Related topics: gold, Federal Reserve, housing, foreclosure, Bill Fleckenstein
I have often used this space to rail against the Federal Reserve, and with good reason, as its policies have been a financial catastrophe for this country and the average person. Hence my view that it is important to own gold (and perhaps other investments related to it).
But we should not lose sight of the fact that the Fed is not the only central bank whose decisions could also fuel the investment demand for gold.
Certainly the situation facing Greece, which has been pushing and pulling at the market, should be watched carefully. My friend in Europe, whom I refer to as "The Lord of the Dark Matter," made a particularly clever observation last week when he noted that, "The guardians of EMU have reached terminal ineptitude velocity."
But he cautioned that, "at a moment like this, of maximum policy pessimism," the European Monetary Union leaders (if that isn't an oxymoron) tend to find a way to pull a rabbit out of a hat, though it is certainly not easy to see what variety they might come up with this time.
His observation was followed on May 31 by a spate of stories regarding the (next) potential Greek bailout. According to most of the headlines, the powers that be in Europe are going to put another bailout package together by the end of June, thus there won't be any imminent restructuring of Greek debt.
Bill Fleckenstein
Beware of Greeks bearing bonds
While I suppose that is plausible, it doesn't quite fit with the fact that the premium on Greek credit default swaps -- basically, investments that provide insurance against Greece defaulting on its debt -- fell by only about 55 basis points that day (i.e., 0.55%) on a base of roughly 1,500. (That may be because people agree with the Lord of the Dark Matter, who followed up in emails this week to say that, in his opinion, no matter what the authorities come up with by June 30, "Greece will default," though there's no telling when.)
In any event, a Greek default will take the form of a debt restructuring by the European Monetary Union, and I have a hard time seeing how such a development would be bearish for gold.
The only thing we have to fear is more Fed research
On the home front, protection against currency debasement and inflation produced by the loose monetary policies of the Fed are the main reasons to own gold. The Lord of the Dark Matter forwarded me the May economic letter from the San Francisco Fed, which sheds some light on the attitude toward inflation there.
If I didn't know it to be authentic, I would have sworn it was a spoof. The essence of the letter is that, while the public is worried about inflation, we shouldn't be, because we're always wrong -- implying, of course, that the Fed is always right.
The authors of this paper set the tone early: "Since commodity price shocks have occurred relatively often in recent years, this excessive sensitivity has meant that household inflation expectations have performed quite badly as forecasts of future inflation."
They are responding to the fact that, in a recent University of Michigan survey, household inflation expectations averaged 4.5% over the next year or so. I expect that will prove to be optimistic.
From the people behind 'The New Economy' and 'Contained!'
Of course, these fellows in the ivory tower, who missed the fact that they created two giant asset bubbles, think the public is wrong about where it sees inflation. I don't know which prior forecasts the letter is referring to that have supposedly been so inaccurate, but I don't think it matters. The ultimate sign of arrogance was the conclusion to this official effort to jawbone the market toward its point of view:
"At the same time, the high sensitivity of household inflation expectations to noncore inflation is puzzling. One could argue that this excess sensitivity reflects the fact that consumers buy things such as food and gas more frequently than they buy home furnishings or haircuts. In this case, expected inflation should come down relatively quickly because households will buy enough nonfood and non-energy goods at some point. It's also possible that households' sensitivity to noncore inflation goes up following substantial, sharp increases in the price of energy and food items, such as those that occurred in the 1970s and over the past few years. This would be consistent with higher household sensitivity to noncore inflation at either end of our sample. . . . This similarity to the 1970s is unsettling because it suggests that consumers are not accounting for the ways monetary policy has changed over this period."
That last line is one that should have been delivered by someone like Chevy Chase or Jimmy Fallon pretending to be a Fed spokesman. The only thing different between the Fed's operating procedure during the 1970s and now is that it is infinitely more reckless. The fact that it has worked so hard to rationalize away the public's fears that inflation might pick up shows you how truly detached the Fed is from reality.
