Kevin Davitt | Jun 05, 2013 12:27AM ET
In my estimation, Central Bankers around the world have an acute fear of deflation. Their prescription has been (and continues to be) hefty doses of easy money. A plethora of British pounds, and abundance of euros, a deluge of US dollars, a surplus of Swiss francs. This is an ongoing and concerted strategy to avoid deflation at all costs. From where I sit, the FOMC, the BoJ, BoE, and ECB appear to be employing a Martingale System, and like countless other junkies/enablers they are lying about their ability to rein in their habit.
Central Bankers will stay the course because after nearly 5 years of heavy use - the markets are addicted. To be fair, the MIT educated PhDs delivering the drug have been threatening to "taper." It's like Librium for the alcoholic because going cold turkey causes seizures and can be terminal. That is far too great a risk.
At first the Quantitative Easing efforts seemed appropriate and relatively benign. The Global Economy was in the throes of a deep contraction after credit markets froze in 2008 forcing a number of firms into bankruptcy (not nearly enough) and others into arranged marriages. Now the prescription may be doing more harm than good.
Malinvestment happens when incentives and expectations become very skewed. Are we near that point? Here's what Bill Gross has to say.
It's worth noting that the ECB has actually reduced the size of their balance sheet over the past year. However, their austerity has been more than counter balanced by the Bank of Japan, Bank of England, Federal Reserve and Swiss National Bank.
This year, we've seen a resurgence in the deflation trade (US dollar higher, commodities, precious metals in particular lower). Check out Hedge Fund positioning in the Dollar Index:
Now let's look at Silver through the lens of Hedge Funds/speculative types.
In synopsis, the easing continues (and in my opinion WILL continue despite the taper threats). Ultimately it may not matter because there has been about 16 trillion in USD equivalents created over the past 5 years. Most of that has not worked its way into the system because of perverse incentives.
The contrarian in me says that at some point, and before long, we'll see the velocity of money pick up. It may be a rudimentary analysis, but I know my wife and I get at least 3 credit card solicitations a week in the mail. Lending standards are becoming more lax. Banks will look for new ways to make their cheap money make more money.
Medium term, I would target a move back toward 55 on the GC v. SI ratio from the current 62.
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