Storm pits nature against the Fed -- again

Isaac, which is following Hurricane Katrina's path and threatening the Gulf's energy infrastructure, is exactly the foil that hampers the central bank's ability to stimulate growth.

By Anthony Mirhaydari Aug 27, 2012 12:39PM

How the plot thickens. A few weeks ago, I wrote that a standoff of sorts had developed. On one end was the Federal Reserve worried about flagging economic growth, rising joblessness and the specter of outright recession should the Eurozone crisis go sideways or if Congress bungles the "fiscal cliff" issue later this year. On the other were the acts of nature that threatened to boost inflation and neutralize the cheap-money stimulus of the central banks.

 

At the time, the concerns were extreme drought, poor crops, wars of religion in the Middle East. Now Tropical Storm Isaac threatens to wipe out energy infrastructure in the Gulf and send energy prices soaring. The timing is just terrible.

 

For one, consumers are just now starting to get back on their feet, thanks to the March-June drop in oil prices from around $110 a barrel down to $78. They're back up in the mid-$90s now, but the pullback in consumer inflation that resulted has boosted real wages, caused retail sales to surprise to the upside and pushed the personal savings rate higher.

 

 

With Q2 GDP growth clocking in at just 1.5%, losing this source of strength on a spike in gas prices would be bad news.

 

Moreover, markets are waiting with bated breath for the upcoming Jackson Hole central banker retreat (starting Friday) and Fed and European Central Bank policy meetings next month for signs of new easing measures. If Isaac boosts inflation and keeps policymakers on hold for fear of repeating the inflation spike that accompanied QE2 in late 2010 and early 2011, prices of stocks, commodities and other risky assets will react violently.

 

Back then, it was a combination of higher food prices, the political unrest of the Arab Spring, the Japanese earthquake, tsunami and nuclear disaster, and the resulting spike in crude oil that sucked the wind out of the economy, nullified the Fed's efforts to boost growth and sent stocks lower.

 

A very similar situation threatens to unfold again.

 

We've already seen action. The ECB cut its deposit rate. The Fed extended Operation Twist. The Bank of England unveiled a "funding for lending" scheme. And the People's Bank of China embarked on its first rate-cutting cycle since the recession.

 

More was expected at the ECB and Fed meetings earlier this month, but alas, policymakers punted into September. Well, September is almost here. It's decision time.

 

As August ends, officials are starting to set expectations. There has been a steady stream of drip-drip media leaks out of Europe that the ECB is prepping action and that Spain, the country that needs help with unsustainably high borrowing costs, is coming around to the idea of asking for help. And last week's release of the Fed's latest meeting minutes shows that officials are not only mulling more action but are examining the actions taken by the ECB and the BoE for ideas.

 

 

There is certainly plenty of need for additional monetary policy stimulus, despite the fact short-term interest rates have been near zero since 2008. Money velocity, a measure of how quickly dollars circulate in the economy, has plunged to postwar lows as banks withhold credit. Bank of America Merrill Lynch economists highlight something called the "global money gap" -- a measure of global narrow money versus GDP that ECB researchers have found tends to lead the economic cycle -- which has fallen into negative territory for the first time since the run-up to the 2007-09 recession. That's a bad sign.

 

Leading economic indicators have also been soft, from Taiwan export orders to Chinese flash PMI numbers. There were also poor Japanese trade figures and ongoing weakness in the Eurozone.

 

But before we get to the September policy meeting, we have the central banking symposium at Jackson Hole, Wyo., kicking off next Friday. It was there, two years ago, that Fed chief Bernanke first teased the second round of bond buying that supported the economy and markets in 2010 and 2011 before inflation kicked higher.

 

All eyes will be on Bernanke as he takes the mike at 10 a.m. ET Friday -- unless Isaac, and the invisible hand behind the storm, steals his thunder.


Trading update

I continue to recommend my readers and newsletter subscribers focus on the one area of the market that continues to demonstrate relative strength: precious metals and the related mining stocks.

 

If the Fed wins the standoff and pushes through more stimulus, then gold, silver and mining stocks will move higher on higher expectations of both economic growth and inflation as well as the likely drop in the U.S. dollar. If nature wins and inflation spikes, then these assets will do well anyway as investors look to hedge against rising prices.

 

I'm expanding my exposure to the area by adding Keegan Resources (KGN) to my Edge Letter Sample Portfolio.


Disclosure: Anthony has recommended KGN to his newsletter subscribers.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


VIDEO ON MSN MONEY

15Comments
Aug 27, 2012 4:18PM
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"There is certainly plenty of need for additional monetary policy stimulus"?? Are you f***ing kidding me?Can this Anthony guy be any more clueless?? Does he work for the Fed or what?? That's the LAST thing we need!! More worthless dollars thrown at the problem creating mre debt and doing NOTHING long term to help any one. IT DOES NOT WORK IDIOT!!!!

