Risk of 1937 Relapse As Fed Gives Up Fighting Deflation – Tightening Monetary Policy Even Though Core PCE Inflation Has Fallen To The Lowest Levels In Living Memory- Gold Keep Falling, Outrage Liquidation Continues, Banks Stopped Lending
It has set off an emerging market shock and risks “blowback” from a fresh spasm of the eurozone debt crisis, and it is letting all this happen at the same time, before the US economy is safely out of the woods.
It has violated its own counter-deflation strategy, tightening monetary policy even though core PCE inflation has fallen to the lowest levels in living memory and below levels deemed dangerous enough in the past to warrant a blast of emergency stimulus. It is doing so even though the revival of bank lending has faded.
The entire pivot by the Federal Open Market Committee is mystifying, almost amateurish, and risks repeating the errors made by the Bank of Japan a decade ago, and perhaps repeating a mini-1937 when the Fed lost its nerve and tipped the US economy into a second leg of the Great Depression. “It’s all about tighter policy,” was the lonely lament by St Louis Fed chief James Bullard.
The Fed seems to be acting in the belief that the US economy will shake off this year’s fiscal tightening – 2pc to 3pc of GDP – and that a housing recovery is now entrenched. The sharp fall of Wall Street’s homebuilders index would suggest caution. Unlike the surging Case-Shiller index of house prices, it looks forward, not three months backwards.
The Fed could have kept policy steady, welcoming the shake-out in frothy markets over the past month as a useful “fire-drill” for future QE exit, without pushing its point too far. It chose to escalate.
Gold Is Falling Again
Gold crashed through $1,300 days ago, and it’s heading toward $1,200 today.
The yellow metal appeared to be getting its footing earlier today, but the bottom fell out again minutes ago.
Check out this intraday chart from FinViz.
Is this the next key support price for Gold?
CLICK ON CHART TO ENLARGE
Almost two years ago the Power of the Pattern shared that Gold looked to be forming a Bearish Eiffel Tower pattern (see Gold Eiffel here) and that the Swiss Franc was suggesting Gold will be flat to down for years to come (see Franc here)
The above chart reflects that the Eiffel Tower pattern is still putting downside pressure on Gold, as it freshly breaks below an 8-year support line.
Goldman On China: ‘Sufficient’ Liquidity But Tightening Bias To Stay
The People’s Bank of China (PBOC) released an official statement addressing directly the latest liquidity conditions in the banking system and indicating that the central bank intends to maintain sufficient liquidity conditions in the interbank market. As Goldman notes, this clear communication of policy intentions is highly important to guide market expectations, avoid liquidity hoarding, and contain excessive volatility of market. While they hope this calms markets in coming days, Goldman notes that theinterbank rates are likely to settle back to a level higher than before to rein in leverage growth. However, in a helpful prompt for more jawboning, the squid notes, continued communications on policy intentions and actions will be helpful to further ease market uncertainties, given the extreme volatility in recent weeks; though we note the tightening bias will remain as the new leadership appears to prefer to take their pain early (and blame previous parties) than wait.
Leeb – There Is Outright Panic & Liquidation Now Taking Place
I’m trying to focus on the reasons for the collapse, not only in gold and silver, but most of the stock markets across the globe. A lot of investors read Bernanke’s comments about ending QE, if certain economic conditions were achieved, as a reason to liquidate.
Investors firmly believe that the end of QE is like cutting the floor out from underneath the stock market. At the same time, China has decided to curb a lot of bad investments in their economy.
The U.S. dollar slipped Thursday, down after six straight days of gains and ahead of the release of U.S. consumer spending and labor-market figures which could affect the Federal Reserve’s policy outlook.
The ICE dollar index DXY -0.06% , which measures the U.S. unit against six other major currencies, fell to 82.836 from 82.964 late Wednesday, when the index notched its sixth consecutive win, the longest streak since May 2012, according to FactSet data.
Not unexpectedly following news that various retail and online banking services had been impaired in the early part of the week at China’s biggest banks, now Caixin reports that banks are simply shutting lending to both businesses and individuals.
Eurozone Banks Stop Lending To Each Other
EUROZONE banks are refusing to lend to peers in other countries in the common currency bloc, signalling a worrying fall in confidence that appears to have worsened since the Cyprus bailout earlier this year, data analysed by Reuters shows.
European Central Bank data shows the share of inter-bank funding that crosses borders within the eurozone dropped by one-third, to just 22.5pc in April from 34.5pc at the start of 2008.
The silent retreat to within national borders is most pronounced in the troubled economies of southern Europe, but is even seen in Germany.
Russian Market‏@russian_market1 m
Old Swiss Banker tells me that Gold will fall to $750; Silver to $12 in 7 weeks -> quotes forced liquidation at central banks incl. #SNB