Verbal interventions have become the only tool for supporting the dollar and manipulating the markets from FED. And the FED's minutes have become one of the major tools for verbal interventions. So yesterday the last FED's minutes went public and expectedly - the markets went down. But it will be naive to think the talking between some FOMC members that know they will be published, mark the real content of the thoughts of these people. These are public expressions and not professional analyses.
The reality is much different. Even with the most optimistic spending cuts, US government deficit will remain enormous. It must be financed somehow. Disappointed from excessive money print foreign investors are running away from US debt. The very low interest rates demotivate also domestic investors, as inflation is de facto higher than the interest rate. I.e. the real rate is negative.
The financing of US deficit has 1 major source - the newly printed money from FED. The money flow through 2 ways - via direct purchased (so called QEs) and via lending dollars to politically correct banks at record low interest rates, and then they buy the debt. In both cases the starting point of the money is the same - FED.
So fundamentally FED has no means to really cut the money supply. It must keep the expansionary policy, not because of unemployment or economic growth, but because of the needs of Federal Government. So FED can neither cut the rates, nor can stop the QEs. So the major tools of influencing the markets are blocked. And there remains only to talk to the public.
It is not only a problem of FED. Other major central banks around the world are in the same situation. So the instant money flow is granted and fundamental factors are in favor of bullish markets. This simply means that it is wise to use the corrections brought by verbal interventions, to buy. There are rumors that the Central bank of China is buying gold. So these corrections are a good chance for investors like it. And for any investor thinking in a deep and long term way...
Feb 21st 2013