MONETARY POLICY JACKSON HOLE STYLE
I'm back from a glorious vacation and I have found that the placid markets delivered a teeth clenching ride down last week and a euphoric blast higher this week. Clearly the volatility tells us that everything is JUUUUST fine with the markets.
We have some interesting things cooking, but the one that is taking center stage now is the meeting of the world financial leadership in Jackson Hole, WY. Recall, that this is where QE II was hatched last year right after Fed Governor Bullard suggested that further quantitative easing was the right prescription for the job. I went back and found one of the most popular posts that I've written that was penned right about that time. It might be worth the read as you'll note that I mentioned the impact that their efforts would have on mortgage rates.
"This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011. Isn't it funny how despite their efforts we continue to spiral the way of Japan. Want to get an idea for what it might look like right now? You can buy a Japanese 10 Year note and receive 1% on your money! Hello deflation! PUBLIC ENEMY # 1 - DEFLATION"For a refresher, I'd also suggest you hit the Pulic Enemy #1 - Deflation post because it highlights the 2002 Bernanke speech where we get the entire road map of Ben Bernanke and get to read all of his arrogance and foolishness about his abilities to print and print and print to stave off deflation. Well, we all are witnessing how Japan isn't such a bunch of idiots after all as we are finding that political will power (or better said, LACK OF IT) is a much more powerful force than Bernanke perceived. Political leadership is not willing to do what is necessary when it comes to managing spending effectively and stamping out the influence of special interest groups. When the "special interest groups" are the banking henchmen, it is even more of a problem and the hard medicine of taking writedowns and losses is not one that those guys eagerly accept.
So, now more than one year after writing that post calling for mortgage rates with a 3% handle, we are getting closer and we are on the verge of receiving news from Jackson Hole that while we won't be receiving QE3 in the same monetization framework of the first two failed attempts, we'll see monetization through the use of repurchase agreements, reverse repurchase agreements, targeting interest rates to steepen the 2-10 year curve, and flattening interest rates on the long end. We'll also finally see a termination of payments of interest on excess reserves held at the FED to stop the risk-less arbitrage that banks have been doing for oh so long. Of course the impact won't really be that banks will lend, but we can always hope right.
GOLD / INFLATION / PRINTING
As I wrap this post up I will close with this thought. The markets are rallying because they are hoping and praying that some sort of QEIII will be announced. As I mentioned I don't expect a formal QE3 announcement and neither does gold for now. Gold is getting it's face ripped off.....all the way down to where it was a couple of weeks ago!!! Coordinated margin hikes for gold futures trading has also conspired to drop gold almost $200 an ounce. Call this crazy, but I could easily see the slaughter continue down to the $1450 to $1475 area that I had identified several months ago as my target for bigger and more buying. Am I scared that gold is getting smashed, no, because effectively the FED is trying to monetize and will end up printing because that is what central banks do. I will begin making purchases at we near the $1,600 an oz level and increase those purchases as we get to my target.
I'll be posting select items from the monthly report. As you know I never posted it and some of that data is stale. I will pull out charts that are still useful and make a few comments, but nothing huge for this month since we only have a few days left!
It's good to be back and notice that nothing has changed except the un-reality of these markets. Apparently the Euro-zone problems have all been fixed and I didn't get the memo!
Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com