The Fed held interest rates steady today. It was the wrong decision.
Central banks are increasingly becoming big drivers of deflation. Look at the ECB last week and its announcement that it was now going to buy high yield bonds. That was the day the markets topped out. Stocks and many materials markets turned south and have been heading down since.
The ECB has been driving massive deflation in Europe via its negative interest rate policy and ongoing asset purchases. Now it's buying high yield. That's HIGH YIELD income that would have gone into the economy. And Draghi wonders why deflation has been so hard to counter? For chrissakes, he's the one driving it.
Now we have the Fed and Yellen and her extreme cautiousness. The Yellen Fed is probably the most cautious Fed that I have ever seen. She did one rate hike back in December. That's it. Even so that was a success. It got things going. In fact if you go back and look at what happened after that December 16 hike you will see that gold bottomed and commodity markets all started moving higher. Stocks climbed, etc. Growth started to pick up.
We've been lucky because so far this fiscal year government spending has been strong. It's up bout $90 billion over last year and last year was the strongest spending in five years. It's been the only thing that has kept us out of recession, but not by much. We're only growing at 0.8%. That's not enough..
We've been lucky with this government spending. However, we continue to face extremely strong headwinds most of those being injected by central banks and their insane deflationary policies. It's like a diseased academic dogma that's taken hold of policy and it's literally killing the global economy. Negative rates, income removal and the belief that all of that is stimulative? Utterly insane.
I have been correctly bullish since last year on the economy, stocks and risk assets. I have not been calling recession for the past three years like others because of the deficit. By the way, the deficit is now $93 billion higher than last year. Where are those people who have been screaming that the deficit is too small? Maybe it is, but at least acknowledge the fact that it's growing again. They don't. Why? Because they don't even know. They're too lazy to even look.
What we're facing now is probably a stall. I'm hoping that's the worst case. Maybe we continue to grow real, real, slow as spending continues to rise, but no acceleration. Not with the central banks fighting this recovery with everything they've got.
Let me finish by talking about gold. I've been bullish on gold since last December. That's when the Fed raised rates for the first time in 9 years. I wrote in this blog, BUY GOLD and gold's been going virtually straight up since that call.
Last week it was all over the news that George Soros was buying gold and selling stocks. I laughed. Here's a guy who, recently at least, has been talking lots of nonsense. About China credit bubbles and global "uncertainty," and more. Based on this "rationale" it's an amateur move, buying gold. "Uncertainty" is not a reason to buy gold.
With deflation ratcheting up this could be 2014 all over again for gold. In other words, the beginning of a big decline. George better watch out.
Had the Fed raised rates today I would have been bullish as hell, but that didn't happen and not only didn't it happen, but what came out of that meeting at least for me was a timid and confused Fed. Yellen's frightened and confused as hell. This is probably what a Hillary Rodham Clinton presidency will look like. Immense caution when it comes to the things we really need and bold, irresponsible action on the things we don't need. Like wars.
Anyway, I'm not saying dump stocks. Not just yet. The spending could pull us through. Barely. But right now it's all we got.