Aug 1, 2012
This is the kind of week that everyone who can read a calendar looks at and goes all atwitter that big things are in store for us. We have major huge economic indicators coming: job reports from the U.S., monthly PMI data from around the world, and interest rate decisions. Add to that monthly pronouncements from the major central banks, most notably the E.C.B. and the Federal Reserve and yes, this is shaping up to be a big week.
Which means, in the end, expect very little from the central banks.
The data itself will carry the day and the markets, while hoping for big news leading up to these moments, are invariably disappointed by what is announced. The central banks have so thoroughly destroyed the proper workings of markets that they are now reduced to parsing word clouds from Bernanke’s testimony. The Fed’s discussion on policy each month takes around fifteen minutes, the rest of the meeting is spent crafting the propaganda to spoon feed the hedge funds desperate to eke out a quarter of a point of yield. With the S&P 500 (AMEX:SPY) trading near 1400 there is no reason for the Fed to print. The E.C.B., the Swiss National Bank, the Bank of England and the PBoC have already done so and that money, with their infinite swap lines, have already provided sufficient liquidity to prop up equities, bond and commodities all at the same time.
Why does the Fed need to act when everyone else is acting for them by proxy?
For those looking for a QE announcement this week, stop. The Fed has been tightening for months now. There are suggestions of loosening in last week’s monetary statistics but until the adjusted monetary base expands above $2.8 trillion there is no clear trend. The trial balloons have already been raised about lowering interest paid on reserves and the policy moves will be implemented at some point, sooner than later but not today. The Fed’s statement will be about forestalling the inevitable for as long as possible.
Bank credit is expanding. M1, M2,MZM and the multiplier are all rising at accelerating rates. If Wednesday’s data is as good as Tuesday’s consumer confidence and Chicago PMI data then the Fed will be under no stress to announce a major policy change. When one looks around the world and notes the extent to which the dollar is being replaced at the margin as the settlement currency for international trade it is obvious that the Fed cannot be seen as accommodating while it is busy attempting to soak up those Dollars that are no longer needed.
With everything that has happened in Europe and continues to happen, the fact that the Euro (AMEX:FXE) will not break below $1.20, thereby putting a cap on the USDX (AMEX:UUP) should be a red flag that the liquidity is already in the system.
The Fed does not have to announce QE3 because due to shifts in the global economy QE2 never really ended.
The big question will be the behavior in Gold and Silver. Those invested in Gold (AMEX:GLD) should be very wary of the Fed’s announcement tomorrow. Tuesday evening’s trading in Asia had the Silver (AMEX: SLV) price in mild backwardation during the first day of the delivery period for the July contracts. Gold’s curve is flat out for more than a year, meaning the physical market is very tight. Normally betting against Gold whenever Bernanke speaks is a good bet, the Bernanke Put exists in every market except Gold, but with the market this thin it will be harder than in the past for bears to push it down.
Trading the markets in weeks like this is nearly always a recipe for losing money. Take a page from The Government of Singapore Investment Corp. which has raised its cash reserves to 11%, higher than during the financial crisis of 2008. Failing that call your local coin shop.