The Fed: Killing the Dollar and Spiking Gold

The anticipated quantitative easing from the Federal Reserve’ continued to push equity prices higher last week.  The S&P500 rose another 0.95% to almost fully discount (or price in) the Fed’s next round of electronic money printing.  The VIX (or fear) index slumped to six month lows, as a new wave of complacency sets in among traders, traders who are betting with near certainty, that the Fed’s upcoming actions will do nothing but boost share prices.

In the real world, the economy continues to struggle.  Trade balances for August were worse than expected; the trade deficit near the highest level of the year.  Producer prices (as pretty much all commodities have been soaring of late) rose much more than expected.  Consumer prices were slightly lower than consensus, BUT look for them to rise soon, OR for corporate profits to shrink (as producers eat the commodity cost increases).  The Empire state manufacturing survey was stronger than anticipated; the consumer sentiment index was worse.  Retail sales were higher than expected, but this number can be highly misleading.  Same store sales are vulnerable to survivorship bias; if a chain’s original 10 stores drop down to 5 stores, the remaining 5 stores can easily show same store sales increases, but the total sales of the smaller chain are usually lower.  State sales tax collections support this theory; they are down 6% year over year.  If TOTAL retail sales were actually growing, state sales tax collections should rise too. 

Chris Whalen, of Institutional Risk Analytics, is one of the most respected financial and banking analysts in the country.  In a recently published piece in Business Insider, Chris attacks the Fed’s zero interest rate policy by pointing out for all the interest saved by borrowers (courtesy of near zero rates set by the Fed), consumers and businesses lose the ability and the will to spend the same amount of money–about $750 billion annually.  In other words, the Fed is essentially taking money from households and businesses and giving it to banks to repair they balance sheets. 

But according to Chris, in the end, these too-big-to-fail banks will still need to be restructured and broken up.  In the end, the Fed will fail to achieve its goals.

During the process, the US dollar will continue to erode in value.  Savvy investors, who are too scared to short the stock market (and fight the Fed) are expressing their bearishness by dumping the dollar altogether and buying gold, and lately silver. 

Without a positive return, there is no reason to hold financial assets.  So investors (households and businesses), by dumping the dollar, will raise the risk of a sparking dollar crisis. 

What should the Fed do?  Chris asserts that the Fed must raise interest rates immediately, nevermind not print any more funny money (quantitative easing). 

Otherwise, we should expect to see gold rise further, and when the Fed eventually fails to boost real GDP growth (and when the big banks begin to wobble again), the political will to challenge the Fed will escalate, perhaps leading the end of the Fed entirely.

Let’s hope the US survives before the Fed is finally restrained or ultimately killed.

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