Meanwhile, the U.S. is now touting “King Dollar” once again. In the recent past, the pact seemed to be mutual currency debasement within the currencies represented by the Dollar Index. The primary objective for the U.S. has been to maintain the role of the reserve currency. With serious attempts to dethrone the dollar from that role coming from Russia, Iran and China, it is expedient to cut loose from the Yen and the Euro. The dollar remains the safe haven of choice due to the size and liquidity in that currency. While there will be traditional currency wars between countries and economic blocs trying to gain or maintain competitive advantage, the primary currency war is over reserve currency status. On that front, the U.S. is clearly winning for the time being.
Volatility continues to be the byword in the markets. While the HUI remains clearly in the lead relative to bonds, energy and even gold itself, the gap has narrowed a bit. The mining stocks had a similar lead during the early part of last year, but that lead was erased as the miners were hammered, the stock market was elevated and the Saudis took down the oil market. It is too early to say if the pullback in the mining index represents a similar pattern.
The surge in the mining stocks would normally be expected to abate under any normal market pattern, and there were secondaries for a few of the companies that also helped to cool the excitement. That is not necessarily manipulation, but something to be expected. We will just have to see what the next few weeks bring us to see if it turns into more than just a healthy correction.
The energy markets had another twist thrown into the mix last week with the death of the Saudi king. The transition to the new leader has been smooth so far, but it will be interesting to see if the door is now open to modifying their quest of low oil prices or at least the length of time that their price suppression continues.
There is absolutely nothing wrong in the global supply vs. demand calculations despite the propaganda. Supply and demand are closely balanced, and that came with a temporary surge in Libyan production. Demand continues to grow, particularly for the non-OECD countries. While economic weakness is offered as a possible source of reduced demand going forward, that is only one part of the equation. The other, and much more powerful, is that the developing world is demanding more energy in their journey toward a better economic life. That demand is not going to abate or go away unless there is an extremely serious global economic downturn. We continue to find the energy sector very attractive.
Weimar Experience
As for traditional stocks and bonds, the case can be made that the massively increasing amounts of fiat currencies are going to drive prices higher as was case during the Weimar experience. That would be particularly true for U.S. stocks and bonds as investors seek safety. We could very well see some sort of final blowoff before the Big Black Swan sends valuations reverting to some historic mean and metrics and beyond.
However, retail in general continues to implode. The poor earnings announcement by UPS could be a harbinger of worse things to follow. The strong dollar has to a least create a headwind for the major multinationals let alone taking a haircut off of existing earnings. Investors need to be very careful to take into account these considerations when contemplating existing holdings or new positions.
The central banker comedians have a captive audience. Those of us with savings and an open mind to what is occurring are not laughing.
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