Is The Mainstream Financial Media Questioning Central Bank Credibility?

In yesterday’s post 16 Investment Insights – Money, Markets, And Metals In 2015, we provided a summary of the key investment insights from 6 top fund or money managers, including Jim Rickards and Ronald Stoeferle, from the quarterly Incrementum Advisory Board (

In today’s article, we pick out an important excerpt from the Advisory Board, in which Jim Rickards discusses the observation that the financial mainstream media is increasingly questioning the credibility of central bank monetary policies.

Jim Rickards: “I don’t actually think that the fundamental state of the world has changed. What has changed, it has become more visible. Analysts, investors and mainstream media are starting to wake up to things like currency wars, the save haven nature of gold, etc. I think the reason for that is that until you reach the zero rate bound, you can pretend it it’s a normal rate cutting exercise. Once you hit zero that pretense is gone and the currency war becomes more explicit.

Going back to December 2012 that was made explicit in Abenomics, as of today I would say it has become explicit through European Central Bank policy. Right now you have people like Gary Cohen, president of Goldman Sachs saying in Davos today, “we are in a Currency War”. So people are getting more honest about what in fact is going on. However the problem remains, there is no way out of the currency wars, it has to continue until something breaks, until the system breaks down or there is a global monetary policy conference. It doesn’t have to be something like Bretton Woods, it also could be something informal like the Plaza Accord. However I don’t see the leadership for that, so this means more volatility right now. The FED understands this but they took the view, that the US-economy is strong enough to bear the costs of a stronger currency.

So the US has a strong currency based on the view that the US has a strong economy and we can afford to let Europe and Japan to devalue. The problem with that logic is that, the US economy is not that strong. The FED is basing their strong outlook on their flawed models and we know the future course of policy will be data dependent. This is a big deal because what I expect by May or June, if the economic data comes in the way I expect for fourth quarter 2014 and first quarter 2015, it will be fairly weak and the FED will not raise rates. That will be a shock. Right now everyone is on one side of the boat. The whole world is set up for a rate increase. If we get to May and the FED begins to signal, that they’re not going to raise rates any time soon, the whole thing could flip. It could be a violent reversal were suddenly its “Risk-On”, everyone goes back to emerging markets, the carry trade goes back on, USD goes down, EUR goes up. Everything we saw in 2012, we would begin to move back into that direction, once the FED admits that they are not going to raise rates.

So for now I expect more of the same, a strong USD weak EUR, weak EM currencies and continued asset bubbles. By June we should be prepared for a reversal for that trade. That could also be quite good for US stocks. Part of the risk on trade is going long US-stocks.”

Gold vs US Dollar

Further to the central bank credibility issue, Jim Rickards goes on to explain an important evolution in the traditionally inverse relationship of the USD and gold. “Things seemed to have changed somewhat recently. We had a fairly inverse relationship between USD and gold. If you look at the dollar index and gold, the low point of the dollar-index was exactly timed to the high point of gold. So there has been this inverse relationship between gold and the USD for the past three years. This changed during the past weeks.

Why is this breakdown happening? The answer is that today governments cannot have deflation. The structure of sovereign debt and central banking today is such that it cannot allow deflation to persist for a longer time. There is a long list of reasons why governments have to have inflation, therefore when you see deflation arising despite of central bankers wishes which it did in 1929 and it is doing today, central banks stop from nothing to turn it around. Investors start to buy gold during that environment. Why would anybody buy gold during a Deflation? The answer is, deflation is a pretty good leading indicator of inflation. In other words precisely because it has to turn, you buy gold even in the deflationary stage because you can see through it.

Gold was down in USD in 2014, but up in any other currency. This is not a gold story but a USD story, now the USD is the best performing currency of the world. Gold is also an interesting facet of the currency wars. If you think of gold as money gold can’t fight back.”


The transcript of the full conversation is below.

Incrementum Advisory Board January 2015


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