NEW YORK (
TheStreet) -- We can clearly see from Tuesday's new bailouts of
Royal Bank of Scotland (RBS) and
Lloyds (LYG), who, together, received an additional $51 billion in bailout funds from the U.K. government, that there remain latent problems in the global financial system.
The half-billion-dollar loss posted by
UBS (UBS) Tuesday morning is a stark reminder, as well, that this global financial and economic recovery is uneven, at best.
My interpretation of gold's recent rebound is one of a flight to safety amid these financial surprises, not an inflation signal or a weak dollar play, as some would suggest.
If a falling dollar were the sole reason for the rally in gold, other commodities would mirror the better-than-$25 surge in gold, which they are not!
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Easy Does It...
While I believe the U.S. is recovering more quickly and more robustly than most people realize, I also believe that the recovery is fragile, insofar as it still relies on a friendly Fed.
The Federal Reserve kicked off its two-day policy meeting at 9 a.m. Tuesday morning amid reports it is contemplating sending clearer signals about the timing and magnitude of its "exit strategy" to drain excess liquidity from the markets and economy and not re-inflate any bubbles in stocks, commodities or property prices.
We have seen higher rates in Israel, Australia and Norway in recent weeks and months predicated on that very notion. The "snugging up" of monetary policy, to use an older term, is designed to cool the asset inflation that is presumably rearing its ugly head in those countries and avoid a bout of generalized inflation farther down the economic road.
As many know, I believe these actions to be premature. I believe that the nascent return to normality, post-Lehman, is exactly what monetary and fiscal policies were intended to achieve and that withdrawing stimulus this early in the recovery is a risky proposition.
The
Federal Reserve, amid many conflicting reports, is supposed to be contemplating altering its language about the future course of the economy and monetary policy in a way that will extract key phrases from the statement it is due to release Wednesday around 2:15pm EST.
Time to Show Some Federal Reserve
The argument is that with the markets surging over the last seven months, commodity prices rebounding (only some, not all!), residential real estate rebounding and credit markets returning to more normal functioning, the Fed can not only outline how it will extract excess liquidity from the financial system, but also drop the line from its statement that it expects to keep interest rates low "for an extended period of time."
Fed Fund futures have gone from a 75% certainty that the Fed will raise rates by next June just a few days ago to about a 50% chance today.
The market's recent vacillations in October dented consumer confidence, while consumer spending in September was down a greater-than-expected 0.5%.
While I am getting strong anecdotal evidence from industry sources that the consumer is doing far better than that, particularly on the high end, it is hardly time for the Fed to discuss a rate hike.
The Fed can, has and should let a variety of market insurance programs expire, whether its back-stopping money-market mutual funds, commercial paper programs, or other such normally functioning areas of the financial markets. These moves will reduce the Fed's presumed multi-trillion-dollar spending spree and reduce fears among hawkish policymakers that the Fed is "creating" too much money.
The insurance programs the Fed created to back-stop certain areas of the credit markets were not actually dollars spent, despite claims to the contrary. The insurance was never used. So the notion that the Fed pumped close to $11 trillion into the market is not only illusory, it is intellectually dishonest to claim it to be so.
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Written by Ron Insana in New York.
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