Fed heads from A to Z have spoken in the last week. They have declared with one voice that the Fed Funds Rate will be raised at their March 15 meeting. They say it is because the economy is strengthening.
No. I have seen all kinds of ‘explanations’ but none of them work for me. As Dorothy said in the Wizard of Oz, this isn’t Kansas anymore. We have come to a very strange place indeed.
What is the most crowded trade in the world? Why, the U.S. dollar of course. And it’s becoming more crowded by the day. Here’s the Merrill, Lynch take:
I was wrong. The Trump inflation trade is back with a vengeance. Stocks and the dollar are up, bonds and gold are down (not a lot). Speculation over the Trump tax proposals (Trump called them ‘phenomenal’ last Thursday with no details) got the mania going again. Sentiment is now at all-time record highs for stocks and the main indices are making new highs every day.
Remember what the Trump story is all about? His policies will drive economic growth higher, inflation will rise, the Fed will need to raise rates faster and the dollar will soar. To see the story, all you had to do was look at short-term U.S. interest rates which were climbing fast after years of stagnation and deflation worries under Obama. That’s why the Trump trade is also known as the inflation trade. Buy stocks and the dollar and sell bonds and gold because bond yields are going higher.
The news is full of confidence surveys in which consumers and business people say how confident they are that the economy is getting better and the future looks bright. There’s just one little problem: they aren’t acting it. They aren’t walking the talk.
You may remember that I have been warning you that the next financial crisis will probably start in the bond market. And it does look like we are getting closer. As Bloomberg notes, EU sovereign bonds have handed investors the worst start to a year on record. Losses are mounting quickly.
As I noted last week, I think we have seen the bottom in the gold correction. More evidence of that came today with the release of Friday trading data from COMEX. Last week, as the gold price began to fall towards its 50 day moving average where corrections usually end or breakdowns can begin, COMEX Speculators blew an enormous number of contracts out the window.
My regular readers will know my argument that the stock market is highly over-valued and that stock market performance is all about, and only about, loose central bank policy. The Fed has stopped money creation via QE and has started to raise interest rates. I have therefore been expecting the market to figure out that the reason for higher stock prices is leaving the building, leading to a serious stock market correction. Today we got new highs instead which makes me wrong at the moment. But my thinking has not changed. Central bank policy is still driving the bus and it is not going to work for much longer.
For the first time in many months, there is a hint of backwardation in the physical gold market. It means that demand is rising, dear reader, possibly a trend change. It means that holding physical gold may now be slightly preferred to holding U.S. dollars.