While the spike in gold has been the one bright spot in an increasing cloudy 2016 economy, the jump means a lot of things. Mostly it means the price of gold was being held down by the strong dollar and coordinated short selling; but it also means investors have lost faith in our global financial system and the ability of central banks to manage it. Perhaps it was a bit of wishful thinking all along to imagine central banks had the ability to “manage” something as large and complex as the world economy in the first place. It’s just like the funny idea that we can have unlimited growth on a planet of fixed size and limited resources.
One of the more peculiar ideas to surface in world banking is the idea of negative interest rates. After meeting with limited success among a small number of countries in Europe, Japan’s central bank decided to give them a go. Only it didn’t work for Japan and negative interest rates are murder on the banking system. Hopefully Japan’s bad experience will give the U.S. Federal Reserve pause about going negative here.
Without negative interest rates to force money into the financial system, some analysts believe that leaves the Fed with only one option and that’s to inject more cash into the economy in the form of Quantitative Easing or QE. We had an artificially inflated market for six years and maybe the Fed is dreaming about the good old days instead of allowing the market to find a bottom on its own.
Execs Gone Wild
Part of the reason we have such insane valuations in the market is because instead of investing all that cheap QE money into expanding production, business execs used it to buy back their own stock. Self-dealing with taxpayer money let them drive up stock prices without adding any value to their companies or jobs to the economy. Instead of “job creators,” we coddled a new breed of profit skimmers – one of several reasons many analysts vocally oppose additional QE.
Why QE Might Happen Anyway
Some hedge fund analysts are suggesting the Fed might not have any choice but to pump additional money into the U.S. economy. Their reasoning is that the Fed waited too long to raise interest rates and now the rest of the world banks, with their respective economies teetering on the edge of recession, are all simultaneously turning on the money pumps. That leaves the Federal Reserve as the only central bank still tightening.
Bond Market Weakness
Weakness in the bond market may be another factor that drags the Fed into another round of QE. This one is a little more complex and starts in China. The slowing economy is putting strain on the government’s foreign currency reserves, as an increasing number of Chinese citizens are looking to bail out of the yuan and into more stable foreign currencies. In order to raise cash, there is fear in some circles that China will turn to cashing in some of the many U.S. Treasury Bonds it holds. Following China’s lead will be more countries desperate for cash due to low oil prices, like our “friends” in Saudi Arabia.
It sounds strange, but the financial system is almost tired of having so much cash. Banks are, in some cases, literally clogged with it. All the same it’s hard to blame investors, especially those in their forties and fifties, for being leery of the economy right now. For those nearing retirement there’s great incentive to keep more of their personal wealth in cash and liquid hard assets, like high quality gold and silver bullion. Not only is the U.S. stock market wildly unstable but the global economy is in at least as bad shape. The meager stock returns ahead in 2016 just aren’t worth the risk.