It’s clear now: The cheap money pumping isn’t going to stop unless inflation kicks higher.
That seems all but inevitable now as both the Bank of England and the Federal Reserve weaken their “forward guidance” constraints on near-0% interest rates as unemployment rates fall faster than expected (mainly due to labor force dropouts). A recent spate of weaker-than-expected economic data also ensures that short-term rates will remain lower for longer — even if the Fed keeps tapering its “QE3” bond-buying program.
They’ve moved the goalposts to keep the cheap money — and the liquidity-addicted stock market — on a roll. And thus, with a small group of unelected bureaucrats responsible for the price of money (and indeed the price of financial assets as well), it’s all but assured that the cost of living is headed higher.
Instead of focusing on employment rate (which has fallen faster than they expected), more nebulous concepts like spare capacity, long-term unemployment and workforce participation rates are cited as policy benchmarks. But more than anything, the central bankers feel they don’t need to act unless inflation — with the Fed’s preferred measure rising at just a 1.1% annual rate — becomes a problem.
The market is already responding.
The Dow Jones Industrial Average has bounded back over the 16,000 level as it crosses over its 50-day moving for the first time since October. Crude oil earlier this week pushed toward the $102 a barrel level for the first time since October, too. Gold has crossed its 200-day moving average — a level it hasn’t been above in a year. And precious metals mining stocks are coming to life in a big way, reversing persistent downtrends going back to the last inflation scare in 2011, when higher food prices encouraged Arab Spring revolts and higher oil prices.
Central bankers have grown increasingly
desperate creative over the last few years as they use every trick in the book to keep the economy going. The result has been a flood of liquidity into the financial system that has pushed interest rates to lows never before seen in human history.
In an era of household indebtedness, stagnant wages, government deficits and unfunded entitlement liabilities, there’s really no other way. A more lasting solution would involve solving the root causes of the economic malaise, including unreformed social programs, a lack of corporate investment, unskilled workers and over-reliance on credit.
But those are harder. It’s easier to just juice the stock market with cheap money and hope for the best.
And that’s what they’re doing as indicated by comments from BoE head Mark Carney and new Fed chair Janet Yellen this week. As a result, they’re making the same mistake their predecessors have made: forgetting that monetary policy operates with a nine- to 12-month lag.
If they think inflation is going to return to their 2% targets and that the economy is showing signs of improvement (outside the recent softness many are blaming on severe winter weather), rates should already be recovering to more normal levels. Instead, not only are short-rates pegged near 0%, but the Fed still is buying $65 billion a month in long-term bonds.
Households will soon feel the inflation pinch, likely via higher food and fuel prices this spring and summer. An epic drought in California will hit prices for fresh fruit, vegetables and nuts while severe weather has decimated America’s cattle herd.
The U.S. dollar is also weakening on expectations of a continuation of easy monetary policy, threatening to fall to retest 2011 lows, which will boost import prices due to the currency effect.
The good news is that this is presenting an opportunity in gold and silver mining stocks — one of the only areas left in this market that presents a modicum of value. (Read about five opportunities I’ve highlighted recently.)
Anthony Mirhaydari is founder of the Edge, an investment advisory newsletter, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended SIL and GPL to his clients.