Weekend Update January 23

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

ABSTRACT: Much of the news this week was focused on the macroeconomic level, highlighted by the European Central Bank’s larger-than-expected stimulus program and the panicked reaction by several other central banks across the globe. The dollar, U.S. stocks, and precious metals all advanced in tandem over the course of the week as investors abroad look for safety from mounting global uncertainty.

GEOPOLITICS & WORLD EVENTS

Draghi, ECB Move to Save Euro, Union

The headlines were dominated all week long by the uneasy anticipation surrounding Thursday’s meeting of the European Central Bank’s Board of Governors. ECB President Mario Draghi has been vowing for several years to do “whatever it takes to save the euro,” and Thursday’s announcement of an ambitious new QE package from the central bank confirms his resolve in doing so. In spite of vehement opposition from Germany and the Netherlands in particular, the quantitative easing plan was approved for an open-ended time frame ending sometime after Summer 2016. The ECB will buy €60 billion of government bonds from member nations each month, growing its balance sheet and providing greater liquidity and creditworthiness to the financial systems of affected EU countries.

While many analysts expected the ECB to move toward purchasing Eurozone sovereign debt, the size and scope of the stimulus package was larger than expected, and exceeded the €50-billion-per-month figure leaked by sources on Wednesday. While the more aggressive terms of the “EU Bailout” plan were cause for celebration by the continent’s more embattled economies (Portugal, Spain, Italy), it also elicited a series of rather serious demands from German Chancellor Angela Merkel. German sentiment is that the bailout funds will allow fledgling Southern European countries to delay or shirk the pressing need for structural reforms to their economies and financial apparatuses. Merkel advocated for “urgent fiscal reforms” to address the debt burden of distressed EU nations before interest rates begin to normalize. Germany is in the unique position of having balanced its budget a year ahead of schedule while still experiencing modest economic growth, so it can cite convincing data to bolster its insistence upon austerity for the rest of Europe.

The ECB’s strategy is pretty clear: if the central bank devalues the euro, then it also devalues all of the sovereign debt of the currency union’s member nations. In addition to injecting liquidity into national banks overburdened with debt, the ECB’s QE may also render this debt easier to pay off now that the central bank is putting it on its own balance sheet.

Yet, the impediment of an uncooperative Greece still looms for Draghi and the ECB. The political fragmentation of the European Union could come back to bite it economically if the leftist opposition party, Syriza, maintains its lead in the polls through Sunday’s elections in Greece. If elected, the party has vowed to exit the EU and refuse to honor the policies of previous Greek administrations, which likely means not paying back the initial bailout money Greece received after the financial crisis.

Greece is in a difficult bind: even if it decides–whomever is in power–not to send shock waves through the EU, the Greek government must still wait 6 months to receive any of the QE money due to limits on how much debt the ECB can hold from any one member nation. In either case, in the short-term, conditions aren’t going to get demonstrably better for the Greeks. With the potential for a domino effect, their possible exit from the currency union could be death knell for the euro.

News & Notes

Chinese regulators suspend new margin trading for several of the country’s biggest firms, sending the Shanghai index 8% lower.

In the wake of Switzerland decoupling the Swiss franc from the euro, the People’s Bank of China and the Swiss National Bank agree to renminbi clearing, expanding the currency’s foothold in Central Europe.

Anti-poverty charity Oxfam finds that the world’s richest 1% are on the cusp of owning 50% of global wealth.

Standards & Poors will soon be suspended from rating bonds for the next year by the SEC in connection to misleading investors with inflated ratings on commercial mortgage bonds.

MARKETS

The Precious Metals Strike Back

The beginning of 2015 is charting a very similar path to the beginning of 2014, with precious metals rallying after touching lows during the preceding December. Once again, extreme uncertainty in the global markets has driven investors seeking a safe haven into gold, while silver and the Platinum Group metals have also been the beneficiaries of renewed demand. 10-year Treasury yields remain a measly 1.81%.

While gold plowed through resistance at $1,290 and spiked above $1,300/oz for the first time since August, it has actually been held back in dollar terms due to the greenback’s uninhibited climb this week. With the euro dropping to an 11-year low on the European Central Bank’s announcement of a new €60-billion-per-month quantitative easing program, the DXY dollar spot index marched as high as 95.48 on Friday before easing back a bit. The move by the ECB also sent European stock indices to 7-year highs while U.S. equities fell, snapping a 4-day winning streak.

