Wasington, D.C. -- (ReleaseWire) -- 02/06/2015 --BENNETT: Daryl Jones covers commodities, geo-politics, and major asset classes outside of equities for Hedgeye Risk Management. Daryl, thanks for being here.
JONES: Good morning.
BENNETT: Daryl, Mario Draghi and the European Central Bank just unleashed an over $1 trillion negative interest rate tsunami on the European markets. Back on June 5th, 2014, the ECB became the first major central bank to push rates negative. That move, of course, was meant to shock bank depositors into deploying their money out of the banks and into risk assets. That failed, but strangely enough they decided to do it all over again and raise it to the next level by adding quantitative easing to that. What are they thinking here?
JONES: It's a good question. We struggle with it. I mean, Japan is obviously the case study for why this type of easing doesn't work, and I think the central bankers maybe think they are smarter than the markets or something, but people sort of see right through it. And there is the practical issue that you don't really see any follow up for it in the real economy with stuff like this so what you're trying to do is stimulate economic activity and you don't really do it. I mean, they are trying to incentivise people to sort of buy risk assets, but again, that doesn't really happen either. You may get a short term pop in the markets but in terms of the long term impact it's pretty ineffectual and we don't even really know what their long term negatives are, especially when the ECB balance sheet starts to grow. So I think for us, pretty disappointing and we've seen way too much central bank intervention lately, and this is another example why it is not a good thing.
BENNETT: QE in the United States has been criticized for helping banks but doing absolutely nothing for main street. It doesn't seem like that there are any real world results. Do you think the Europeans are even focused on that? Did they take heed of any of the headlines that came out in Washington?
JONES: It certainly seems like they are ignoring the history on a lot of levels. I think the problem is many of these central bankers are from a Keynesian-inspired school of thought, and they believe that they have the power, the wealth to change things with these programs. Again, we've seen it play out, it's not going to help the guys on Main Street, it's not going to help to the average consumer in Europe on the margins. Maybe it's positive for the banks but we are not going to see the follow-up that that we need for the economy.
BENNETT: What does this mean for American investors? For the last six years, it seems that when things go wrong in the world economy we benefit, but I am wondering if that benefit is starting to go away.
JONES: I think the positive for the U.S. is probably that this is good for the U.S. dollar, and I think of course for the consumer-led economy to the extent that the U.S. dollar is getting stronger, it increases purchasing power of the consumer. In correlation with oil, that's the big reason to see gasoline prices come down, a strong dollar. And then also I think people look at U.S dollar denominated assets and they want to own them, when they see all these dramatic measures happening around the world. You know, you had also Canada easing last week. So I think, in aggregate, it is actually a positive tail wind for the U.S. stock markets and probably for the U.S. economy at some level.
BENNETT: For how long tough? The idea of de-dollarization was first floated last May, correct?
BENNETT: And suddenly, you started to see currency-swap agreements turn to bi-lateral agreements, and then people were selling U.S. Treasury bonds and rotating into gold, although the gold price wasn't exactly representing it. I'm wondering if this is because the world has actually becoming less comfortable with holding dollars?
JONES: Well, that's a very good point. You can feel like it's kind of a race to the bottom with all currencies on some level.
JONES: I think longer-term, your point is spot on. In the short-term, for six to twelve months, eighteen months, we can argue it's probably still good for the U.S. dollar, good for the U.S., but longer term, the way we are going with this currency devaluation... One real issue is that U.S. economy is not going stay decoupled for long, so to the extent that the U.S. or European or Asian growth is worse than expected, then the U.S. is going to follow on these growth issues, so I think we are all going to end up in the same place.
BENNETT: I've been preaching the value of gold for a long time as I see fiat currencies in developed economies breaking down. What's your take on gold going forward?
JONES: For us, we tend to be fairly tactical and we have a quantitative model that gives us a buy-signal, based on the view that these currencies are being continually devalued. I think that's a really effective long-term investment because gold for centuries and centuries has been a valuable commodity, and it's only going to inflate in value when central banks are just devaluing these paper currencies.
BENNETT: Do you think gold will ever become the actual real reserve currency like it's been in the past?
JONES: I think it's going to take a lot to kind of get back to that point, but you know, practically speaking, I think it can, whether it's the official reserve currency, or currency that is actually tied to the price of the gold. I don't know that we'll get there, at least with the current central bank bankers. But I think from a practical perspective that is what will likely happen and frankly has been happening. Again, gold is the historic store of wealth, people can measure it and I think that's something that over the long run will be a good asset simply because of what's happening with lots of central banks.
BENNETT: This past week of course gold broke $1300, which put it at a five month high. Do you think we are stepping in a direction where there will be more investor demand for non-fiat currency?
JONES: Absolutely, because the thing that's happening with the ECB and other central banks—this is the only the first chapter, the quantitative easing doesn't stop with one move. We are going to wake in six months and ECB is going to decide they have to do more because it's ineffectual, but maybe they don't know that themselves or they don't realize that. So I think this type of easing is never one step.
BENNETT: The Euro zone's weakest economy is Greece. They are having a difficult time climbing out of their debt issues, but this quantitative easing program by law is unable to purchase Greek debt. They need liquidity and support from the ECB, and the same probably goes for other weak performers like Italy and Spain. If QE money ends up going to the stronger northern European nations, what are the chances this program is going to help the economies facing the bigger issues? They don't have solvency so they need some form of a liquidity. How is this going to work?
JONES: Again, that's another issue of this program. I mean, if you are not actually helping the country or region in the areas where they need it, what are you really trying to do? The northern European countries, Germany, they don't need quantitative easing while southern countries like Greece do, but in fact that's not what the program is being used for. And again, it's going to be quite ineffective.
BENNETT: Daryl, I know you aren't a currency trader but Russia's ruble is nose-diving and the Euro is also plummeting, even the Canadian dollar is falling apart. The U.S. has been inflating its money supply more than any of these other currencies, so I'm wondering how much longer do you think this is going to go on. What's your sense as to why we keep getting stronger?
JONES: The currency gain is always a relative thing. Even if there are things that we don't like about the U.S. dollar, if you look at it on a relative basis to the ruble, to the Canadian dollar, to the Euro, to the Yen, I think there are a lot of reasons to be more bullish about the U.S. and I think it's going to be sustained for a while. Some of that is priced in, but particularly with Canada and Russia—oil at $50, $45, it just devastates the economy. That's what's been priced in and with the ECB's move and likely continued moves, the Euro is just going to go lower. We are probably looking at parity in not so distant future.
BENNETT: What's your big-picture view of 2015? Do you think we have rougher seas ahead?
JONES: I definitely think it is going to be a very volatile year where you will really have to be tactical. Again, the challenge for us is this environment of decelerating growth and really accelerating deflation, and not many asset classes perform well in that kind of an environment. Obviously, 2014 wasn't a terrible year for growth in the United States and we think the first half of 2015, just because of what is happening internationally, is going to be rough for growth in the U.S. although the back half of the year may be better but it's just a really tough environment for investing when you are in this deflationary spiral and growth is limited at best.
BENNETT: Thank you Daryl. Daryl Jones, is Director of Research for Hedgeye.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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