In the past, we would see investors flocking to GOLD if there was fear of a market collapse.
As you can see in the following chart, US financial conditions is at a local low (not surprising given that The Fed is printing money at a 24.24% year-over-year basis). Around the Covid breakout and Fed (over) reaction, Gold and Silver jumped and Gold subsided only to recently rebound.
But is the explosive growth in cryptocurrency Ethereum a result of fear? Fear that overly easy financial conditions and explosive money printing will cause a bubble that will burst.
Since 2008, The Federal Reserve has eased financial conditions tremendously, helping boost prices to record highs. For example, commercial and residential housing prices are much higher than at the peak of the housing bubble in 2005.
The Fed has flooded the economy with epic amounts of money …
Federal Reserve Chairman Jerome Powell has called the risks emanating from “frothy” stock prices and other potential financial imbalances “manageable.” Some current and former central bankers are not so sure.
They worry that the Fed’s rock-bottom interest rates and massive bond buying might lead to asset price bubbles, and excessive risk-taking and leverage that could come back to haunt the economy.
“We’re now at a point where I’m observing excesses and imbalances in financial markets,” Dallas Federal Reserve Bank President Robert Kaplan said on April 30. “I’m very attentive to that, and that’s why I do think at the earliest opportunity I think it will be appropriate for us to start talking about adjusting those purchases.”
Powell, for his part, has shown no inclination to pull back on the Fed’s support for the pandemic-damaged, yet recovering, U.S. economy. But he’s lately sounded a bit more wary about potential dangers to financial stability.
Then we have The Fed’s Vice Chair Richard Clarida:
The U.S. economy still has a “long way” to go before repairing the harm of the Covid-19 pandemic and it is premature to discuss scaling back central bank asset purchases, said Federal Reserve Vice Chair Richard Clarida.
“We’re still a long way away from our goals,” Clarida said Wednesday in a television interview on CNBC, adding that policy makers will act on incoming information about the economy rather than projections.
With Q2 GDP growth forecast to be 13.567% and unemployment at 6%?
Nearly 90% of S&P 500 companies beating earnings estimates this quarter (65% is post-1994 average) with a little help from their friends, The Federal Reserve. That is INORGANIC growth using near-zero interest rates and mega leverage.
Can The Fed EVER withdraw its stimulus needle from the economy?
Of course, the Biden Administration’s massive Covid-relief checks provided a displacement for working. While that seems obvious, how did the economists misjudged the jobs report so badly.
U.S. lumber futures rallied as much as 4% to $1,541 per 1,000 board feet Wednesday, the highest ever for a most-active contract. The surge came as voracious home-construction and renovation demand sends builders scrambling to secure the wood they need. Prices have quadrupled in the past year amid the activity, catching sawmills off guard during the pandemic. The rally, which some expect could continue, is hitting pocketbooks and potentially pushing first-time homebuyers out of the market.
Of course, no one at The Federal Reserve calls this “inflation.” With M2 Money growing at 24.2% YoY and home prices growing at 12.2% YoY?
Of course, any price change can be waved away by saying excess demand and/or supply restrictions. In Fed-land, there is NO inflation. Why? Then The Fed would have to raise rates and slow down the money supply pump.
When I was at Ohio State University, Steve Buser and I started the Student Investment Management (SIM) program in 1990 with $5 million from OSU’s endowment fund. It was a fun class to teach and we were featured in Time Magazine, Barron’s, the BBC and United Airlines in-flight news, among others. So, today’s news was always fun to talk about. Like this …
Volatility gripped financial markets as a selloff in some of the world’s largest technology companies dragged down stocks. Treasuries climbed with the dollar.
The S&P 500 headed toward its worst day since mid March, while the Nasdaq 100 sank 2% amid a rout in megacaps Apple Inc., Tesla Inc. and Amazon.com Inc. CVS Health Corp. climbed after raising its full-year forecast as Covid-19 vaccines and testing helped boost first-quarter results and offset a weak cold and flu season.
