The Case for More Money Printing
According to an article in RT, this past quarter was the worst 3 month period for the global economy in 4 years. From July to September, the performance of many of the worlds top stocks markets was terrible.
China’s Shanghai Composite Index lost almost a quarter of its value, Japan's Nikkei lost 14%, the German DAX was down 12%, London’s FTSE dropped 7%; and the US Dow Jones Industrials fell by almost 8%. This is all in the third quarter. (Source: RT 2015 October 1)
The plunge in global stocks wiped out almost 11 trillion in value from world stocks in just 3 months. The story is the same in just about every region around the world. North America, Europe, Asia, developed economies and emerging economies all saw big declines in asset prices.
7 Years of QE and Counting
What is so concerning about the selloff is how swift and violent is was at times. No doubt that after years of strong gains, the global markets were in need of a correction. But very few anticipated such a volatile correction that was global in nature.
After years of easy money policies, stock prices almost everywhere have soared. But now with the US Fed considering hiking rates, markets are sending a signal that continued support from the world Central Banks is needed to keep things from collapsing.
Markets around the world have been supported in unprecedented ways since the financial crisis in 2008. Seven years after the crisis markets are still unable to stand on their own. This has prompted many analysts and financial market experts to begin suggesting the more quantitative easing is going to be necessary to keep the global economy afloat.
So let’s look around the world.
Despite a bold 1.1 trillion euro bond buying initiative, the inflation targets in Europe are not being achieved. According to an article in ZeroHedge;
“the five year/five year inflation gauge that Draghi has said the ECB watches very carefully remains at very depressed levels [with] no sign from the swaps market that inflation is expected to hit target as far as the eye can see.” (Source: ZeroHedge 2015 September 30th)
So far the bond buying program that the ECB has undertaken is not working. Remember the intended goal has been to boost inflation, but inflation has turned negative in Europe.
Bloomberg reports that the Euro area inflation rate unexpectedly turned negative in September for the first time in six months, adding pressure on the European Central Bank to bolster stimulus. (Source: Bloomberg 2015 September 30th)
As we know the worlds Central Banks will respond to deflation with more money printing. The article in ZeroHedge reports that S&P is predicting that the ECB will have to increase QE by 120% to 2.4 trillion Euro.
The rating agency is now suggesting that the ECB program may last two years longer than originally planned and will be expanded significantly.
Japan’s economy is contracting and may be headed for recession. Last week Japan announced that industrial output fell by .0.5% in August, down for the second straight month.
After 2.5 years of aggressive quantitative easing programs, Japan’s economy is still struggling with deflation and low growth. As a result some experts are suggesting that the Bank of Japan will soon announce new measures to try and reverse the trend.
After the poor industrial output numbers for August, Masaaki Kanno, chief Japan economist at J.P. Morgan Securities and a former BOJ official said. "We now expect the BOJ will announce additional easing” on Oct.30th (Source: MorningStar September 30th 2015)
According to the article, any additional easing policies by the Bank of Japan would be the first since last October when the Central Bank raised its target for asset purchases to the current $668 billion.
As regular readers know China was at the forefront of the Global stock market decline over the last three months. In an effort to prop up stocks China launched an unprecedented $800 billion rescue package. Reuters reported:
Public statements, media reports and market data reveal that Beijing unleashed 5
trillion yuan ($805.2 billion) in funds - equivalent to nearly 10 percent of China's
GDP in 2014 and greater than the 4 trillion yuan it committed in response to the
global financial crisis - to calm a savage share sell-off. (Source Reuters 2015 July
With China’s growth slowing the most in 20 years, more stimulus measures are likely necessary to provide additional support to its economy. It is not just in China, the Central Banks of India and Taiwan have also eased their policies recently.
Instead of letting the markets go through a natural correction, policy makers intervene with drastic measures to attempt to keep asset prices artificially inflated. All of these moves are a sign that easy global monetary polices will continue because without them many fear the markets will collapse.
The US Fed has engaged in 3 rounds of quantitative easing from 2008-2014. While the program has stopped the Central Bank has been unable to move off of zero interest rates. Some are now expecting that the next move by the Fed will be to ease rather than tighten.
Art Cashin, who is a the the Director of Floor Operations for UBS Financial Services at the New York Stock Exchange, summed up the Fed’s efforts perfectly by saying:
"they're in a kind of silly loop where they did QE expecting a reaction... didn't get it.. and then they did QE again because it didn't live up to their expectations... but I think they have no other options, if things get negative on the economy, QE is all they can do.”(Source: ZeroHedge 2015 August 11)
Gold and Easy Money Policies
The global playbook for Central Banks is to continue to flood the world with easy money. The new stimulus programs will most likely be masked in some type of creative finance to convince market participants that they will be effective this time.
One of the asset classes that could be impacted the most are currencies. Asian currencies had their worst quarter since the 1998 financial crisis. Emerging market currencies as a group are at their lowest level since 2002. (Source: Casey Research 2015 Oct 1st)
The loss of confidence in currencies will accelerate when investors finally realize that the Central Banks do not have the formula to save the global economy. In our view this is why the precious metals are such a key component to own.
In the last two articles we discussed the implications of lower bond prices (higher yields); and negative interest rates. In this article we highlighted the global trend to more stimulus or QE type programs.
However, the exact form the coming global economic crisis will take is still largely unknown. Any one of the scenarios highlighted in the last articles could come about.
As a result by keeping a portion of long term savings in the precious metals and holding them outside the banking system will increase the chances of preserving wealth over the next several years.
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