Subject: Bridgewater Daily Observations - "Thoughts on the Gold and Commodity Price Implosions and the Other Disinflationary Market Moves"
Regarding gold, there was mass liquidation from a) a certain amount of actual gold selling from Southern European countries, b) the Cyprus case prompting some market players to realize that other Southern European countries' restructurings will be handled in this way, which implies that there will be more gold selling in the future, c) margin and forced liquidation selling of investors with large gold positions, d) trend-following selling and e) panic selling by retail/ETF type investors. Regarding other markets, there was the need to raise cash and sympathetic psychological reactions (due to correlations) leading to contagion selling of other assets (like other commodities and stocks).
In other words, these markets are going through the stage of the money-flow based liquidation process that makes for dramatic moves and will make these markets very cheap.
It was always inevitable that squeezed players would sell gold to strong players and, as a result, the gold would move to those who are financially strong. This has happened throughout history and is reflected in the stats that show how the ownership of gold and silver has flowed in accordance with the declines and ascendancies of countries, families and individuals. This phenomenon is reflected in the saying "selling the family silver" when entities run out of cash because they have over-indulged.
To be clear, we didn't expect this magnitude of market move: on other the other hand, we weren't surprised by it as we have come to expect market prices to often become much more volatile than their fundamentals due to cash-flow based moves. Without markets behaving this way, we wouldn't have opportunities to buy low and sell high.
Regarding what we think these moves will mean for economies and monetary policy, we think they will have some psychological effects (e.g., a "wealth effect"), but we don't expect that they will be large or long-lasting. Also, they are certainly manageable by central bankers. The actual tightness of money and credit will drive things. Our approach is to look at the fundamentals and to expect the markets to move toward them rather than to look at the markets and expect the fundamentals to move toward them.
Developed World Monetary Stimulation Set To Be Stronger and IncreasingIy Differentiated
The ongoing round of developed world monetary stimulation is set to be much stronger than it has been but still much weaker than the peak levels that occurred during the financial crisis. At the same time, the condition of the global economy is much stronger than it was during the financial crisis; growth is about at potential versus contracting rapidly, and the level of economic activity is about normal versus being very depressed. However, central bank stimulation and the conditions across countries are much more differentiated than they were at the time of the prior peak. The Fed continues to buy large quantities of Treasuries and MBS and has shifted to an open-ended commitment to these purchases for as long as
necessary to get the US economy on track. The BoJ (Bank of Japan) announced last week that it will rapidly accelerate the pace and duration of its bond purchases, and the new Kuroda regime has expressed a firm commitment to do what's necessary to increase inflation in Japan. Even though the BoE (Bank of England) is not currently buying bonds, the UK, in a tightly coordinated effort with targeted fiscal measures, is experimenting with a number of different forms of credit easing (including subsidized lending to businesses, subsidized lending to new homebuyers and capital relief on certain types of loans). While the impact of these specific programs so far isn't clear, what's more important is that policy makers have been vocal that they too will keep experimenting until they figure out what works. At this point, the ECB stands out as the central bank doing the least in the way of extraordinary monetary policy. Draghi's commitment last year to do what it takes to preserve the euro was key to stabilizing European financial markets, but since that time the ECB (European Central Bank) really hasn't done much. The announcement of the ECB's OMT program has contributed to improved financial conditions, but over the last several months, the ECB's balance sheet has contracted as both peripheral and core banks have repaid some of their three-year LTRO borrowing. In fact, looking across the developed world, there's potentially quite a divergence playing out. Conditions in Euroland are weaker than anywhere else in the developed world while the degree of monetary support is also the weakest. Outside of Europe, the degree of monetary support is accelerating, and those countries are already in a stronger position, with mostly higher levels of output, stronger levels of growth and more progress on their deleveragings. If this continues, the differences in policies and conditions will contribute to divergences in asset prices and growth.
Accounting for the BoJ decision to dramatically ramp up its level of purchases, the degree of global monetary stimulation is set to increase pretty dramatically over the course of this year. Largely due to increased Fed purchases, over the past several months, the degree of ongoing stimulation was already close to its strongest level in the past several years. Over the next several months, stimulation will ramp to its strongest level since
the financial crisis.
Focusing on the developed world, there are clear differences in the degree of stimulation each country is putting on the table.
* In the US the Fed is buying $85 bin a month in long duration US Treasuries and US agencies. The Fed has not yet set a limit in time or size for this latest round of QE.
* The BOJ had been providing minimal monetary stimulation but has announced a shift to large scale purchases of long duration JGBs.
* In aggregate, the BOE has engaged in the most QE in the developed world. Though its asset purchases are on hold, the BOE, in coordination with the UK government, is experimenting with innovative forms of credit easing.
* In Europe, the ECB has only engaged in limited asset purchases, and when it did so, it was on the grounds of financial stability rather than broad-based easing. Over the last several months about 25% of the ECB's L TRO has been repaid, and the ECBs OMT program has yet to be activated.
Monetary stimulation is the weakest in Europe despite the weakest economic conditions in the developed world. As you can see from the chart below, the level of output in the US is now comfortably above pre-crisis levels. In Japan and the UK, levels of output remain depressed but are improving. On the other hand, the level of output in Europe is depressed and deteriorating.
Current growth conditions are also differentiated. Growth in the US and UK remains moderate, while our latest read on Japan is that growth is reasonably strong and Euroland continues to contract. And within Europe, as we've described in more detail in recent Observations, all of the major economies with the exception of Germany are experiencing depressed levels of economic activity and weak growth.