Jun 22/15 – They are faking it

2015-06-22 1pm EDT  |  #bonds #Central Bank #Fed

Last week, the Telegraph published an unusual article whose interviewee advocated the following:

"Systemic risk is in the system and as an investor you have to be aware of that," he told Telegraph Money. The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some "physical cash.”

Who was this shaman inciting this sort of fear mongering? Was it “banned from CNBC” Peter Schiff? Or crazy old Jim “buy commodities” Rogers? Maybe the other Jim? Could it be “currency wars” Rickards?

Surely this ominous warning must have come from one of these fringe financial lunatics. Holding physical cash? What charlatan suggests such a thing? Gold and silver? Doesn’t this guy know precious metals are headed to zero? What sort of rag has the Telegraph become? These ZeroHedge types never used to get published in real newspapers.

But here’s the rub. This interview wasn’t with some financial doomsdayer. The quote was from Fidelity’s Ian Spreadbury. Ian is the one of Britain’s leading bond fund managers and is responsible for more than 4bn of investors’ money.

This is a serious fellow who is not prone to exaggerated predictions of disaster. In fact, he is going against his own and his employer’s interest by suggesting investors hold more cash and precious metals. There is no short term personal gain for him to warn about the financial system’s instability.

Mr Spreadbury added: "We have rock-bottom rates and QE is still going on - this is all experimental policy and means we are in uncharted territory.

No man’s land

I have been repeating this point for quite some time. We have never been here before. The world has never had major economies with negative rates and massive quantitative easing programs. If someone thinks they know how all these interconnected assets will affect each other, then you should ignore them. This is a huge unprecedented science experiment.

It could unravel at any moment. And more importantly, it most likely will not unravel in a way most market participants anticipate. We could get a destabilizing melt up in equities or other some other assets. Or the sovereign bond market might go no bid if the market thinks the Fed has lost control.

Don’t forget what the Fed has done to its balance sheet over the last half dozen years:

And it’s not like the Fed is alone. Have a look at the chart for the Big 3 Central Banks’ balance sheets:

Central Bankers are throwing more and more money at the problem, yet the global economy just keeps slipping. The economic fire refuses to light even with the huge stacks of wood the Central Banks have heaped on.

Market participants are increasingly realizing these Central Banks don’t know what they are doing. Famed hedge fund manager David Einhorn was one of the first to point out the Fed had no plan, and was just tuning to the last economic datapoint. But now more pundits are coming to this same conclusion.

Over the week-end I listened to an interview on King World News (I can’t bare to listen to all of his guests – there is only so many times you can hear about all the conspiracies to drive precious metals lower, but every now and then he gets one that is worth your time). Eric King had Nomi Prins on his show. Nomi had recently made a presentation to the Federal Reserve, the IMF and the World Bank at a Central Banking conference where she was invited to speak. In the interview Nomi recounted how after meeting with these officials, she came to the conclusion:

I learned they didn’t know what they are doing. They don’t have a clue. They are in uncharted waters and they are faking it.

I love that line. They are faking it. I couldn’t agree more.

These Central Bankers are completely and utterly lost. They have theories, but they are simply applying duct tape on the most recent point of failure. Not only that, they are slowly coming to terms with the realization about the monster Frankenstein disaster they have created. As Nomi said:

We are in unprecedented territory, and there are a lot of different critical volatility components and factors that have been created by the seven years of zero interest rates and bond buying policies. And the fact that I was even there, and invited to discuss financial stability, which was the theme of the conference, means they know it is an issue, and that we are not talking about a stable financial system.

More and more market participants are concluding the world’s Central Bankers are not nearly as in control of this situation as previously believed. I think the next crisis will look nothing like the previous one, and given the faith that’s been placed in these Central Bankers up until now, there is a good chance that they will be at the heart of the next financial panic. Last time the Central Banks were ones to step in to save the system. What if this time they are the ones who cause the panic in first place?

Thanks for reading,

Kevin Muir

the MacroTourist