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The FED leaves Interest Rates Unchanged

By Eric Panneflek


Dear PGM Capital Blog readers,

On Wednesday September 21, in a mostly expected move, the U.S. Federal Reserve decided not to raise interest rates at the September meeting of its Federal Open Market Committee (FOMC). The committee’s two-day meeting concluded with Fed officials voting to keep the U.S. central bank’s target range for the federal funds rate at 0.25 to 0.5 percent.

Below chart shows the FED fund rate from 2003 up to now.

Here below are some highlights of Federal Reserve Chair Janet Yellen's press conference on Wednesday following the end of a two-day meeting of the U.S. central bank's policy-setting committee.

The FED Chairwoman Janet Yellen press conference, following the two-day F.O.M.C. meeting, on September 21, 2016.

The following are the highlights of Federal Reserve Chair Janet Yellen's press conference of Wednesday following the end of a two-day meeting of the U.S. central bank's policy-setting committee:

  • Wage Growth:
    The FED thinks that the USA Economy has seen some modest pickup in wage growth and that it's running a little bit higher than it was over the last two years.
    How ever they do expect, the unemployment rate to decline further and the labor market conditions to improve in the country.
    They also hope and expect that the USA will see some further pickup in wage growth and that it will be broadly beneficial to the American households.
  • Productivity Growth Slowdown:
    The FED thinks, that what ultimately drives inflation are both wage and price growth, related to tightness in the labor market and pressure on resource utilization.
  • Decline in business spending:
    The FED chairwoman stated that, investment spending has been quite weak for some time and they are really not certain exactly what is causing that.
    The FED is aware that a part of this decline is due to the huge contraction in drilling activity associated with falling oil prices, but the weakness in investment spending extends beyond that sector.
  • Credibility and revisions of forecasts:
    The FED chairwoman, stated that the FED agree that they are undershooting their inflation goal and that they want to make sure they stay on a course that raises that to 2 percent, and they're struggling with a difficult set of issues about what is the new normal in this economy and in the global economy more generally, which explains why they keep revising down the rate path.
  • On the US Economy:
    According with the FED, the US economy has a little more room to run than might have been previously thought.
  • Rate Outlook:
    The FED judged that the case for an increase has strengthened but decided for the time being to wait for further evidence of continued progress toward their objectives.

The Fed downgraded its forecast for economic growth in 2016 for the third time this year. It now projects growth this year to be 1.8%. In June it forecasted a growth of 2% for this year.

The FOMC raised interest rates for the first time in nearly a decade last December.

As the Fed has hesitated to raise rates this year, there is a growing debate about its credibility. Many economists and investors say the Fed's hesitancy to raise rates - and conflicting messages from its top leaders - has eroded public confidence in the central bank.

If the FED wants to raise interest rates in 2016, there are only two FOMC meetings left before the end of the year, the first one will be on November 1 and 2, and just one week before the USA presidential election and the other one, the last one for this year, on December 13 and 14. The odds for November hike are to near 22 percent, while the probability for December hike is still around 60 percent.

The Fed has two objectives when it makes its interest-rate decisions namely:

  • Reaching full employment.
  • Achieving an inflation rate of 2 percent.

The big question is, when will the conditions finally be right for the Fed to raise rates. Expectations matter when it comes to Fed decisions, because monetary policy changes the cost and availability of money.

Though the Fed weighs many factors regarding the domestic and global economy in its interest-rate decisions, the committee’s moving goal posts have economists and analysts wondering what it will take for a rate hike to happen.

As can be seen from below chart, Gold prices were markedly higher last week with the yellow precious metal up 2.26% last week and to close at 1,337.20 an Troy Ounce in New York close on Friday September 23.

The rally marks the largest weekly advance since mid-June & the largest weekly range since late-July and comes amid a sharp pullback in the greenback, prompted by Wednesday’s Fed interest rate decision.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent and that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


Helicopter Money and Zero Coupon Perpentual bonds

By Eric Panneflek

Dear PGM Capital Blog readers,
Eight years after the financial crisis, the world’s central banks are trying to boost the global economy as much as ever. Though having arguably prevented financial markets from falling into the abyss in 2008 by lowering interest rates, the central banks are adopting increasingly complex interventions, to which the world economy remains stubbornly immune.

Helicopter money is an alternative to Quantitative Easing (QE) when interest rates are close to zero and the economy remains weak or enters recession.

Nobel winning economist Milton Friedman is known to be the one who coined the term 'Helicopter Money' in the now famous paper “The Optimum Quantity of Money

It’s called helicopter money because of the illusion of dumping currency from the sky to people who will rapidly spend it, thereby creating demand, jobs and economic growth.

Originally used by Friedman to illustrate the effects of monetary policy on inflation and the costs of holding money, rather than an actual policy proposal, the concept has since then been increasingly discussed by economists as a serious alternative to monetary policy instruments such as quantitative easing.

According to its proponents, helicopter money would be a more efficient way to increase aggregate demand, especially in a situation of liquidity trap, when central banks have reached the so-called 'zero lower bound'.

A zero-coupon bond (also discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.

The zero-coupon bonds do not make any interest payments (which investment professionals often refer to as the “coupon”) until maturity.

For investors, this means that if you make an investment today in a zero-coupon bond that matures in 20 years, you won’t put a single penny worth of income in your pocket for two decades.

A Perpetual zero-coupon bond, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt.