Aug 27, 2012 5:46PM
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Wake up folks!  It's not what the economy needs it's about lowering everyone's debt through inflation. (including most especially, government debt)  Never mind the damage it does to people who were respondsible and saved all their lives. Reward the irresponisible and punish those who played by the rules.  This will only end badly.  The problem is that it will end badly for the middle class while the rich invest to avoid the plague.
Aug 27, 2012 4:43PM
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More counterfeit money from the Fed is great for Wall St. and poison for main St. I can"t believe

they can even talk about it,that in itself drives commodities up and real wages lower.

Aug 27, 2012 4:40PM
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What Jesus did to the money traders in the temple is what we need to do to Wall Street!  Nuff Said!
Aug 27, 2012 5:51PM
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Stimulus and bankruptcy are the same thing. The only difference is time.

 

You want to know where our economy is going, see below.

 

 

http://www.youtube-nocookie.com/embed/EW5IdwltaAc?rel=0

Aug 27, 2012 4:42PM
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"but the pullback in consumer inflation that resulted has boosted real wages, caused retail sales to surprise to the upside and pushed the personal savings rate higher."

Positive things happening from less inflation?

How can the all powerful and all knowing Wizard of the Federal Reserve not realize this?

Perhaps the man behind the curtain is a good man... but not a very good wizard.


Aug 27, 2012 4:46PM
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Money supply is credit.  The M2 velocity chart paints a troubling picture about the trend towards less available credit.  While it would be natural to see this as deflationary, I don't see how the liquidation of debt will normalize the availability of credit anytime soon.

Aug 27, 2012 7:44PM
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hey how bout that, shirley huntley has been arrested for, well of all things FRAUD!! setting up phony "charities" and funneling the cash to family and of course herself, gee a leftist pig commie democrap "cheating" the public out of it's hard earned money!!! say it ain't so!!!! now how many of these democraps, especially in New York, the meca of liberal looney fraud and vermin, let's see, there;s elliot "I'm a cheating azzwipe' spitzer,  antony "little" weener, I 'mean weiner, oh yea there's john "let me **** some pig while my wife's dying of cancer" edwards, do I really need to go on?? oh yea, there was that 'rican dude setting up phony, of all things, healthcare centers, and not even living in the right district to begin with, now what's his name?? ah, whatever, so hard to keep up with you filthy vermin democraps and the frauds that you are, but not to worry, your time is soooooooooooooooooooo over in Nov, we the People are gonna flush you thieving lying scumbags outta here!!! now didn't john" lurch" kerry hide the yacht his wife bought him in Mass to get outta paying taxes on it?? almost forgot 'bout him, what is it with you pig leftists, you want to jack up taxes on the rest of us but God forbid YOU PAY YOURS!!!! you vial communist sewer sludge!!! you soooooooooo done in NOVEMBER!!!
Aug 28, 2012 8:29AM
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With Q2 GDP growth clocking in at just 1.5%, losing this source of strength ,,,

 

That's a strange sentence.  The word "just" implies, correctly, that the number is poor, and would indicate that the economy is in the tank.  It is then followed by the phrase "losing this source of strength."  Even if the word "strength"  was referring to the numbers in the previous paragraph, it seems a bit of a stretch to consider some mildly better than expected numbers as any real strength.

 

So, which is it?   It can't be both weak and a source of strength at the same time.

Aug 27, 2012 5:12PM
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I don't understand why people keep saying counterfeit money

I looked up the dollar value and it is almost 3x higher in value than when bush was   president

So the dollar value has been going up....why do republicans keep claiming the dollar will be worthless when deflation with the dollar is happening?????
Aug 27, 2012 3:10PM
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Amazing how folks in finance have been so averse to the power and need for creativity.  We need creative finance at this point.  Staring in the rear view mirror looking for answers is what public school teaches us.  Lets possibly even look at the idea of even raising interest rates. Walking along the path of zero rates as we are now has quicksand on either side and ahead as well.  The debt will not disappear without huge investment, education,  and a commitment to personal responsibility and a strong adherence to the profit motive.  None of which seems workable in the present political climate. I am suggesting at this point we need to completely rethink corporations and their role.  We need a super sized kick in the rear and here is my thought of how.  We need to escape from the US dollar. The dollar has outlived its intent and been bastardized into submission.  We need a private corporate monetary system. We need companies to have their own chit system where they control their own money supply by their stock value.  The board of directors will use their own personal judgement as to the value of this private money.  This will be somewhat of a floating value and employees will be paid with a chit system where their value to the company is determined by the company and their "Company" buys for them their homes fuel food and medical care.  Interest is determined by the Company and all banking outside the corporation becomes unnecessary.  This theme was approached in the early 20th century but in my opinion was ahead of its time.  Such a diverse population as we have now and an unbridled political environment requires the ability of people to engage in actions with limited control from politicians and the federal government.  Admittedly this is not a perfect model from a tactical and political view but from a social and economic view I believe fills an incredible void.  People need to be able to work and prosper in groups of their own choosing with minimal government intrusion. 
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