Why Next Week's F.O.M.C. Meeting Looms Large
gold-eagle.com
Chris Temple
Next Tuesday, the Federal Reserve's Open Market Committee meets once again to discuss its monetary policy. Nobody expects Greenspan, Bernanke and Company to change the official federal funds target rate from its meager level of one percent. In fact, following this morning's release of still-lethargic employment numbers, futures markets have started backing off their bets that the Fed would finally begin raising short-term interest rates by next Spring.
Following the F.O.M.C.'s last few meetings, the central bank's rate setting arm has told the world that it does not intend to raise rates until the Second Coming-if then. This stance has served the Fed well, as it seeks to keep "the economy" moving forward by extending-and worsening-the consumer credit and housing bubbles. Wall Street has similarly bought this kind of phony prosperity hook, line and sinker, as traders have bid stocks back up to their highest levels in two years.
There's an old saying, though, that one can have too much of a good thing. While Fed officials' countless promises over the last few months that the central bank would keep interest rates low for "a considerable period" have had much of their intended effect on the various bubbles the Fed is trying to inflate further, it has also had a downside. In recent weeks, it's the negative effects of such an open-ended monetary inflation that have begun to be felt more; all of them a cause or consequence of a steadily weakening U.S. dollar.
As these nasty side effects of the Fed's actions have begun to move front and center on the financial pages, the need has grown dramatically for the F.O.M.C. to tell us SOMETHING different next week. Does it realize that a gold price now North of $400 per ounce puts the lie to its continued protestations that inflation is not an issue? Does it also acknowledge that its trashing of the U.S. dollar has caused a substantial decline in foreign capital inflows? Does it need a translator to grasp the incredible magnitude of the O.P.E.C. cartel's comments of earlier this week?
Last but not least-as much as it does not want to-will the Fed signal that it WILL raise short term interest rates sooner rather than later if that's what the markets demand?
A NEW INTEREST RATE WORLD
As the F.O.M.C. gathers, it will be in a world monetary environment that has changed in the six weeks since the last pow wow. For over two years, the world's central banks have pretty much been engaging in tag-team easing of monetary policy, as all of them have lowered interest rates and made new credit plentiful to goose economic activity.
But that's over.
In the last month, the Bank of England has begun raising short-term interest rates, desiring to moderate credit and housing bubbles. Australia's central bank has now raised short-term interest rates TWICE in about a month, following Wednesday's hike, for the same reasons.
Though the Fed may not "get it" yet, there are sufficient market participants becoming more concerned about future price inflation that they want to see some responsibility back in monetary policy. Far from being spooked, they have rewarded both sterling and the Aussie dollar with higher valuations. Signs are popping up that currency traders and bond buyers alike are moving back toward their historic behavior of putting their chips on those nations with the higher interest rates. In addition, those also whose economies are based on raw materials-Australia, South Africa and Canada, for example-are also enjoying buying interest.
In such an environment, the longer the Fed resists this trend, the greater the beating that the dollar will suffer. And this will especially be the case, I believe, if the Fed does NOT at least change its statement next week. Such inaction and denial on the part of the F.O.M.C. when the evidence is accumulating rapidly against the Fed's position would be rightly viewed not only as irresponsible, but delusional.
GOLD AT YET ANOTHER HIGH
I have believed for a while now that the Fed and its shills in the financial press would one day regret having called so much attention to the price of gold over the last year or so. That day may be here, as gold closed today at yet another new high of $406 per ounce on the cash price. This leaves the yellow metal within a mere $12-14 of a level it has reached and pulled back from several times (the last of these in early 1996) since its long, painful bear market began over 20 years ago.
Such luminaries as publisher Steve Forbes, former Congressman Jack Kemp, economic commentator and Republican National Committee ally Larry Kudlow and others have all been pointing to gold's ascent as "proof" that the Fed was successfully holding off deflation, and that its monetary tonic was working at reinvigorating the economy. They haven't told John Q. Investor this, though, in order to encourage him to buy gold-no, sir. Gold's rising price has instead been used as the rationale to convince the investing public that all was well with the world again, and that it was now time to come to Chairman Greenspan's and the economy's aid once more by doing the patriotic thing: shoveling money back into the stock market.