A sharp drop in equity futures earlier Tuesday left traders scrambling for reasons to explain the move. The catalyst behind the decline was unclear, but investors speculated on military tensions between China and Taiwan, Singapore’s tougher lockdown and Ferrari NV’s decision to postpone financial targets.
Today’s 3-month Treasury auction revealed an even lower 3M high yield rate than the previous auction. The 3M high yield was 0.015%.
The ultra-low yield comes after The Fed increased their Treasury bill holdings in late 2019 and early 2020. And Powell’s dismissal of any slowdown of Fed monetary easing.
On a different note, nonresidential construction spending fell in March by -1.1% while residential construction spending rose 1.7% from February.
Printing a ton of money helped residential construction spending.
Gold, silver, Ethereum rise as Fed’s Powell signals resistance to slowing monetary easing.
Mortgages ended April with one popular valuation metric at its tightest spread since September of 2012, back when the Federal Reserve announced what would come to be labeled “QE3.”
That name was applied as it was the central bank’s third round of quantitative easing since the collapse of the Great Moderation in 2007. Markets are now on their fourth round of QE — the latest started in March 2020 — which has helped drive the Fannie Mae 30-year current coupon spread over a blend of the 5- and 10- year Treasury yields to 0.60% on Friday.
The Fed statement from September 13, 2012 declared that in addition to $40 billion a month in mortgage-bond purchases, it also expected the federal funds rate to stay at “exceptionally low levels” at least through mid-2015. The bank would go on to purchase $1.4 trillion in agency mortgage bonds through October 2014.
Today, the Fed Chair Jerome Powell has been unmistakably firm that he intends to keep QE4 at its current pace — adding $40 billion MBS per month — at least over the near-term. Consensus is for it to last through year-end. The bank has purchased nearly $2 trillion mortgages so far this round of QE.
So the question that hangs over the mortgage market remains the Fed’s time-line to begin tapering its mortgage purchases. Morgan Stanley analysts noted on Friday that “mortgages are snug on most every metric.” That makes it difficult to argue that they are set to tighten further, even with the central bank holding a heavy supportive thumb on the sector’s valuation scale.
For now, April saw the U.S. MBS index earn 0.11% in excess return over Treasuries. The month of May, historically, has offered average excess return of -0.11% over the last ten years, the third worst compared to all the other months of the year during that time frame.
The Great Modernization? Essentially this means ignoring sensible Federal Reserve guideline like the Taylor Rule which now suggests that The Fed Funds Target rate should be 3.25%, but is being held at 0.25%.
The April 29th Treasury auction produced some very European/Japanese-like results. As in a 0% 4W high yield rate.
And thanks to Green Man (Fed Chair Jay Powell), the Fed’s System Open Market Account Holdings of Treasury Bills soared in 2019/2020 helping to drive the 4W yield to 0%.
The 0% 4W yield rate is very Japanese-like. Except in Japan, Treasury yields are negative at tenors of less than 10 years.
Europe has 20 nations with 2-year Treasury yields of less than 0%.
The US 3-month Treasury is being auctioned on Monday.
The way that The Federal government measures inflation shows that there is little impact from the dramatic increase in M2 money supply. US Personal Consumption Expenditure Core Price Index YoY is only at 1.41%.
Yet a number of commodities and housing have increased along with the massive expansion of Federal Reserve M2 money stock. For example, used cars (Manheim US used vehicle value index) has increased 36% since December 31, 2019. Lumber has increased 149% over the same time period and copper has increased 43%. Home price growth has increased to 12% YoY, up from 6.6% for December 2019.
Yet the US Personal Consumption Expenditure Core Price Index YoY is only 1.41%.
Food? Up 70% since March 2019.
Since April, investors are seeking protection in the form of gold and silver.
Of course, there are droughts and weather events that impact food prices. And growing economies can drive up commodity prices. Then again, markets may simply be drunk on Fed money printing.
