Tuesday, August 16, 2016

If I Was A Hawk For Just One Day - Another Data Point Benefiting Gold And Silver

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*John Williams, the president of the Federal Reserve bank of San Francisco, issued a research piece Monday.
*We saw him as one of the few hawks calling for rate hikes last week.
*His implication this week is that we need to let inflation run.
*This is more evidence supporting gold and silver and markets. But markets only benefit until we actually see inflation -- then, look out.

The president of the San Francisco Fed, John Williams, had been one of the few Fed members calling for a rate hike this year as recently as last week. That group is quickly dwindling. This week, Fed President Williams issued a research piece calling for a new higher inflation target. That 2% inflation mandate would turn into 3%. That would imply the Fed would be on hold longer, giving inflation more room. Yesterday, we wrote about other Fed excuses to remain on hold. The Fed on hold is good for gold, silver and markets. For markets, it's good until we actually see inflation.
In this article, we will analyze some of Mr. Williams' findings to see that the Fed itself might have been the cause of this problem he identified.
Last Week - Hawk
Just last week, Mr. Williams told The Washington Post he wanted a rate hike this year. As to not raising rates this year he said, "I'm definitely not one of those who thinks we should wait until we see inflation get to 2 percent before we raise rates. I think that would put us significantly behind the curve."
That was last week.
This Week - Dove
In his report released Aug. 15, Mr. Williams talked about an abnormally low R* (R-Star), which relates to the real interest rate. Real interest rates are the rates of interest you receive minus inflation. If you receive 1.5% and inflation is 1.5%, you effectively receive nothing when adjusting for the cost of living. Mr. Williams' research report points out that prevailing market "real rates" are very low.
We recently pointed out that the U.S. treasuries were actually at negative "real" rates. Investors are not getting paid for their investment when factoring in inflation. In fact, U.S. investors in bonds are paying the issuer to take on risk. That is not a great long-term investment, to say the least. (See our report from Aug. 1, which shows that the U.S. is yielding negative "real" rates.)
One of Mr. Williams' ways to combat this low and negative real rate was for central banks (CBs) to raise their inflation target. He said:
First, the most direct attack on low r-star would be for central banks to pursue a somewhat higher inflation target. This would imply a higher average level of interest rates and thereby give monetary policy more room to maneuver. The logic of this approach argues that a 1 percentage point increase in the inflation target would offset the deleterious effects of an equal-sized decline in r-star. Of course, this approach would need to balance the purported benefits against the costs and challenges of achieving and maintaining a somewhat higher inflation rate.
While an extra one percent inflation would add to overall nominal rates, getting there would mean rates would need to stay lower longer. That would allow inflation to reach those higher levels. Then, in the future, the Fed would have a higher plain to lower rates in future easing periods.

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