NEW YORK (Reuters) – U.S. stock index futures dipped on Friday, setting indexes up for a full week of daily declines, as the dollar index added to the previous session’s rebound ahead of a speech from Federal Reserve Chair Janet Yellen.

* Yellen will speak on monetary policy at the San Francisco Fed at 3:45 p.m. EDT.

….read more HERE

Janet Yellen channels Billy Flynn? Last week the Fed Chairwoman treated us to a master class of rhetorical misdirection which produced some memorable examples of doublespeak, including the soon to be classic “Just because we removed the word ‘patient’ does not mean we’re going to be ‘impatient.”‘ But perhaps more surprising than her new heights of verbal dexterity was the market’s euphoria at being so blatantly manipulated. Never has the financial world enjoyed a lie so thoroughly.

By simultaneously claiming to be both aggressive and defensive, and to be moving forward even while standing still, Yellen positioned the Fed as being all things to all people, thereby igniting a rally in all asset classes at the same time. Stocks, bonds, gold, foreign currencies, all went up when Yellen took to the podium. While this may be the way to win friends and influence people on Wall Street, it’s no way to finally put the economy back on the path to a sustainable recovery.

If the removal of the word ‘patient’ did not move the Fed closer to raising interest rates for the first time in nine years, then why remove it at all? Why take a step forward if you are also taking a step back? It makes sense only if you believe, as I do, that the Fed is far more concerned with maintaining the illusion that rate increases are possible, when it knows that they are extremely unlikely.

This is a game that they have been playing for the better part of six years. Sound tough, set benchmarks, and then back away when crunch time seems nigh. The act should have grown stale years ago, but we have come to crave the pantomime. The more audacious it becomes, the more we applaud.

Despite the removal of a single word (that prompted the Wall Street Journal to headline its lead story that rate hikes were put into play), there were far more indications, contained in the Fed statement, or spoken by Yellen herself at the subsequent press conference, that should lead us to conclude that increases are far less likely now than they were before the statement was issued. But such a straightforward understanding should have led us to conclude that the economy is stalling. No one wants to look at that possibility squarely in the mouth.

2015 was supposed to be the year in which all the strands came together to create a real recovery, an environment in which rate hikes would be a certainty. But anyone who looks past the rosy rhetoric can see that the economy is currently in one of its weakest periods in years. The first few months of 2015 have seen more missed economic forecasts than any other comparable period since the depths of the Great Recession. Industrial production, retail sales, housing starts, just to name a few, are all continually weakening according to data from Reuters Polls, 3/18/15. In fact, the Atlanta Fed’s much talked about “GDPNow” data set, which was supposed to provide a fresh real-time look at the economy, is showing that the economy is growing at a paltry .3% annualized rate. While many people are blaming the result on the winter weather, much as they did last year, it is worthwhile to note that ice and snow in winter is not a new phenomenon.

So it should have been seen as unbelievably telling that as the data is deteriorating, the Fed has more openly shifted into a “data dependent” stance to drive its policy decisions. But at the moment, the markets are ignoring all the bad metrics to believe that the Fed is only looking at one data set that actually looks decent (at least on the surface). The “non-farm payrolls” jobs report shows unemployment drifting ever lower and now stands at just 5.5%, a level usually associated with “full employment” and a strong economy. The rate has fallen further and faster than just about anyone predicted, and has blown through the Fed’s previously announced, and abandoned, levels that were supposed to have triggered rate normalization. The rate is indeed low, but apparently not low enough for the Fed.

At her press conference Yellen stated that she would need to see improvement in the labor market, from where it stands now, in order to pull the trigger for a rate hike. But given the dismal nature of the other metrics, how can she expect further improvements in the job market anytime soon? In reality, we may have already seen the lowest unemployment number and highest job creation we are likely to see for a long, long time. If that wasn’t enough to get the Fed moving, what exactly do we think will do the job?

If the Fed does not think that 5.5% unemployment is low enough to justify even a .25% Fed funds rate (a level that would traditionally be considered an emergency stimulus for a free-falling economy), then it should be clear that it does not believe that the labor market really is that strong. Perhaps the Fed is looking at the collapse in labor force participation, and the proliferation of involuntary part-time employment, as evidence that the market is far weaker than it publicly acknowledges.

