The Schizhophrenic Economy

A cura di di Walter Snyder, Swiss Financial Consulting

According to the FED, the recovery after the crisis of 2008 is coming along nicely although it is a bit slower in Europe.  The FOMC is still debating whether a rise in interest rates is indicated, and December seems to be the right month for another rise of 25 basis points. Employment figures are fine, and the economy is on course. Mr Draghi is doing everything necessary to promote growth in the EU with the ECB carefully monitoring the banking crisis.

No one seems to insist that debt is not a problem, given that the extent of indebtedness globally has reached horrific proportions. It is better for central bankers not to mention it.

That the alternative media have a different view of the present situation suggests that the economy is schizophrenic. Investors know that ZIRP and NIRP have made it difficult for them to find investments that have a good yield. Buying bonds with negative interest rates is an extremely risky business based on the expectation that negative rates will become even more negative with the result that bonds with a lesser negative interest rate will increase in price. Consequently bond trading has become a sort of kamikaze activity. Therefore a completely juxtaposed viewpoint has been presented to the financial world where an impending crisis is foreseen with high volatility, stock market crashes and apocalyptical scenarios globally. Another consequence of low interest rates is that equities have increased in price with P/E ratios going continually higher. Stock buyback programmes of many companies have also contributed to pushing equity prices higher.

A symptom of the fear that central bankers have that confidence in the global financial system may be eroded is that the BIS continues to intervene on the gold market to keep the price down. This blatant manipulation of the gold market has as its goal making gold uninteresting as a currency so as to avoid any attempt to base an international currency system on the yellow metal. Yet India and China continue buying gold at the current low price. They obviously think that there is a connection between money and gold even if the price is far below what it would be in a market that did not function with hundreds of lease contracts on every ounce of gold in the vaults of the West.

I have already repeatedly advised investors to beware of the overvalued US dollar, exaggerated equity prices in the US, ridiculously low bond interest rates and market manipulation. When central banks start buying equities, then it is time for investors to prepare for the worst because the central banks can create unlimited amounts of fiat currency. Nowadays the government does not even need a printing press since numerous clicks on a computer will increase the central banks` cash balances by billions and billions and billions.

If the Fed raises interest rates, then a real depression could be the result as the economy is not ready to face higher charges for servicing debt. It is a situation that is dangerous for even the gurus of the central banks do not know what they are doing. No one has experimented before with ZIRP and NIRP. Those people have had no experience in doing what they are doing though it is now possible to see (above) some of the effects. David Stockman has made it clear that the market`s function of price discovery has practically been eliminated for bonds. Equity prices are artificially high. Sovereign debt has reached unreasonable limits. The US national debt is over 100% of GDP. China`s debt seems out of control. Small investors should hedge with gold and real estate. The big boys will have to be more selective and ride out the storm. Caveat emptor as always.

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