As I have asked many times lately, though, if investors, currency traders and other investors could take solace in a gold price which at $340, $350 or-I'll stretch here--$380 was "good," what does $406 tell them? What about $420, arguably the last remaining technical resistance level which, once breached, will confirm gold's bull market even for the skeptics?
We've reached the point where gold's rising price may finally be CAUSING-as much as being a result of-the weakness in the dollar. This dollar weakness threatens to get out of hand as well, largely due to the Fed and the Bush Administration both implicitly having invited it. The Fed has made bets in favor of gold and against the dollar virtually one-way, risk-free ones. Longer-term, neither of those trends is going to change. However, I have to believe that-as it crafts its post-meeting jargon for public dissemination next week-the F.O.M.C. will have both these items on its mind, and will be looking for a way to make both gold bugs and currency traders more honest, if not a little frightened.
OMINOUS O.P.E.C. COMMENTS
Though Fed Chairman Greenspan still has plenty of people bamboozled as he insists there's no "inflation," not everyone is so fooled. Some really do understand that a dollar just doesn't buy what it used to; and those people happen to sell a whole lot of oil to the United States.
Though O.P.E.C. decided to wait a while before reducing oil output, what oil ministers had to say earlier this week about their preferred target price must have sent the coldest shivers yet up Greenspan's spine. While not repudiating it outright, they suggested that their previous desired "band" of $22-28 per barrel for oil really needed to be "missed" to the up side. Simply put, that range was entered into a while back; and since then, the value of the dollar that oil is denominated in has lost a quarter or so of its value.
Thus, according to influential Saudi oil minister Ali al-Naimi, prices now over $31 per barrel really aren't too high. They-and the cartel-are simply adjusting the price belatedly to account for the Fed's debasement of the world's reserve currency. Notably, some members of the cartel even lobbied unsuccessfully for an overt new band. Venezuela's Hugo Chavez, for example, wanted the cartel to establish a new, stated band of $25-32 per barrel. Some say this was due more to his dislike of the U.S. than to economics. Maybe it's just sour grapes; after all, when the C.I.A. and the Bush Administration try to topple you from power, you tend to become unpleasant.
WE'LL BE WATCHING!
This whole cocktail has been made progressively worse for the Fed to deal with due to its own, willing trashing of the U.S. dollar. Honorable mention also needs to go to President George W. Bush, who's spending money (i.e.-running America deeper into debt) at a clip so fast as to make even Lyndon Johnson look like a fiscal conservative.
Whatever the case, we could well be mere weeks-if not days-away from a sudden unraveling of financial markets unrivaled since 1987. Many of you remember as I vividly do that investors-especially American ones-gleefully shrugged off all the same things back then that they are now. A falling dollar and rising interest rates meant things were "good." And, from late 1995's adoption of the Plaza Accord until the late Summer of 1987, investors bid up stocks to then-unprecedented heights in spite of the greenback losing darn near half its value in the interim.
But then-almost as if someone had flipped a switch-everyone decided to wake up to the fact that the dollar's long decline was evil. Moving from euphoric to panic-stricken almost overnight, stock market investors ran for cover. In a mere nine weeks, they shaved nearly 40% from the Dow Jones Industrial Average before the carnage was over.
Presiding over the Fed during the latter stages of that lunacy was the same man who now must decide which one(s) of a series of distasteful things he must say or do to avert a similar outcome. In the end, the long-term trends of a falling dollar, rising commodity prices and falling financial assets will not change regardless of what the Fed does. However, how the Fed NOW handles-or fails to handle-this delicate mess of its own creation will determine whether we get an immediate, 1987-style blow-off for stocks now, or a more gradual correction. Its willingness to at least fire a rhetorical shot across inflation's bow will also determine whether the greenback's slow but steady bleeding turns into a rout, and gold flies above $420 per ounce to who-knows-where.
In short, what's at stake next Tuesday for all the markets is more than it's been at any time in recent memory! |
