Financial Asset Party Around The Globe Continues, Plus Morgan Stanley Notes An Opportunity In The Gold Sector

A note from Morgan Stanley is in the piece below about a possible opportunity in the gold sector.

By Bill Fleckenstein President Of Fleckenstein Capital
August 9 (King World News) – 
The overnight financial asset party continued around the globe, with nearly all major stock and bond markets higher. Despite extremely disappointing productivity data (Q2 was reported at –0.5% versus expectations of +0.4%), our equity market followed the rest of the world higher, gaining 0.2% through midday. I don’t mean to suggest that I think the productivity data matters all that much, but it used to be something that bulls pointed to as a rationalization for doing what they were going to do anyway. Now it is just another piece of bad data to ignore…

Make That “Data Co-Dependent”

Of course, ignoring any and all bad news is a function of the monster that the Fed has created, which won’t surprise anyone reading this column. However, on that subject, it is worth noting that an article by none other than Ben S. Bernanke himself written for the Brookings Institution today contains rationalizations some of us predicted we would see some time ago to justify the Fed dragging its feet, even after reporting that inflation has ratcheted up. (This is no easy task, given how the calculations of the inflation data are specifically set to preclude any CPI inflation.)

In this academic puff piece “The Bernank” makes the case that, even though we all thought seven years of 0% interest and $3.5 trillion of monetization were extraordinarily accommodative, he doesn’t really know if that is the case:

“However, the revisions in FOMC participants’ estimates of key parameters suggest that they now see this progress playing out over a longer timeframe than they previously thought. In particular, relative to earlier estimates, they see current policy as less accommodative, the labor market as less tight, and inflationary pressures as more limited [my emphasis]. Moreover, there may be a greater possibility that running the economy a bit ‘hot’ will lead to better productivity performance over time [my emphasis]. The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Feds anticipated trajectory of rates.”

As if that weren’t enough, before finishing this absurd piece of rationalization, he notes, “policy should not react until inflation has actually risen in a sustainable way.”

This is precisely an outcome I first discussed years ago, i.e., that the Fed would rationalize away any price increases because, since its policies don’t work, they would not have accomplished what they set out to from an economic activity stimulation standpoint (not to be confused — as so many do — with inflation). In other words, GDP growth would still be not quite good enough.

If Only Laser Printers Could Print On Möbius Strips

What I find sort of sweetly ironic is that Greenspan’s excuse for keeping monetary policy too low (which was a rounding error of “lowness” versus what we see today) was that productivity was booming (even though he exaggerated its impact, as did the BLS at the time). Now we have Bernanke arguing that creating an economy that is generating too much inflation might increase productivity. It is mind boggling to see how these Fed heads twist themselves into pretzels of rationalizations in an attempt to blame anything they can to explain why their policies don’t work, all so they don’t have to come to that very conclusion.

With that rant out of the way, in the afternoon the market slowly gave up most of its gains and was essentially flat with 30 minutes to go, when I had to leave. Away from stocks, green paper was weaker, oil was flat, fixed income was higher, and the metals gained about 0.5% apiece.

Nothing Gets By These Guys

On that subject, I note that a big dead fish house (in this case, Morgan Stanley) recommended Goldcorp today. For those of us who think that company has lagged way behind, this is the sort of report we are going to see more of. There are many investors and investment institutions that have been left behind in this gold bull market, and in my opinion they will all start to read how cheap it is vis-à-vis Barrick and Newmont and want to jump on the bandwagon. Today’s note from Morgan begins.

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King World News

Interviews with market experts from around the world with a focus on precious metals.