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Fleck's Thoughts
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Negative Deposit Rates Give Gold a Yield


Leading up to today I had assumed it would be quiet as people squared positions in front of tomorrow's giant game of speculation precipitated by the ECB, but I was wrong to think that. The market had barely opened when a news leak stated the ECB was going to propose creating 50 billion euros per month out of thin air with which to pursue QE through 2016. Less than 30 minutes later, the Bank of Canada announced a surprise rate cut to 75 basis points.

Seeing Red With Big Blue In the wake of that news, the stock market here shrugged off an early loss and managed to gain about 0.5% through midday. The Dow lagged, held back by a 3% decline in IBM's shares, as its results last night were pretty poor (though it did manage to beat the earnings-per-share number, that wasn't good enough). I think it is more than slightly ironic that Warren Buffett's first technology investment wasn't even in a technology company, but rather a financial engineering company, and one where it ought to be perfectly obvious to everyone that it has been playing games. How he ever could have snarled himself up in this one is beyond my comprehension.

Turning back to the action, after the initial surge the market backed off and with an hour to go (when I had to leave) it was just modestly green. Away from stocks, given the news I have already relayed, one might imagine there was a lot of motion in the "outside" markets, and there was. The yen was pretty strong all day and the euro saw a small bounce on the news, although I don't know what that might portend for tomorrow.

I am pretty determined not to speculate in front of the ECB meeting. I would rather react to the news if I can determine something actionable is occurring (and also control my risk). I am somewhat interested to get long the euro, but I have no idea if that contrary strategy will work, nor am I considering that just because it is contrary. I have a list of reasons, but they are speculative ones. That said, I'm not sure exactly what I am going to do and will wait to see what happens and how the market responds.

Fixed Income Fixation Fixed income hung out on both sides of unchanged, and that is the market I am most focused on, not because I expect to do something immediately, but as longtime readers know, I keep looking for signs of a bond market revolt against the idiotic central bankers and it occurs to me that the ECB finally joining QE might be that moment.

Thus, I thought it was noteworthy that so many debt markets saw reversals. Now these are small changes on tiny numbers -- e.g., JGBs in the last 48 hours traded down to 19 basis points and are now back to 25, while Germany's, Sweden's, and the Netherlands' five-year paper all swung from slightly negative to positive, leaving Switzerland as the only negative yield in the world of five-year government paper.

I don't want to make too much of this, as it could very well be noise and the numbers are so small it doesn't take much of a move to make the change look like it is a big deal. However, the world's bond markets are the biggest joke any of us will ever see in our lifetime. When that eventually changes it is going to cause huge problems. The only question is when that will be and exactly how the bear market will choose to unfold.

If QE Is Wrong, Central Bankers Don't Want To Be Right The fact of the matter is, we don't really know how various markets will respond to QE, other than that stocks the world over love the idea, though they have all been boosted because of QE and in anticipation of more. Most participants seem to think QE has worked, and point to America as evidence. On the other hand, the same sort of madness that the U.S. has pursued has not helped the yen or the euro, but it didn't particularly hurt the pound, and in the end it made the Swiss franc go crazy. (The initial reaction to the surprise cut by the Bank of Canada was to sell the Canadian dollar.)

My point in all this is that there is no particular pattern to how various markets respond to QE. Thus, even though it is quite likely we know what the ECB is going to do (and we now may), we don't know what the reactions will be. So much sheer madness has been deemed orthodox, we now routinely see financial articles that state categorically we need more inflation so we can get more economic growth. If you think about for even a minute, it is just complete lunacy, like trying to drive asset markets higher to stimulate the economy. All you get is misallocation of capital and long-term problems, as well as unintended consequences, e.g., the collapse in the price of oil or the Swiss franc going to the moon, and there will be others.

The noise level is extra high and the predictability of events is unusually low. The main winning strategy has been to bet that the trend in force will continue until it doesn't, though that didn't work so well for those who had the short-the-euro/long-the-Swiss-franc trade on.

The Karat and the Stick Lastly, the metals were mixed, with silver gaining 1% to gold's slight loss. Gold traded on both sides of unchanged, as speculators pushed each other around. However, for investors, it has never been more attractive, as more and more countries see negative deposit rates, meaning that in those countries you are basically being paid to own gold compared to cash. (Of course, gold is far more volatile than cash, so it isn't a perfect analogy.) Colored paper is convenient, but it is also worthless.

Positions in stocks mentioned: none.