Gold up over $20, dollar falling, equity markets up, bond yields falling – just trying to get my head around the implications. In one way or another, what is happening is inconsistent with every analyst’s predictions. This brings into question the background dynamics – as many small investors wait on the sidelines fearing a musical chairs collapse.
For certain, Econintersect is not predicting good times ahead.
The current situation diverges from my predicted investing playbook. It appears economic war has broken out with most major currencies taking steps to weaken using Quantitative Easing (QE). Overnight, the Bank of Japan lowered its benchmark rate to zero. The real news is that Japan is now willing to begin QE with the initial purchase of $60 billion – a far cry from the Fed’s $2 trillion+ portfolio.
Fed watchers have been trying to read between the lines of all statements – and many believe the Fed is about to unleash a 50% growth in their balance sheets. Just the mention of additional QE appears to have weakened the dollar. I remain unconvinced that QE over the medium or long term affects the value of a fiat currency. Many want us to believe there is a direct correlation.
I believe a fiat currency’s value is driven by a slew of dynamics – and long term stability of the currency is one of them.
Fed Chairman Bernanke yesterday fired at broadside at USA fiscal policy implying the USA would be better off if it had realistic methods to control spending:
…….in Europe and elsewhere, seemed to have found fiscal rules to be helpful in achieving greater budget discipline. For example, Switzerland, Sweden, Finland, and the Netherlands all realized improvements in their fiscal situations after adopting rules that limit spending. Canada saw improvement in its deficit after it implemented spending limits in the early 1990s, and its ratio of public debt to national income fell substantially after 1998 when it put in place a “balanced budget or better” rule.
Strong fiscal policy is a dynamic which tends to strengthen a currency. This brings into question what are the Fed’s objective with the dollar. This is also a strong endorsement of the balanced budget movement – an interesting speech to make a month before elections.
In our uncertain economy, I can now add uncertainty with the dollar’s value to a list of uncertainties. The dollars value has a large impact on investing decisions.