Strange Economic Signals

Investors have been enjoying a bear market rally for the past week or so amidst some of the most historically unprecendented economic signals we have ever seen:

1. Earlier this week, short-term interest rates went negative for the first time.
   Translation: Investors are loaning out money expecting to get less of it back in the future, a poorer proposition than your mattress, in search of less risky investments.
2. Last week, gold went into "backwardation" for the first time in history.
   Translation: Investors are unwilling to sell gold in the spot market and buy it back at a lower, profitable price next month. Reason: Fear that it may not be there as gold hoarding increases, and there is credible worry of COMEX warehouses defaulting on futures deliveries.
3. The Fed is now discussing with Congress issuing its own debt, not backed by U.S. Treasuries.
   Translation: The "Reserve" part of the Federal Reserves, the basis for which our money supply is issued, has historically been U.S. Treasury Bonds (U.S. Debt). The Fed is looking for ways to accelerate lending and liquidity decoupled from this historical limitation.
4. Britney Spears is gearing up for a comeback tour this Spring.
   Translation: Laissez les bon temps roulent!

Of these noteworthy events, #3 should be by far the most disconcerting (although I wouldn't fault you if you voted for 4.). The Fed seems to be saying that it wants to increase the money supply faster than the U.S. can handle more debt. Allowing the Fed to print money without increases in the corresponding reserves was not even contemplated in the Federal Reserve Act of 1913. What does this mean for the "Federal Reserve Notes" in your wallet (if you're lucky), as well as for Joe Pensioner and Ira Savings?

Well, assuming the Fed is looking for new ways to increase the money supply to head off deflation and the collapse of credit in such a fundamental way, it signals to me there is more amiss than we have been led to believe. It also opens the door to a virtually unlimited increase in the money supply (at who's discretion?), rampant inflation, and complete distortion of all economic indicators. If you are up to your eyeballs in debt, this could be a very good thing. If you stayed out of debt and amassed many "Federal Reserve Notes" of your own, it's very bad.

Also for your consideration is a recent article in Forbes magazine hypothesizing a proactive devaluation of the dollar by policy edict (the same effect as above). This article would probably be laughed out of most Econ 101 classes, but I point it out as an example of prevailing "wisdom" and how extreme events have apparently become. The recurring theme here is that the apparent rally over the last 6-9 months in the U.S. Dollar may be ready to make a U-turn. The safe haven investments that return fewer future dollars for today's dollars may not be the best idea after all. I note today that the dollar is strongly down against all things such as Yen, Euros, gold and Cheerios.

These are strange days indeed. Be safe out there.

//Gary