Monday, August 15, 2016

Everything Out The Window Economics: Good For Gold And Silver

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*Nothing matters any more economics.
*Pedal to the metal economics.
*We just heard the Fed has a new plan "everything out the window" economics.
*It's a strange world.
*We even take a stab at what they are missing.

We wanted to discuss a new excuse that the Fed will use to keep rates lower longer than we'd otherwise expect. The Fed has started questioning many relationships that they have counted on to predict inflation. That means when it appears in their expectations they may not believe it and will want to see it remain before they do much about it. The more we hear the more evidence we have to tell us the Fed is on hold (maybe forever). That should be good for gold and silver as there is less holding back future inflation.
Risk Management
Bloomberg reported that The Fed has been slowly adopting a "risk management approach." That means that when inflation passes 2% they may move. Before that they may not move much at all.
The term risk management means that they let everything do what it's going to do but when it gets out of hand then they'll throw some cold water on it.
That is a big statement, wouldn't you say? That means that everybody who is tracking growth and inflation measures, is for the most part wasting their time. The Fed cares less for now. Even when we see whatever the Fed is waiting for the Fed is going to wait a little more.
Fed Wants Inflation Overshoot
Even when they see that 2% they may still wait before they raise rates. The Bloomberg article discusses that they may want inflation to persist and "overshoot." Why would they want to do that? Because if they raise rates when inflation gets to 2% they may drop inflation back down to sub-mandate levels and have to start all over again. (We wouldn't want that.)
They may want inflation to be nicely over 2% now before they do anything. Let me rephrase that. They may want inflation to be nicely over 2% for some period of time before they do anything. This way they can be sure that when they slow inflation with higher rates it drops down to 2% and not below. If it dropped below they'd have to ease all over again.
Risks To This Framework
The problem with ignoring what has worked in the past is that it may still work. You can easily get a scenario that inflation expectations pick up but because they failed to materialize to actual inflation they are ignored. That said, at some point they will be meaningful and at that point the Fed will be "behind the curve."

Chaim Siegel has been working with hedge funds and mutual funds as an analyst and PM his entire career. Chaim specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company stories with a hedge fund perspective. If you want his analysis real time sign up to the right for real time email alerts. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, ^GSPC, INDEXSP:.INX, #elazaradvisorsllc, CME Globex: ES Disclosure: These trades can lose you money and principal especially when using leverage BY USING THIS SITE YOU AGREE TO TAKE ALL RESPONSIBILITY FOR YOUR OUTCOMES AND LOSSES AND HOLD BESTIDEAS, ITS CONTRIBUTORS AND ELAZAR ADVISORS, LLC HARMLESS