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Central Banks lose credibility and accelerate gold purchases

Powell Loses Credibility Again 

 

“I don’t see the ‘stag’ or the ‘-flation’,”

Fed Chairman Jerome Powell said during his Wednesday address.

“Loosening financial conditions are not inflationary”

Jerome Powell

“The Fed acknowledges the “lack of further progress toward the Committee’s 2 percent inflation objective” and also slows the pace of treasury QT by more than half. Easing policy at the same time inflation is a greater concern is at best inconsistent and at worst imprudent.”

Bob Elliott

Jerome Powell statements on Wednesday are alarming. Once again inflation is rising and the Fed chairman is trying to ignore it. Worse, his statements suggests he is either out of touch or has another agenda. Look at how badly he clashes with three sets of observable data shown below, and on two major points.

Point 1 :  The data on growth and inflation has completely reversed towards stagflation over the last 3 months. This could not be any clearer.

US economic surprise index vs inflation surprise index. Graph via Morgan Stanley.

 

More evidence stagflation is beginning also came from the ISM report. The manufacturing price index is breaking out and at a two year high, while new orders have fallen back below the contractionary 50 level.

 

Point 2: The chart below is even more alarming.

Not only is the correlation between inflation and financial conditions very tight, and for twenty years, but this is the second derivative of inflation. In non-geek language, this means that inflation is not only rising but rising at an accelerating rate!

Powell clearly continues to fail to meet his repeatedly stated inflation objective. His clear easing of policy outlook at the end of 2023 must now be considered another significant policy error he has yet to realize, let alone admit.

Powell continues to stick rigidly to the 2% inflation target. Yet he has never articulated exactly why that is the right objective. Many believe the target does not make much sense, or is at best an arbitrary target.

The most credible central banker, perhaps of all time, is Paul Volcker. This is his take on it. One might hope that Powell is aware of what Volcker wrote.

Paul Volcker, October 25, 2018: “A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation… “But it is also true, and herein lies the danger, that such seeming numerical precision suggests it is possible to fine-tune policy with more flexible targeting as conditions change. Perhaps an increase to 3 percent to provide a slight stimulus if the economy seems too sluggish? And, if 3 percent isn’t enough, why not 4 percent… “The fact is, even if it would be desirable, the tools of monetary and fiscal policy simply don’t permit that degree of precision. Yielding to the temptation to “test the waters” can only undercut the commitment to stability that sound monetary policy requires.”

 Powell is floundering without articulating the rationale for his rigidly held  inflation objective of 2%, and in addition he is repeatedly failing to meet it. Furthermore, he continues to make plainly inaccurate factual statements about stagflation, and the relationship between financial conditions and inflation!

Expect policy chaos to continue.

Japan is trapped

Dollar/Yen has a remarkable correlation to international bond yields. The chart below shows the correlation to 10 year US Treasury bond yields. This means that the debt trap in Japan will directly impact US markets.

 

The correlation between the yen and US ten year treasuries is obvious. Rather than print more money to buy more government bonds, the preferred solution for Japan is to sell US Treasuries for intervention. This is what they have done so often in the past.

This creates a huge problem for the US as the US needs buyers not sellers of Treasuries!

We continue to watch Japan’s economic policy predicament very closely. It is at least as problematic a policy problem as in the US and may even compound US policy problems. Despite massive yen support interventions, the yen has continued to fall which puts even more pressure on inflation in Japan.

The scale of government debt and Bank Of Japan holdings means that the needed interest rate rises to support the yen and contain inflation seem to go beyond reasonable mathematics. 

Policy makers can slowdown market moves, but how do you get to a credible resolution if you are unable or unwilling to stop inflation rising? This is now clearly a problem the markets will be watching closely. 

Listen to central bankers? Or watch what they are doing?

Judging by what the central banks are doing one could be excused for concluding that they themselves are losing confidence in their own abilities. 

The bottom line is that whatever central bankers tell us it is clear that central banks continue to buy gold at an accelerating rate. Central bank net demand totalled 290t in Q1 – the strongest start to any year on record.

 

In addition trading levels in China have exploded into 2024.

Western asset managers still seem to believe that central banks have got this under control.

For all the interest in gold around the world it remains remarkable how historically low allocations to gold still are in western financial markets.

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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