Silver is seeing its strongest January in over 30 years, advancing more than 10% since 2015 began. After spending much of the fourth quarter of 2014 mired around $16/oz, the white metal has surged more than $2 this month to settle comfortably $18 per ounce. This is the first time that silver has topped the $18 mark since last September. Platinum and palladium have been more volatile than the other precious metals, as there appears to be quite a bit of profit-taking following a rally in either metal. Crude oil has been caught in a similar pattern, following up positive trading days with big drops. Brent crude gained 1% early Friday morning to reestablish its premium above West Texas Intermediate, as the two benchmarks sat at $49 and $46 per barrel, respectively.

In fact, it seems no sector of the global economy outside of precious metals can put together any sustained momentum lately. This has been especially true with all of the surprise moves by central banks over the last week in anticipation of more economic stimulus to remedy a sluggish world economy. The monetary authorities in India, Turkey, Canada, and Denmark all unexpectedly cut their benchmark interest rates this week following the “Swiss Surprise” last Wednesday; the Danes, in fact, cut their already-negative rate twice in the course of a few days, lowering it first from -0.05% to -0.2%, and again to -0.35%.

As central bank policy around the globe becomes less and less predictable, there will likely be more hedging with precious metals from investors as well as the large institutional traders seeking some protection from possible market fluctuations. January has seen the greatest inflow of money into gold ETFs since October 2012, reversing the narrative of massive outflows from these funds over the last two years. With time and a bit of luck, the macrocosmic outlook for various investment vehicles will come into better clarity; for now, the picture reads “TBD: to be determinedacross the board.

GOVERNMENT & POLICY

The State of the Union: Populist Delusion

The president laid out his broad, generalized vision for the nation this week in the annual State of the Union address.

President Obama was laid back, confident, and played to his crowd. Each policy point was wheeled out like a shiny new bicycle for us–the children of the Nanny State–to squeal at in excitement on Christmas morning; Obama largely played to a delighted audience. For the most part, the members of Congress who were gathered for the occasion offered resounding applause and standing ovations. (Even a few Republicans joined the cheers.) The atmosphere was one of triumph for the president.

Like all political speeches, finer details were ignored while the Commander-In-Chief’s agenda for his last two years in office was presented with the broadest of brushstrokes. Part of making that agenda appealing involved artfully rebranding history. For instance, the president touted bringing greater access to healthcare coverage to Americans without acknowledging the glaring problems with the Affordable Care Act. He hailed the reduction of soldiers stationed in Afghanistan without seriously addressing the violent buildup in Iraq-Syria. He even spoke of bringing American corporations back home while creating more attractive trade environments overseas–a pair of goals that seem to be mutually exclusive, or at least at odds with one another. It many respects, Obama’s speech only made sense if the observer didn’t question a word of what he was saying.

The president’s appeal to a hollow, “do-as-I-say-not-as-I-do” bipartisanship, reminiscent of his previous speeches (and many State of the Union addresses before him), is simply the cheery face that must accompany political grandstanding of this sort. Quite deftly, Obama used the sweeping Republican victory in the 2014 midterm elections as a way to shift blame away from the Chief Executive on a number of pending issues. He emphatically presented proposal after proposal–paid sick leave, expanding child care services, an infrastructure overhaul–that is unlikely to make it out of the House of Representatives if drafted by Democratic lawmakers. Yet, by laying this political groundwork, the president can point a finger at the legislature at some later date and accuse them of something akin to “not acting in the interest of middle-class economics” if they don’t take up his (albeit ill-conceived) suggestions.

Middle-class economics” was a favorite catchphrase for the president. He trotted out the term five times in the early part of his speech in an obvious attempt to craft a truly populist message. Here’s the thing about populism: it always sounds good, but nobody wants to pay for it, and thus is little more than empty rhetoric.

I’m not knocking the president for thinking toward the future, and throwing fresh policy ideas into the political discourse; I disagree less with the sentiment of his idealistic plans than with his party’s means for achieving them.

The larger point is he knows that very little of the new proposals in the State of the Union will be enacted during his presidency, or even during his successor’s term in office. They are merely political tools, carrots dangled just out of reach of the American people so Congress can be blamed for inaction, obstruction, and in-fighting when they are merely sticking to their principles.

If you’re intent on following President Obama down his populist rabbit hole, be my guest. Just don’t be surprised when it turns out to be another dead-end.

 

A LOOK AHEAD: The most-watched event over the weekend will be the elections held in Greece on Sunday, which will undoubtedly have a hand in deciding the fate of the euro and the EU as a whole. Also keep an eye on next week’s FOMC meeting, a two-day affair held on Tuesday and Wednesday.

 

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.