POWERLESS
During periods of pre-election farce it can be easy for investors to increase “domestic” bias when considering asset allocation, so we’ll do our best to stay “global” in this note, as a reminder of the effect international markets have on Australian investors.
After a horrible final quarter of 2018 for financial markets Global Central Banks resumed their financial system “bailout” and bubble inducing emergency settings that began 10 years ago.
A small rise in rates by the US Fed was all it took for central bankers to stare back into the potential abyss and run back to what they do best, blow bubbles.
So we continue with all the interest rate suppression policies, making it a special time in world history.
It’s hard to fathom that, globally, we’re back over the 10 TRILLION DOLLAR mark of negative yielding paper.
Last week, in a new twist from the “whatever it takes” man, European Central Bank supremo, “super” Mario Drahgi, he promised to use “ALL THE TOOLS” and to tolerate inflation greater than 2%.
All the tools? What could he possibly mean? Buy all the things? Japan’s central bank owns close to 50% of all Equity ETF’s.
The underreporting of the “new” inflation targeting of the ECB and other global central banks is quite remarkable.
It’s possible that they’re not being believed as the only inflation they’ve been capable of producing so far is asset price inflation, bubbles in equity markets, bond markets and real estate.
This may be changing as we speak. Inflation is the enemy of savings, especially when combined with super low interest rates. Investors beware.
The problem for, say, the US Fed, is that in the past inflation has been controlled by interest rate settings.
We’ve now seen what happens if interest rates go up, markets “misbehave”! They won’t be revisiting that anytime soon.
Just check the movement of crude for the year so far. Can’t wait for that to show up in Fed “data”. And we’re sure companies will be willing to pass any cost increases onto consumers.
One of the main reasons the Fed will be powerless to control a bout of inflation is next year is election year in the US and the President has made it very clear that he associates the stock market with his success as a leader.
He has shown to be willing and able to put political/media pressure on the Fed if they don’t support his goals. Rates can’t go up to combat inflation.
This could be the reason for the current disparity between what stocks and bonds are telling us. One screams recession, the other more “awesomeness”.
Investors might be thankful for the short term “green light” but all of this hides an extremely fragile financial system.
What to expect if something breaks and you don’t fix it, instead double down on all the poor policies that got you there, making systemic issues even larger.
Make no mistake, this is where we’re at. The Reckoning may still be a ways away…..or the result of a single event.
Nothing summarises the existence of systemic risk than the illustration below.
DEUTSCHE BANK:
It’s funny that the German’s have come up with a solution to this problem, make it part of a bigger one!!
One must consider the possibility of proper systemic reform post the next crisis.
Luck will favour the prepared, better to be early than late for this party. Diversification may be your friend.
For those that consider gold to be a form of decent protection in this paper mad world, price action has been a little “unsteady” in USD but still over AUD1800 for Australian miners.
You should be reminded that absurdities in price action continue unchecked.
For example, before a large derivative and options expiry date toward the end of March, on the 27/3/19, 9:37am (quietest part of the day, Asia offline), 7000 COMEX (US market) contracts were sold “at the market” in the space of 1 minute.
This means that 700 000 ounces (21.77onnes), with a notional value of US$921 MILLION was dropped into the pits (electronic) without price limitation!
The following day COMEX gold futures exploded to 528 626 contracts, or roughly $69 BILLION in notional value.
The world gold council reports that the average daily trading volume for COMEX gold futures is just 28billion in Feb and 36billion YTD 2019.
Each time this happens, buyers of the actual metal just say, thank you.
Paper may be limitless in its production, the physical stuff is certainly not.
Not finding much
Going to be an interesting next couple of months!
Peace!
