When Central Bankers Say Nothing, We Have a Real Problem

Did you know that, over the weekend, North Korea fired three short range missiles across the sea?

Neither did I…

And judging by how Aussie and Asian markets reacted on Monday, no one really cared either.

The S&P/ASX 200 dropped 0.59% on Monday. The Nikkei fell an almost irrelevant 0.01%. And North Korea’s neighbour — South Korea — saw their major index, the KOSPI, fall 0.35% yesterday.

The Shanghai Shenzhen Composite, on the other hand, rallied 1.24% at the same time.

Of course, that was until US markets opened last night. More below…

The Dow Jones Industrial Average only fell 0.02%, for a total of 5.27 points. However, it was what the gold price did that was most interesting. The spot price of gold hovered around US$1,297 for most of the day but, during US market trading hours, spiked US$25 per ounce before falling back slightly. The yellow metal is currently sitting around US$1,318 per ounce.

Gold is always a good indicator of turmoil in the markets. While a US$25 per ounce spike might seem drastic, you’ll often find people flock to precious metals before the panic sets in the stocks.

Even though North Korea is clearly stepping up its military efforts, judging by mainstream press coverage, most people only cared about what came out of Jackson Hole, Wyoming in the US.

The Jackson Hole Economic Policy Symposium is a yearly event where the heads of the world’s largest central banks get together and discuss monetary policy. But I see it differently.

To me, it’s more of the powerful ‘market managers and fiddlers’ meeting to discuss how attendees have been spending their summer holidays.

Either way, central bank watchers were very disappointed. The weekend meeting provided very little for punters to cling on to.

Behind Closed Doors

All official statements have been carefully worded, giving no clues as to what has occurred behind closed doors. This way, the market can’t react to anything ‘Fed speak’.

The Financial Times in the UK summed up the meeting best, writing:

Many were hoping that this year’s Jackson Hole symposium would provide insights on important policy issues now facing systemically-important central banks. Instead, both headline speakers — Fed Chair Janet Yellen and ECB President Mario Draghi — avoided them, opting to tell politicians about the importance of financial regulation and free trade.

Many had hoped that Chair Yellen would shed light on how the Fed intends to handle the competing claims on monetary policy from persistently low inflation and what the staff has judged to be “elevated” asset prices. There were hopes that President Draghi would detail the ECB’s approach to gradually tapering its large-scale purchases of market securities, including calibrating and sequencing this with steps to restore policy interest rates back to positive levels while navigating the stronger euro currency.

The real optimists had also wondered whether, with Governor Haruhiko Kuroda of the Bank of Japan also at the gathering, there could even be signals on whether, and how, more than one systemically-important central bank could simultaneously normalise monetary policy in an orderly fashion.

Every one of these hopes was dashed. Rather than comment on monetary policy, Chair Yellen chose to defend the progress made in recent years on financial regulation and warned about the dangers of excessive de-regulation. President Draghi also steered clear of immediate policy issues, and this notwithstanding the additional pressures associated with the recent strengthening of the single currency. Instead, he opted to defend free trade, stressing the importance of making it more inclusive, and reinforced Chair Yellen’s emphasis on the importance of prudential financial regulation and international standards.

Reading through all the mainstream write-ups, everyone seems to have the same take.

Janet Yellen made a clear stab at US President Donald Trump by warning about the dangers of deregulating the markets. And Mario Draghi is talking up support for the euro ahead of Brexit.

What bothers me is the complete lack of direction from the central bankers. Now, I don’t want to be a cheerleader for obsessing over central bank statements, but not saying anything at all bothers me far more than saying too much.

Just how precarious is the market that a major annual meeting of the most powerful central bankers in the world releases a statement so bland? They know that people chew through the reports, looking for any hint of how central banks plan to manage the global economy.

Don’t think for a second the lack of direction at Jackson Hole means they are going to let the market sort itself out. That’s not what central bankers do.

In a ‘Trumped up’ market surrounded by centrally-planned financial systems, the designers — the central bankers — have to select their market reflections carefully.

When every single statement matters, central bankers can’t even risk a few words in fear of sparking a broad market selloff. And that’s a real problem.

Kind regards,

Shae Russell,
Editor, Markets & Money

PS: Hurricane Harvey is currently crippling the refining industry in Texas. It’s the biggest hurricane in the US in 12 years — and the largest one in Texas in the past 50 years. Punters have been asking why the effects of Harvey aren’t showing up in Brent or West Texas Intermediate crude oil prices.

There are two reasons for that: Texas is a refinery state, not a drilling state. And the US has a surplus of crude available. Furthermore, a shutting down of the refineries suggest that there will be less demand for crude, compounding the problem.

However, my colleague Greg Canavan reckons that crude oil prices are close to bottoming out. And based on his extensive research, he says oil stocks are starting to look very cheap. And it could potentially present one of the best investment opportunities for 2018. Click here for more.

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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