Fire in The (Jackson) Hole

In this central bank stimulus fuelled global financial market all eyes are on US Fed Chair Janet Yellen’s annual address from Jackson Hole tonight.

They will pick apart every word looking for cues.  Will it be hawkish, signalling tightening monetary policy through rate rises soon, or will it be dovish, seeing rates on hold and possibly a change in data targets to justify it.  Citi bank’s latest poll has 85% of respondents betting it will be a ‘dovish hike’ scenario, that is, a deferred rate rise in December.  As we discussed in today’s Weekly Wrap, there have been more hawkish speeches through the week by other Fed members and this has helped see downward pressure on gold and silver all week.  Bond implied bets are up to around 30% for a September hike and 65% for December.

The dovish scenario being bandied about is maybe the Fed announcing new (more distant) targets for inflation and GDP growth to justify keeping rates on hold.  That Citi survey has respondents giving that only 10% chance.

We still believe there are $25 trillion reasons why they won’t raise rates any time soon.  That figure is the sum of all financial assets (bond, shares etc) that central banks now own through all their money printing.  Raising rates whilst the world as a whole, and even the US, is stuck in anaemic growth and record debt threatens the value of those assets.  Remember assets on the central banks’ balance sheets are corresponding debts on which higher interest rates see higher interest payments and the effect of which sees corresponding lower values.

They remain in between that rock and the hard place.  Conceivably, though with different timeframes gold wins on either scenario.  Hike rates now before the world is ready and is hooked on cheap money and you threaten a crash.  Leave as is or even slacken monetary policy and in the short term the financial and property bubbles get bigger, but you see an increased loss of faith (as has been the theme of 2016 and gold and silvers big price gains) and also set yourself up for the inevitable and now bigger pop of those bubbles.