Gartman: Tapering Isn't Tightening
Friday, 1/10/2014 09:55
Dennis Gartman still backs gold in Yen as the US Fed tapers its "adult" fix...
DENNIS GARTMAN is the man behind the eponymous daily newsletter covering global capital markets.
For more than 20 years, The Gartman Letter has tackled the political, economic and social trends shaping the world's markets, and Gartman himself is a frequent guest on CNBC, Bloomberg and other financial media outlets. Here, he talks to HardAssetsInvestor about his 2014 outlook for the financial markets and commodities, including his continued trade in gold priced in Japanese Yen...
HardAssetsInvestor: You've been a big proponent of the Federal Reserve's monetary policy. How do you see this tapering phase that we're currently in playing out?
Dennis Gartman: Yes, I have been a big proponent of what the Fed did in the autumn of 2008 and in '09. I think that when the history books are written, we'll look back at what Bernanke did and say he was the adult in the room when everything was crashing around him. And he said, "This is going to stop. I will force-feed reserves into the system until this thing turns around." And he did.
Now, he may well have overstayed his welcome a bit. Clearly, QE1 was highly beneficial. QE2 was less beneficial and QE3 has been relatively nonbeneficial. The Fed has announced it is going to begin reducing the amount of accommodation it supplies to the system. It's going to be a long time before the Fed begins to tighten monetary policy.
We have to remember, instead of force-feeding $85 billion into the system on a monthly basis, they're going to force-feed $75 billion. The global economy is clearly turning around and going for the better, but think it will take at least a year to get to the point where the Fed is not adding any more reserves to the system. It may be a year and half before the Fed begins to drain reserves from the system. And it certainly will be at least into 2015 before the Fed funds rate moves from zero.
It's going to be a very slow and even-handed tapering of the amount of reserves that the Fed has been supplying. It will be $75 billion and then it will be $65 billion. And then it will be $55 billion. And then it will be $45 billion. And then it will be $35 billion. It will be very gradual.
HAI: So very steady tightening of monetary policy, nothing dramatic...
Gartman: Not tightening. Let us not use the term "tightening". They are accommodating the market, but at a less aggressive pace. There is a huge difference between doing that and actually reducing the amount of reserves in the system.
The Fed is not reducing the amount of reserves in the system. It is reducing the amount of reserves it is adding to the system. So instead of adding $85 billion, it will be adding $75 billion. It's not draining $10 billion. It's still adding $75 billion. And that's important to understand.
HAI: Good point. And that obviously bodes well for stock markets. But we already saw this big 29 percent increase in 2013, the most since 1997. Can you still be bullish on stocks after such a big rally?
Gartman: Yes, you have to be as long as the monetary authorities are continuing to add reserves to the system. Anybody who fights against the Fed over any protracted period of time loses money. The trend in stock prices is still from the lower left to the upper right. It's still a bull market.
HAI: What's your outlook for gold in 2014?
Gartman: I've been bullish of gold in Yen-denominated terms for the last year and a half. In that period, gold in terms of Yen is down 5 percent, but I'm still bullish. In the not-to-distant-future, I'm probably going to be bullish of gold in Euro-denominated terms as well.
Why am I bullish of gold in Yen terms? Because the monetary authorities in Japan have said, without equivocation, that they are going to double the size of the Bank of Japan's balance sheet before the end of this fiscal year. That's a huge increase compared to the amount of reserves that the Fed is adding to the Fed's balance sheet.
The Bank of Japan is several times more aggressive in its monetary policy additions than is the Fed. And in that circumstance, I want to be long gold in the terms of the currency where the monetary authorities are the most expansive, and that's in Japan.
HAI: Crude oil held its ground last year even though production in the US surged to multi-decade highs. Can prices continue to hold at these levels even as production continues to grow, or is that going to weigh on prices at some point?
Gartman: It's already weighed on prices. We've had crude oil prices break down very hard in the past week. The term structures are turning very bearish. WTI is losing relative to Brent now on a consistent basis. That's likely to continue.
I'm relatively bearish on crude oil. I can see prices falling to $80 or $85 a barrel for WTI in the not-too-distant future. The amount of supply that is coming at us, and given the amount of hedging that has been done by crude producers for the next several years, tells me that prices are likely to continue to go down.
The interesting thing that is happening here is that every time we add a new automobile to the nationwide fleet, we take an old automobile off. You're putting on a new automobile that uses probably, on average, 35 miles per gallon and you're taking out automobiles that probably got 14 or 15 miles per gallon.
We are also seeing the fact that people are driving less. That suggests gasoline prices will be much lower. That is the product that's under the most duress. And with product prices under duress, and with growing supplies of oil, crude prices are very vulnerable.
HAI: Natural gas was the best-performing commodity in 2013. Can we move above $5 per million British Thermal Units [mmbtu]?
Gartman: No. We will not get above $5. It will be tough to even get above $4.50. There is so much that is being produced. And the producers are more than happy to hedge forward at $4.50 because they can produce it for so much less than that. The producers will hedge and the probabilities of natural gas getting above $4.50 for any extended period of time are very, very slim.
HAI: Grains plunged last year. Is $4 per bushel the bottom for corn?
Gartman: No, not with a 14 billion bushel corn crop. Under normal circumstances, I think you're going to put corn down in the $3.50 per bushel range. The only thing that's helping corn right now is the fact that it's very cold and it's increasing off-take for soybean meal to keep the livestock warm. They need a lot of protein in the next couple of weeks. And after that, soybeans and corn are very vulnerable to the downside.
HAI: What's your favorite commodity trade in 2014?
Gartman: My favorite trade is holding gold in Yen terms.
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