Central Bankers on the Brink

At some point, you have to bow to the inevitable. “By now,” says Jim Rickards, “it’s clear that Janet Yellen will not raise interest rates when the Fed meets next Wednesday.”

Yes, we know. For nearly three months, Jim said the Federal Reserve had to preserve its credibility by raising the fed funds rate in March — a follow-up move to the increase in December.

Jim’s in Switzerland this week, presenting to a group of the biggest and most sophisticated institutional investors hosted by a leading Swiss wealth manager. But he’s still keeping a pulse on events back home. And those events have clearly shifted within the last couple of days.

“My expectation was that the market rebound since Feb. 11 would give the Fed a green light to raise rates,” he reminds us. It’s been an impressive rebound from the minor meltdown that began as soon as the calendar flipped to 2016…

chart

“It seems the Fed was more spooked than I expected, and they are literally afraid to raise rates for fear of another meltdown.”

No doubt: Traders in futures tied to the fed funds rate have been pricing in a 0% probability of a rate increase next week.

Hell, this morning they’re saying there’s a 4% probability the Fed will cut back to “near zero” rates — reimposing the seven-year state of monetary emergency that was lifted only last December!

cchart

This is Janet Yellen’s dilemma: Which is worse for the Fed’s credibility? Pausing the rate hike cycle she began only three months ago? Or massively violating market expectations reflected in the chart above?

Markets don’t like surprises. She’s opting for the less-worse choice and pausing. The Fed’s credibility will be torn only to shreds, not bits.

But then what? “All that happens is the rate policy debate now shifts from March to June,” says Jim.

“At that point, they will either have to raise rates (causing a train wreck with market expectations) or wait again. And at that point, we’ll be into election season and rate hikes will become difficult for political reasons.”

Speaking of damaged credibility, how about the market reaction to the European Central Bank’s “bazooka”?

As we noted yesterday, the ECB over-delivered on market expectations — doubling down on both negative interest rates and “quantitative easing.” Yet European stocks took a spill by the end of the trading day… and the major U.S. indexes were flat once the closing bell rang.

“Markets brushed off the efforts,” says the Dow Jones newswire, “raising questions about whether [the ECB] and other central banks still have the tools to bolster weakening growth and inflation after years of easy-money policies.”

We’ll answer the question right here and now: They don’t.

“Evidence is beginning to accumulate,” says Jim, “that negative interest rates produce the opposite effect that central bankers intend.”

We’ve already told you how negative interest rates are backfiring in Japan, mere weeks after they were imposed. In theory, negative rates spur people to borrow and spend, rather than lose money keeping their savings in the banks. But in reality, everyday Japanese have been pulling their cash out of banks… and stashing it home safes, of which there’s now a shortage.

Makes sense: Negative interest rates are a desperate measure, a signal of trouble ahead. What do people instinctively do when they sense trouble ahead? They sock away cash for a rainy day. Besides, why go out and spend your money if deflation is a bigger risk than inflation?

“The effectiveness of QE is also being called into question by recent academic research,” Jim adds.

When a central bank implements QE and buys government bonds, it drives up the price of those bonds… and drives down the rates on those bonds.

“The idea,” Jim explains, “is that if long-term rates are lower, investors will seek higher yields elsewhere by bidding up the prices of stocks and real estate. These higher prices in stocks and real estate create a ‘wealth effect’ that makes investors feel richer. Based on this wealth effect, investors should spend more money and stimulate the economy.”

That’s the theory, anyway. In practice, the Fed engaged in QE on and off for six years, to the tune of $4.5 trillion… and economic growth has remained stuck in low gear, barely 2% a year.

“The entire edifice of the Federal Reserve and the dollar rests on a single point of failure — confidence.”

So Jim writes in his latest book, The New Case for Gold — and talk about auspicious timing. Whether in Europe or Japan or the United States, confidence in central bankers is being lost.

Not coincidentally, gold put in a six-year low at $1,050 late last year. It’s already up more than $200 since then. As Jim said in this space last month, gold is no longer acting like a commodity or an investment. It’s acting like money. “It is competing with central bank fiat money for asset allocations by global investors,” he said.

“That’s a big deal because it shows that citizens around the world are starting to lose confidence in other forms of money such as dollars, yuan, yen, euros and sterling.”

Chances are if you read us regularly, you know that story. But did you know about…

  • … Jim’s “mystical” gold buying formula? Use this formula and you’ll know how much to buy. “Whether you have $5,000 or $5 million,” says Jim, “follow this simple formula and you’ll be more than ready to weather the coming storm”
  • Or about China’s “gold warfare” plan? If you have any traditional stock and bond investments, you must be in the know
  • Or about the No. 1 mistake people make when they buy gold?

Jim talks about it all in The New Case for Gold — due for publication April 5. If you have a valid U.S. mailing address, we’ll send you a free copy signed by Jim — as long as you can spot us the $4.95 shipping and handling.

You’ll also have the chance to listen in on an exclusive intelligence briefing drawn from the information Jim is picking up in Switzerland. “A major event will soon take place that is going to shake the very foundations of the gold markets,” he says — and you’ll be among the first to know.

Get your free hardback copy right here. There’s no obligation. Not even one of those long videos to watch. Sign up now and we’ll ship it to your door as soon as it comes off the press.

Regards,

Dave Gonigam
for The Daily Reckoning

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