The Fed also suggested that a medium-term (whatever that means) inflation rate above its 2% target might also cause it to lose patience and raise rates, but I would not hold my breath waiting for that one. Much as it did with unemployment, I expect that goal post to be moved further and further up the field. My guess is that the Fed will tolerate an inflation rate significantly above 2% rather the risk the seemingly more adverse consequences of higher interest rates.

For now the public debate spectrum on rate increases spans those who expect the Fed to get the ball rolling in June or September (the September camp appears to have the upper hand). The shared belief that increases will certainly occur in the near term stems from the misconception that previous rate cuts (and three rounds of QE) have succeeded in putting the economy back on track. Now that the economic bicycle is rolling along, they believe that it’s long past the time for the Fed to remove the training wheels. But what if, as appears likely, QE and zero percent interest rates were the only wheels? Take them off and the bike falls. However, leave them on too long and we will eventually cycle over the edge of a cliff, as the bottom drops out of the U.S. dollar.

That is the real policy dilemma. The Fed’s hyper-stimulative monetary policy was a mistake from the start. It did not repair fundamental economic problems but merely delayed the inevitable pain associated with their resolution. However, that borrowed time comes at great cost as the now-enlarged problems will be that much more painful to resolve.

But the degree to which “experts” have accepted the false proposition that Fed policy has been helpful is now more fully entrenched. As the economy once again careens toward recession, the calls for another round of QE will grow louder. Perhaps when it comes to QE, the 4th time will be the charm. But as I said from the beginning, QE is like trying to put out a fire with gasoline. The more you throw on, the bigger the fire gets. I expect the next round of QE will be even bigger than the last. It remains to be seen if a larger dose will be enough to convince the markets that the medicine is not really working.

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube

We wrote in one of our daily articles that Sweden had cut its main interest rate into negative territory (-0.10 percent). That way the Riksbank followed other European central banks. Currently, except Sweden, the negative interest rates are set by the Central Bank of Denmark, the European Central Bank and the Swiss National Bank. What does such a historically unusual monetary policy mean for the financial markets?

There is no single general answer, because there is a special story behind each occurrence of a negative rate. For example, the Danish and Swiss cuts were related to managing their currencies rather than to stimulate growth or boost inflation. The Danish kroner is pegged to the euro, so its central bank cuts its certificates of deposit rate (these certificates are used in the open-market operations) into negative territory (currently at -0.75) in order to prevent appreciation of the currency against the weakening euro. A similar rationale was behind the Swiss National Bank’s move, which cut interest rates into negative territory (now at -0.75 percent) in order to prevent capital inflows and neutralize the frank’s appreciation after removing its peg to the euro. In the case of Sweden, the most popular explanation involves deflationary concerns; however the Riksbank could also cut its repo rate in the context of currency wars, because the Swedish kroner has been appreciating against the euro since the end of 2014.

The story of the euro is slightly different, because the Eurozone is not a small open economy, like Switzerland, Denmark or Sweden, which is afraid of capital inflow and currency appreciation due to problems in the Eurozone. Although we cannot preclude the ECB desire to weaken the euro against the U.S. dollar (the decline in interest rates could discourage foreign investors from placing their liquidity in the Eurozone), it does not seem to be the main reason because the monetary planners from Frankfurt cut the deposit facility rate, which is a rate on the excess reserves. The ECB cut this rate for the first time in June 2014 from 0 to -0.1 percent and cut it again in September 2014 to the current -0.2 percent. That way the ECB wanted to provide further monetary policy accommodation and induce banks to lend money from excess reserves into the ‘real’ economy and boost inflation and the economy.

Graph 1: ECB’s deposit facility rate from 2013 to 2015 (in percent)

What are the consequences of negative interest rates? It seems that not so big, because their level is not very low. Moreover, the deposit rate facility is not the main financial tool used by the commercial banks doing business with the ECB. And they are not forced to hold their excess reserves in deposit accounts (with negative interest rates) – they can keep them in their current accounts. The most important thing is that, contrary to what many analysts believe, the lowering deposit rate into negative territory does not lead banks to lend them out to the private sector. This is because banks do not lend reserves to the nonbank private sector. In other sectors, the banking sector as a whole cannot reduce its reserves – the reserves that leave one bank’s balance sheet just pop up on another. This explains why loans to the private sector in the Eurozone have not increased, but have actually fallen substantially after the reduction of the ECB deposit rate from 0.25 percent to zero in July 2012. So, why has the ECB has introduced them?

