Today’s report starts with a rather startling Bloomberg Businessweek cover story: “Is Inflation Dead?”. Inside you can also read an article titled “Did Capitalism Kill Inflation?” Usually, when such esteemed publications carry such apocalyptic quotes announcing “the death of XYZ” type stories, it generally means that the bottom is in. But what is even more striking are the implications of such quotes.
Extinction: something that has been a frequent and recurring phenomenon throughout human history and that like the dinosaurs, it will never return. Something that will only be seen in the museums and journals of economic history. Inflation killed and destroyed by Capitalism. Aside from the hubris, it is important to note that while many traditional inflation measures remain benign, asset price inflation has been rampant.
Moving on to markets. Recently the divergence between a lot of the economic data and the relentless upwards moves in stocks has left many commentators scratching their heads. Of course, the central bank “put” is still in place. Members of the financial media are now openly suggesting that the Federal Reserve should buy equities. The US President’s recent statement on Twitter also underlines the interventionist tilt: “If the Fed had done its job properly, which it has not, the Stock Market would have been up 5,000 to 10,000 additional points and GDP would have been well over 4 percent instead of 3 percent…with almost no inflation…Quantitative tightening was a killer, should have done the exact opposite”. Many in the upper echelons seem to be nervous about this economy. And with this data you can see why:
a) Asia-Pac Manufacturing exports to China:
-9.4% for Japan YoY
-8.7% for Singapore
-22% for Indonesia
-27% for Taiwan
-8.2% for South Korea
b) Japanese manufacturing PMI 49.5 – contraction territory
c) Australian COMP PMI for April 50.6 – barely expansionary
d) Bank of Korea cutting growth expectations slightly to 2.5% vs. 2.6% prior in 2019
e) Japan Tankan showing manufacturer confidence falling to a 2.5 year low
Asian growth matters so much more these days. It really is the engine of global economic growth. So far, the stimulus measures from China have calmed markets, as has the general feeling that the Fed and other central banks will do more stimulus. And the hope and action of stimulus can go on and on and on, and on…
Bank of Japan’s (BOJ) massive exchange-traded fund (ETF) purchases are not aimed at stabilizing the stock market, Governor Kuroda said on Tuesday while speaking in Parliament.
With the ETF holdings reportedly totaling 29 trillion yen, the central bank has morphed into a hedge fund. Many are of the opinion that the BOJ should halt the ETF purchases, else the stock market’s ability to allocate capital efficiently will be ruined.
These numbers are still very significant. As the Financial Times reports:
Last year the Bank bought just over Y6tn ($55bn) of ETFs in line with its target for 2018 and now holds close to 80 per cent of outstanding Japanese ETF equity assets. Total purchases to date represent around 5 per cent of the country’s total market capitalisation. The Bank also owns close to half of all outstanding Japanese government bonds.
This is now the new norm. And yet, despite all the stimulus measures, the Asian data above continues to deteriorate. There are many times in history when markets detach from economic reality. And this is one of those times.
While there are many shorter-term trading opportunities in gold, the $1350 level seems to be the resistance – for now. This is because, on the surface at least, markets are high and unemployment is low. But beneath the surface so many dangerous imbalances remain, especially in terms of the amount of debt outstanding and the lack of transparency around that debt – particularly in China. And while some inflation numbers remain benign, central banks will continue to stimulate, or at the minimum, keep it as an option. Indeed, some predictions in the markets imply that the Federal Reserve will actually cut rates within a year. The days of normalization of rates, that many predicted, seem long gone.
Summarizing: the global economy remains optically ok, but there are some worrying signs. If these continue to deteriorate, then it is inevitable that more stimulus measures will have to be put in place. The monetary base will then be artificially expanded… again. And that can only be positive for gold and gold related stocks.
In addition to this, global companies are starting to report their most recent earnings. It has hardly been a superb season thus far. Much of their commentaries focus on managing expectations for upcoming quarters, but they are also specifically warning us about a global slowdown. Even the usually super-bullish IMF has alerted: Trade is slowing, and so is the global economy. The IMF warns of a ‘delicate moment’
The next few weeks and months will see if this is a prolonged downturn or just a blip. Either way, the promise of stimulus to support the economy is not going away any time soon.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.