Morning Snapshot
13-Sep (USAGOLD) — Gold is consolidating, but remains generally well bid in advance of today’s FOMC statement. Disturbing jumps in initial jobless claims and PPI did little to move the needle as all eyes are squarely focused on the Fed.
The consensus seems to be that the Fed will indeed announce additional quantitative measures today at 12:30ET. It is also likely in my opinion that they extend ZIRP guidance into 2015. What remains to be seen is the scope of any new QE. The Wall Street Journal’s Jon Hilsenrath acknowledged yesterday that the “activist wing” of the Fed wants to follow the ECB’s lead with an open-ended commitment to bond buying. Yet there are risks associated with the so-called ‘big bazooka approach’: What if it’s not any more successful than QE1 or QE2?
At that point, investors would have to come to grips with the reality that monetary policy alone is not the answer to our debt woes. That going deeper into debt — even at suppressed interest rates — is not the way to extract oneself from a debt crisis. The first rule of holes: Stop digging. At that point, citizen’s will start looking toward the government to make meaningful fiscal changes; and quite frankly I don’t believe Congress has any appetite for what is truly necessary.
There may be a temptation at the Fed to go with another half-measure, and save the really big ‘unlimited bond purchases’ ammo for another day. If that happens, market disappointment may result in some long liquidations in the gold market, but I think the downside is limited. The market will quickly start looking forward to upcoming Fed meetings in anticipation of the big bazooka, keeping the long-term uptrend in gold highlighted.
The 2011 household income data released by the Census Bureau yesterday provides a good example of just what the Fed is up against. Median household income fell last year to an inflation-adjusted $50,054. It was the fourth consecutive annual decline and leaves household income at a level last seen 16-years ago and nearly 9% below the high-water mark set in 1999 at $54,932. In a consumption driven economy such as ours, declines in income like this spell big trouble for years to come.
I’m inclined to agree with the Wall Street Journal’s assessment that “it will be a generation before Americans regain the peak income levels.” What these data suggest to me is that in trying to manufacture inflation, the Fed has it’s work cut out for it. It tells me we are likely in for years of negative real interest rates and other forms of accommodative monetary policy in a war against sluggish growth and persistently high unemployment. Again, this is an environment that has favored gold in the past.
we are in for many years of negative real interest
A report from the Census Bureau Wednesday said annual household income fell in 2011 for the fourth straight year to an inflation-adjusted $50,054.
Median annual household income—the figure at which half are above and half below—now stands 8.9% below its all-time peak of $54,932 in 1999, at the end of the 1990s economic expansion.