Helicopter Money:
Central banks can raise and lower interest rates and buy and sell securities, but that’s it. They can thereby make credit cheap and readily available, yet they can’t force banks to lend and consumers and businesses to borrow, spend and invest.

That undermines the effectiveness of QE; as the proverb says, you can lead a horse to water, but you can't make it drink.

Today, developed countries are engaged not in shooting wars but wars against chronically slow economic growth. So the belief in close coordination between governments and central banks in spurring economic activity is back in vogue -- thus helicopter money.

Zero Coupon Perpetual Bond:
A zero-coupon perpetual bond, allows a government to spend with impunity, since it would owe no interest, or would never have to pay the bond in any way.

Zero coupon, no maturity bonds held by a Central Bank, would be some bizarre construct, conferring no benefit on their owner (lender) and no real obligation on the issuer (borrower), but allowing for an almost direct injection of cash into the economy.

Presumably, the government could do anything with the cash raised, from embarking on infrastructure projects to issuing checks to the citizenry.

An interesting implication of a zero coupon perpetual bond is, that a central bank could never sell it if it wanted to quash inflation.

After all, who would buy a valueless security? In other words, by not being able to be sold in the open market, the security might deprive the Central Bank of its inflation-fighting power, finally will produce the inflation Central Banks have sought.

The inflation would finally ease the debt burden of the WEST, by making their currency it owes less valuable.

However, it would also hurt the middle class, which is already under pressure from wage stagnation, in the sense that households holding cash and other forms of paper wealth would see their capital evaporate.

The long-suffering middle classes would become even more stretched and almost certainly a great deal angrier.

The only way to protect your wealth from this new world of central bank intervention, is by holding physical precious metal outside the banking system.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent and that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


The Story of the Boy Who Cried Wolf

By Eric Panneflek


Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to see if there are similarities between the story of the boy who Cried Wolf and the the talk of  the USA FED, who is telling us that they are going to raise rates.

The story dates from Classical times, but, since it was recorded only in Greek and not translated into Latin until the 15th century, it only began to gain currency after it appeared in Heinrich Steinhöwel's collection of the fables and so spread through the rest of Europe.

The tale concerns a shepherd boy who repeatedly tricks nearby villagers into thinking a wolf is attacking his flock. When one actually does appear and the boy again calls for help, the villagers believe that it is another false alarm and the sheep are eaten by the wolf.

The moral stated at the end of the Greek version is,

"this shows how liars are rewarded: even if they tell the truth, no one believes them"


Is the USA Fed that cried wolf:

The USA Federal Reserve  (THE FED), needs Markets To Think They Will Hike interest rate this year, but if no one believes it?

The US Central banks has a habit of preparing markets for changes in monetary policy, which is why it stated that rates would increase 3-4 times in 2016. However, with eight months already in the books, the FED is looking a lot like the boy who cried wolf at this point.

It seems like the Fed has either an excuse or a pledge at each meeting.

Fed Chairwoman Janet Yellen brought more confusion to the markets on Friday, August 26, at the Jackson Hole summit in Wyoming by saying that:

The case for an increase in the federal-funds rate has strengthened in recent months.

This language is about as strong as a central banker could be to warn of a coming move.

For the first two hours after the speech, stocks moved higher and bond yields fell slightly, a reaction that seems to say, prove it!

Will the November elections prevent any rate hike?
The US Presidential election is in full swing, and this contest is like no other America has witnessed.

The chances are that the aftermath of the current election will present more animosity and ill-feeling than past contests given the two candidates. The bottom line is the election, and the consequence will likely become yet another compelling reason for the U.S. central bank to leave monetary policy unchanged.

Is the FED Chess-mate?
The Fed is suffering from a credibility problem, and it has itself partly to blame. Over the past couple of years, it has repeatedly signaled impending tightening, only to back away.

On Friday, September 9, Eric Rosengren, the head of the Boston Federal Reserve and a voting member of the FED's policy-setting board said that a “reasonable case” can be made for a rate increase given the growing risk that the US economy and financial markets will overheat, this despite headwinds from abroad.

The Markets called Mr. Rosengren's bluff with the DOW-Jones Industrial to shed on heavy volume, 394.46 points or 2.13% on Friday September 9, to close at 18,085.45 points as can be seen from below chart.

The  S&P-500 and the NASDAQ lost respectively 2.45% and 2.54% on Friday, September 9.

Investors by calling the FED's bluff also dumped US-Treasuries, sending the yield of the 10-year note, on Friday, September 9, to 1.67% an increase of 3.47% as can be seen from below chart.

The Fed has let some golden opportunities to increase interest rates pass them by over recent months. There will be a price to pay for their inaction and consequently make them now the boy who cried wolf.

What's Next?
We believe that Monday, September 12, will be a very interesting date for the markets, because after Friday's sell-off, the stock-market weakness is now number 1, because the FED is going to ignore the weak USA economic data, because they are still talking rate hikes, than the only thing left to take the rate hikes off the table is the Stock-market.

The traders might force it to happen, because if the lousy economic data is not enough, than the trader would like to see how much pain the FED is going to tolerate from the stock-market and the bond-market.

For the rest of 2016, we believe that there are too many compelling reasons for the Fed to continue on its current course of inaction. All the while, gold, and silver are likely to make higher highs as these metals are not crying wolf but, are acting as the canary in the coal mine and are telling us that the inflationary wolf will be nipping at our heels before long.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek