Why a Fed Hike is good for Trump now, Gold Later
First a comment from our Banking Executive friend (BEF)who is bullish Trump, Gold, and has seen the ghost towns built in China as well as dealt with Trump real estate deals in the past.
We can only surmise that his love for Trump is based on his knowledge that Trump is transparent as he looks, ambitious but patriotic, and a billionaire who actually was teh person sticking it to Banks when he threatened default in the '80's. The man invented the TBTF model that the Banks are living under now. For us, Trump is so transparent with his intentions, he is safer than Hillary who would obfuscate a subpoena into her breakfast. Here is BEF's comment , funny and possible:
"Trump... in a landslide.
Gold continues to grind higher. Safes are sold out in Germany. Germans are buying safes reportedly to store marks... but soon to store gold. Everything (stocks, bonds, metal, oil) is now very highly correlated. Gold has been historically very highly correlated to oil. If oil crashes everything is going with it, except (counterintuitively) gold.
Only an EU international banking crisis can take down the barbarous relic at this point. Even then the floor is at $900. At the current QE rate the ECB will own all the outstanding EU sovereign debt in about 8-10 years."
Reality check: We don't think Trump is a risk in office simply because he is so transparent. All of Congress will line up to stop him. But Hillary cannot be stopped, especially if you are in her pocket. Trump is the Devil we know, Clinton is the wild card. All the ambition of Bill, half the talent.
To get from there to the title of this post, you'd have to believe given the current polls that Clinton will collapse under the weight of her own narcisstic ambitions,Trump will learn to shut up, and the Fed will have to raise rates before the election. Gold will dip, but QE$ will save you on the back end
Trump vs Gold- wrong, it's Trump WITH Gold if the Fed Hikes
So if you want Donald Trump as your next Potus, or anybody but Hillary:
You Want a Rate Hike Next Month
You cannot see us, but we are pounding the Table on recent events corroborating Vince Lanci's projection of how a rate hike could be good for Gold and that it would augur the next QE. -SK
From the Article:
How does it happen? We are not sure and are never married to the order of events. Being able to create tangents within a framework of concepts is easiest and keeps our thought process least biased. But right now it could go like this:
- Japan will start the ball rolling. Stocks and Gold will rally there in yen terms. Japan started this global deflationary cycle. They should be the first out of it
- China will have to further accelerate its Yuan depreciation against the USD. Remember their reaction to the Brexit vote? China potentially lost a favorable link to the EU via its relationship with the UK
- The UK and EU will also then consider more QE and helicopter money. Their reasons will be different, but their actions will be the same. For the EU it will be to rescue Italian banks. For the UK, it will be to help their exporting commerce.
- There will be a "whiff" of inflation but no-one will pay much attention
- The US will be forced to capitulate on its own Fiscal stimulus citing the damage done to our economy by a strong dollar etc.
- Stocks, bonds and Gold will rally with Stocks outperforming everything in what should be a massive blowoff top for them and Bonds
EDIT: Somewhere in here, the Fed will raise rates. Potential reasons are a soaring US Stock mkt post JCB Helo money, and/or a strong Aug Jobs report. Or later if neither happen for the Fed. Sometime Post Election, obviously- SK
ECBmon Go- Gotta buy 'em all (with US approval)
- More QE From Japan May Precede The Next Fed Hike- FORBES
- JGB cuts loose with money, Global stocks rally, Fed has excuse to tighten for perfectly logical reasons
- Nikkei bucks downward trend in Asia markets, boosted by weak yen- YAHOO
- b/c he JGB is going to use Fiscal Stimulus in a big way
- China should start devaluing the Yuan more agggressively b/c...
- 1) yen weakness= USD strength=Yuan strength >>the Yuan/USD peg must weaken
- Fed's Fischer says U.S. job market 'very close' to full strength | Reuters
- Consumer confidence hits 12-month high in August- USA
- And the Fed's wish is granted,
- All he needs for a straight Flush is that Aug Jobs report
More From Vince:
You have to Raise Rates to Lower Them
.......an old quote from traders who used to say, " If you want someone to buy from you, you have to bid first to get them to join you. Then you smack their bids. Otherwise how will you get exit liquidity? " Essentially the mechanics of spoofing, if you will. Raising rates might create the situation that is needed for another round of Quantitative Easing and likely some form of permanent debt monetization like "helicopter money". In our global scenario we have been seeing tells that QE and more is coming on a globally coordinated basis. We think ground zero for the implementation of Helicopter money being officially used will be in Japan. Remember when Bernanke made his trip to speak with Kuroda about a month or so ago? That was to get people on the same page while keeping the Fed at a perceived arm's length away.