The hidden reason may be an attempt to recapitalize southern banks. They do not possess much in excess reserves, but the northern banks have a lot of excess reserves. Thus, the negative deposit rate may induce the Northern banks to lend their excess reserves to Southern banks in order to partially avoid the negative rate tax. It means that the situation in the peripheral Eurozone is not as strong as many believe.

Negative deposit rates also impose some costs on banks, which may lower their profitability and even aggravate the problem of sluggish lending. Another important effect is the increase of a relative attractiveness of investing in alternatives, such as gold or Treasury bonds.

This is exactly what we are seeing right now. According to Bloomberg, in Switzerland, “investors are buying more gold as an alternative to hold Swiss franc cash deposits”. As we already explained in October’s Market Overview, lower interest rates mean lower opportunity costs of holding non-interest bearing assets, like precious metals, making them relatively more attractive. If you can earn, say, 2 percent on the deposit, the investment in gold, which you have to store and insure, and pay, say, 1 percent, does not sound very compelling. But when you suddenly have to pay 0.75 percent to hold paper currency, gold looks much better.

This is also why we are witnessing an increasing demand for some European government debts, mostly in Denmark, Switzerland and Germany, which is reducing yields even into negative territory. Yes, it seems strange at a first glance. Why the hell do investors agree to pay for lending money? However, it becomes fully understandable when we take into account the current situation in the Eurozone. In short, investors are eager to pay for holding safe assets, because they fear the collapse of the euro. You can think about such a deal as a currency playing or buying an option. Investors pay the premium, but when the Eurozone breaks up, they would hold gold, Swiss francs or bonds of the relative rich and stable northern countries like Germany, Denmark or Finland.

In other words, some investors are quite pessimistic about the overall economic outlook for the continent and the future of the Eurozone. They are so desperate in their search for safe havens that they pay for the privilege of lending money. Similarly, the recent unconventional central banks’ actions show that they are really desperate. It signals that not only did all the previous monetary stimuli failed to fuel the economy, but also that the global slowdown is coming. Look at the producers’ price indices. The central bankers, as insiders, know that deflation in commodity and industrial prices indicates the crack-up phase of the business cycle.

To sum up, the recent events in Europe seem to be bullish for the gold market. The Eurozone crisis will come sooner or later. Investors predict rather sooner, at least drawing conclusions on the basis of the level of yields on Treasuries. The central banks introducing negative interest rates and implementing quantitative easing (the Riksbank and the ECB), show that a global slowdown is on the horizon. As we constantly repeat, gold is historically the best asset class during slowdowns. The safe haven demand (remember that the Swiss franc, which is traditionally considered as a safe haven currency, is now relatively less attractive) and very low real interest rates would also positively contribute to the prices of gold.

Thank you.

….also:

The Fed Will Not Raise Rates Amid A Strong US Dollar

“In my view, the Fed will not increase interest rates this year,” Marc Faber told CNBC in a recent interview . 

“The economy simply is not taking off, so I don’t see there will be an interest rate increase.” Retail sales have dropped three months in a row, including 0.6 percent in February. Many analysts expect economic growth to slow this quarter from the fourth quarter’s 2.2 percent pace.

“The policies of central banks have grossly distorted financial markets and misallocated capital, in my opinion.”

“The Fed and other central banks would have to increase interest rates quite substantially to really knockoff stock markets.”

….to view the interview go to “The Fed Will Not Raise Rates Amid A Strong US Dollar“

At almost exactly this time last year US Federal Reserve chairman Janet Yellen stated that the central bank would stop using unemployment as a target to determine interest rate rises. Back then it was anticipated a hike in US rates would only happen at some point this year. Fast forward to 18 March 2015 and the Federal Reserve Open Market Committee (FOMC) dropped its ‘patient’ pledge on rates contained in a previous statement this January – but still remains cautious.

The immediate market reaction after the official press release regarding the statement of the FOMC, one of three Fed tools controlling monetary policy, saw US stocks and Treasuries rally…

….continue reading HERE