If this is economic recovery, then I want no part of it.
Another week has begun with the US dollar weakening and everything else going higher, as the Fed’s attempts to force-feed “recovery” have accelerated the pace of inflation fears. Oil is trading at 106 and change, and gold is reaching new highs in the 1440s. Turn on the television and all you will see are reporters standing outside of gas stations, complaining about the high price of gas.
Almost every major economy is raising interest rates (except for New Zealand who will be cutting rates after having had to deal with not one but two earthquakes in the last 6 months), yet Bernanke and the Fed keep turning that blind eye. Why are they so afraid of higher, normalized interest rates?
The reason is this: housing prices. Somewhere along the way in the madness of the housing bubble, consumers became convinced that the best time to buy a home was in a low-interest rate environment. With low rates, prices move higher. So what happens when rates move higher? You guessed it, prices go lower. However, once you buy a home, the price you pay is fixed and final. Interest rates on the other hand, can be variable and consumers have the option to re-fi to get the best rate.
So what has been happening to housing prices since we’ve had this zero interest rate policy (ZIRP)? They’ve gone lower. So Bernanke decided that since he can’t have rates lower than zero, both QE1 and QE2 would help him push rates to below zero, which is where the REAL rate of interest is today. And still, housing prices have declined.
After seeing that this hasn’t worked and realizing that banks, the government, and the Fed itself are all on the hook if housing prices decline further due to the Fed having to raise interest rates, Bernanke decide to turn a blind eye to the inflation around him, and is attempting to scare people into buying homes for fear that prices are going higher through general inflation.
But only a complete lunatic would be looking to buy a house today, with the price of food and energy rising, which is essentially going to take money out of a consumer’s pocket and prevent them from spending it elsewhere. Businesses will lose revenue and have to lay people off, contributing to further unemployment.
This doesn’t sound like a recipe for success to me. The Dollar is tanking, Libyan unrest is picking up driving oil higher (though don’t think for a second that the conspiracy theorists don’t see this as a major cover-up), and people are beginning to panic. This isn’t going to end well.
In the forex market:
Aussie (AUD): The Aussie is flat to slightly lower though higher against the Dollar as risk aversion is beginning to pick up this morning.
Kiwi (NZD): The Kiwi is also mostly lower as it is expected that the RBNZ will cut interest rates at Wednesday’s meeting.
Loonie (CAD): The Loonie is mostly higher this morning as oil prices are climbing faster than I can type, trading just below $107 right now. (Click chart to enlarge)
Euro (EUR): The Euro is mixed, seeing some strength from its anti-Dollar status, but having its own issues as the idea of potential rate hikes puts the sovereign debt problems of member states in jeopardy.
Pound (GBP): The Pound is mostly lower this morning despite increased speculation that the BOE will tighten monetary policy by either reducing asset purchases or raising rates at this Thursday’s rate policy meeting. (Click chart to enlarge)
Dollar (USD): The Dollar is lower despite all of the risk in the market as Fed credibility may be in further question. Talk of tapping to the strategic oil reserve to deal with oil prices rather than raise rates is like putting a band-aid on a gunshot wound.
Yen (JPY): The Yen is higher across the board as its safe haven qualities are in demand with the risk in the market.
Bernanke is running out of time—quickly. Whether this plays into his grand plan or is merely a hiccup remains to be seen. However, the pace with which decisions need to be made is rapidly approaching and I fear that hasty decisions will lead to further bad policy.
There is no doubt that inflation is starting to pick up, it will be interesting to see how high and how much pain it needs to cause before the Fed will act. In the meantime, I’m going to keep an eye on the Dollar for if it starts to turn higher, than I know that fear is starting take hold and that something big may be about to happen.
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