So while we remain flexible on the tactics potentially employed, the strategy remains the same.
Deutsche Bank's Elevator Pitch for More QE
Somewhere in that mix, the Fed will have to raise rates first. They will have to raise 25 basis points to lower 50 effectively and launch QE4. That is a tactical decision and we are sure there is some trigger for it. Perhaps it is the S&P above 2300. Perhaps it is a truly good economic release. But whatever the reason/excuse, the rate hike will cause the stock market and Gold to selloff. And that selloff will be at or near all time highs for stocks. So the market will be able to take that hit for a while. Conversely, gold will not be at all time highs, meaning the Fed has done its job in their minds. And then you get QE4 and turbo money. You gotta bid to sell indeed.
Then we get inflation. The kind you cant cure just by raising rates. For a proxy on the Fed's future inflation-fighting prowess, just look at what lowering rates for 10 years has done for deflation. Why do they think they can stop it once it starts so quickly?
Here's Deutsche Bank's rationale for what we are attempting to describe. DB would be first inline as a bank in need of money, so their pitch isn't objective by any means. But who's is?
So, for those who care, here is Deutsche Bank's elevator pitch for why helicopter money should be next:
- We have evolved to the point where familiarity with QE breeds acceptance, while unfamiliar ‘helicopter money’ policy, unfairly breeds contempt.
- Compared with the scale of QE liquidity dropped into financial institutions, piling up in the form of excess reserves, the exante and expost calibration of Helicopter money can be considered almost surgical. Helicopter money legacy issues are miniscule compared with the QE overhang of liquidity in the system, and a costly and bloated Central bank balance sheet, which is so difficult to reverse.
- QE forces a substitution into riskier assets, which is another way of saying it inflates and distorts the price of risky and less risky assets, with implications for all balance sheets, and inter-temporal economic decisions. Helicopter money is less likely to distort every asset price in the economy, when compared with deliberate financial repressive policies like QE and negative rates.
- One of the big criticisms of helicopter money is that it is open to political abuse and that the coordination of fiscal and monetary policy, threatens Central Bank independence. This is less of a worry if there is a clear institutional framework whereby the Central Bank has the final say on whether to participate in any helicopter scheme or not, and they can ‘right size’ the stimulus.
- If one has to be cautious about Helicopter money it is less about whether it can be successful, and more about how in these times of excessive demand management, any effective tool is apt to be used to the point of abuse.
- Helicopter policy that successfully supports growth (with contemporaneous rightward shifts of the IS and LM curve) inclusive of favorable multiplier effects, will likely temporarily drive nominal interest rates higher, and the question for real interest rates (that with nominal rates is a key FX driver) is whether inflation expectations rise more rapidly than nominal rates.
- Carefully calibrated and contained Helicopter actions, by an independent and historically credible Central Bank (not an oxymoron), would likely have a contained impact on inflation expectations. This is especially true, if Helicopter money is pursued in emergency deflationary circumstances. As such, any initial kneejerk selling of a currency when a G10 country pursues a measured Helicopter solution that is befitting of its large disinflationary output gap, is likely to be a medium-term buy the currency dip opportunity.
- Because Helicopter money is less directed at using currency weakness as a core transmission mechanism than QE or particularly negative rates, Helicopter money should be more, rather than less acceptable to an international community worried about currency wars.
Essentially, Stocks will Go up until the Fed Stops them. Maybe its a price of 2300 in the S&P. Maybe its a strong unemployment number, as suspect as those are given their ability to defy all projections. Maybe its post a JCB Helicopter raid. Here's highlights from Kuroda's speech at Jackson Hole if it helps
Kuroda Synopsis: a mix of things heard before and a declaration that NIRP is here to stay as a tool.
- “There is no doubt that there is ample space for additional easing in each of the three dimensions”- restatement of obvious
- “The bank will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target”- nothing new to us
- “The zero lower bound is no longer insurmountable in practice"- yikes, that sounds to us like it is a new normal in Fed policy
- “It is natural to assume another lower bound exists”- Can't know how far a stick will bend unless you actually break it we guess?
If it happens you get to eat your cake and have it too.
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