How to play, "The New Norm for Dummies"

It feels that we are turning a new page in the saga that is the FOMC and U.S. economy. A story, however, that has a predictable ending and a book that I feel like giving up on ...

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Yes, that's it, the dusty one with the unattractive cover that never leaves the book swap. 

Taking a bite out of the "Big Apple"

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To date, I have been advocating that the Fed will not be raising rates and I have been a blatant bear on the US economy and US dollar, bullish on gold. How well has that played out so far? EUR is up 500 points this year, the Yen a staggering 2000 and gold $270.00. The Fed has not raised rates.

"How do you like 'dem apples?"

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"The New Norm for Dummies" - just buy gold, sell the dollar

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So far, not a bad track record. But, there is very little skill involved and it does not take a genius to perform such results when the instruction manual is there for anyone to pick up and read when it comes to how to play, what Fed's Williams has called, "The New Norm". What is the New Norm? Well, there is nothing new about it. 

Simply, what Williams is suggesting is to walk in a circle backwards, arriving at the same point time and time again. Basically, The new normal will look exactly like what the Fed has been doing ever since Bernanke turned the printing press on, but this time, it will be done via QE4 and at far greater levels. Fed officials are talking about raising not just the the inflation target of 2%, but also the deficit to unprecedented levels while their previous goals of growth moving back to a modest pace along with interest rates gradually rising from near to zero back to a 'normal level' near 4% or higher are still way over the horizon and seemingly going to be unachievable in the near future - and don't they know it? So, this is where the Fed are starting to shift their game plan and this is where the page has turned into a new chapter. 

“New realities pose significant challenges for the conduct of monetary policy,” San Francisco Fed President John Williams wrote in a research paper last week that was released on the shifting monetary policy landscape. At the same time, he wasn't ruling out a rate hike. But, that is a nonsense. 

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What he is basically saying, is, yes, the economy is bad, targets are way off, we are headed to a form of QE, but let's just hike rates one more time for a laugh first. Or, in other words, the Fed will want to buy some more breathing space, at the US economy's expense, while they figure out what to do next, because all they seem to know is cutting rates and more of the same QE, kicking the proverbial can down the road. Meanwhile, the idea of negative interest rates that have been considered by many Fed officials are actually a last resort, and so they should be; just look at places like Japan. 

Get rid of the Fed

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What actually needs to happen is the Fed should address the real inflation in the economy and hike rates until the whole thing implodes and start all over again, because the longer they delay, the worst the fallout will be for the U.S. and global economy. In fact, let's get rid of the Fed altogether and let the market determine the price for short term money each day instead. 

However, for the meantime, let's just watch how this story unfolds and this week, in fact, the actual topic of the Jackson Hole meeting is going to be “Designing Resilient Monetary Policy Frameworks for the Future.” 

So, can there be new forms of plumbing designed by Central Banks of how monetary policy is to be conducted in a low-rate world and will the Fed be that pioneer, looking to avoid a situation that the BoJ are have been in for so long now? 

We will hear from Yellen on Friday and at the same time we will have the US GDP, both events likely to be crucial for fuller markets and liquidity returning as we head deeper into H2 and a very interesting end of the year with the US elections as a further major risk for the US dollar and its prospects in 2017.

By the way, just buy gold!

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