Send this article to a friend:

December
26
2018

Are The Financial Markets Rejecting The Fed?
Rudi Fronk

Last Wednesday, the Fed raised the Fed Funds rate by a quarter point as expected. The FOMC statement was suitably “dovish” by reducing the consensus forward guidance on future rate hikes from three to two. The Fed also signalled that its Quantitative Tightening program would continue on “autopilot” as planned. The response was not what the Fed expected. Stocks fell hard and bonds soared.

Financial markets are about to revisit some important questions.

First, does QE actually work? Does it boost the real economy or does it simply drive up valuations by encouraging speculation? We think the weakest economic recovery in two generations provides the answer.

Is the Fed right when it raises interest rates and continues to sell $50 billion in assets every month because the economy is strong? Or are the credit markets right when they buy Treasury debt despite Fed hikes, driving down yields and flattening the yield curve because they think the economy is weakening fast? We vote with markets.

Can a weakened economy sustain Fed balance sheet and interest rate normalization? The stock market is saying no.

For 10 years, these have been central bank markets. Printing money in America, Europe and Japan has, in our view, created the biggest financial bubble in history. Now that the printing has come to an end, the bubble is beginning to burst. Investors are beginning to lose confidence, they are beginning to flee risk. Aversion to risk means conversion to gold. We think the gold rally of the century is soon to begin.

There is one last test. When central banks reverse their tightening plans and turn back to QE, which we think is coming soon, will the good times roll once again? We think not. After 10 years, we can see that QE does not translate into a stronger economy. We can see that monetary stimulus cannot be painlessly withdrawn.

Furthermore, the real issues are not in the stock market but rather in credit. QE has generated a further massive increase in the debt load that far exceeds the ability of the economy to service it. In our view, the corporate bond market is going to implode, exposing historically weak balance sheets and zombie companies that only survived because of plentiful credit priced at 5,000 year lows.

Perhaps the Fed will ride to the rescue and flood the corporate bond market with fresh liquidity. We are confident that would kill the dollar. Perhaps the Fed will decide to resist further attempts to reflate in an attempt to return to monetary sanity (which we doubt). Massive defaults and unemployment would then ensue, in our view. There is one effective response to either possibility. We think investors will reach for the security of the only asset that is no one’s liability and cannot be printed: Gold.

 

 


 

 

Rudi P. Fronk, chairman and chief executive officer of Seabridge Gold, has over 30 years of experience in the gold business, primarily as a senior officer and director of publicly traded companies. In 1999 Fronk co-founded Seabridge and has served as the company's CEO since that time. Prior to Seabridge, Fronk held senior management positions with Greenstone Resources, Columbia Resources, Behre Dolbear & Company, Riverside Associates, Phibro-Salomon, Amax and DRX. Fronk is a graduate of Columbia University from which he holds a Bachelor of Science in mining engineering and a Master of Science in mineral economics.

 

 


 

www.streetwisereports.com

Send this article to a friend: