Author Archives: Opinion

Sunday In-Depth
A general tendency towards more inflation
‘Ultimately, the power to create money is the power to destroy.’

photograph of Paul Volcker reading newspaper before Congressional testimonyWASHINGTON, DC – AUGUST 5, 1980: Federal Reserve Chairman Paul Volcker reads the financial page as he waits for a hearing.
(Photo by James K. W. Atherton/The Washington Post via Getty Images)

“They should have known inflation was broadening and becoming more entrenched,” LPL’s Quincy Krosby recently told CNBC. “Why haven’t you seen this coming? This shouldn’t have been a shock. That, I think, is a concern. I don’t know if it’s as stark a concern as ‘the emperor has no clothes.’ But it’s the man in the street vs. the PhDs.” What we find odd about all the complaints against the Fed and its tardiness in dealing with inflation (because an election happens to be around the corner) is that they ignore what might have happened had the Fed acted earlier. The same concerns about recession and unemployment would simply have surfaced then instead of now. If Washington is worried about inflation, wait for the public reaction when unemployment and bankruptcies begin to rise.

The Fed has a long history of papering over busts to create booms and stifling booms to create busts, never through it all managing the economy half as well as Adam Smith’s invisible hand. Right now, it’s in stifling mode, but that could change at the first signs of real economic distress. “The Fed,” says long-time gold market analyst John Hathaway in a Sprott Insights interview, ”doesn’t have a dial. It’s an either on or off switch. They’re either switching off the economy and crashing financial assets and the economy, or their crying uncle and caving in, which will likely open the door to more inflation. I think either outcome is positive for gold.”

Historically, the Fed has opted for monetary inflation as its baseline policy because the alternative – an economic depression – is something no central banker wants to add to their resume. That is why, despite seven recessions, the dollar has lost 86% of its purchasing power since the world went off the gold standard in 1971. We are reminded, in this context, of an observation from former Fed chair Paul Volcker, the central banker who broke the back of the last runaway inflation in the late 1970s-early 1980s:

“We sometimes forget that central banking, as we know it today, is, in fact, largely an invention of the past hundred years or so, even though a few central banks can trace their ancestry back to the early nineteenth century or before. It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.” (From Deane and Pringle’s The Central Banks, 1995)

Bloomberg’s John Authers sees central banks’ recent inflation blunder as more than just a gaffe likely to be quickly forgotten. Beginning in the early 1970s, “in place of gold, currency’s anchor,” he writes in a recent editorial, “became trust in the central banks that issue them. Now credibility appears to be at an end. With central banks desperately ripping up their playbooks to try to rein in inflation that’s veered far beyond target, they’re admitting they’ve been wrong, and giving up on trying to steer the markets on their plans for the future. That’s alarming, because the precedent of the 1970s is not encouraging.” He concludes that “the word of Powell or Lagarde is no longer as good as Volcker’s, and it’s certainly not as good as gold.” 

Similarly, Stanford historian Niall Ferguson believes the monetary policy mistakes of 2021 were even more extensive than those made in the late 1960s and early 1970s, resulting from “blinking under political pressure.” “I never met Arthur Burns — Volcker’s predecessor, but one, as Federal Reserve chairman — who preferred puffing on a pipe to cigars,” he says in an in-depth Bloomberg opinion piece. “But I think I’ve read enough about Burns to suggest plausibly that the current Fed chair, Jay Powell, has more in common with him than with Volcker. This is unfortunate and potentially disastrous for the US economy.” 

ramirez cartoon of the economic train wreckCartoon courtesy of MichaelPRamirez.com

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What comes after a week that shook the world

Bloomberg/John Authers/9-23-2022

Yield on the 10-Year Treasury note and headline inflation
(%, 1980-present)
overlay line chart showing the yield on Ten Year Treasuries and the headline inflation rate
Chart courtesy of TradingView.com

“We’re living through arguably the most truly global attempt to tighten financial conditions in memory. This is shifting the tectonic plates beneath the world economy, and threatens dangerous developments in society and in politics as we all try to adapt. And yet what strikes the eye after a week of market landmarks and aggressive interventions by central banks is the continuing discord.”

graphic image of a book and reading glasses A Good Weekend ReadUSAGOLD note: With that as the intro, Authers goes on to offer a top-drawer assessment of what the new age of rising rates means for investors. “The rules that most people now active in markets have learned to live by no longer apply.” Authers says the rule of thumb is that the fed funds rate must get above the inflation rate for policy to be “meaningfully restrictive.” If so, he says, “this episode has a long way to run” – a view not too distant from our own. As the chart above shows, and Authers goes to pains to point out, we have a clean break with the past on two scores – the first in the long term trend in falling rates, the second in the real rate of return on the 10-year Treasury.

 

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The silence of the economists

National Review/George Leef/9-21-2022

grpahic image of an economist watching the collapse of a house of cards

“Throughout the Covid crisis, the world heard very little from the economics profession. Economists love to find fault with governmental policies, but few of them questioned the extreme dirigisme of the way the U.S. and most other governments reacted to events. Few warned that we would suffer from high inflation as a result of spending binges and locking down of much economic activity.”

graphic image of a book and reading glasses A Good Weekend ReadUSAGOLD note: A scathing review of the economics profession – too little, too late, too often. In the end, it does matter if we fail to get good guidance from those who are supposedly in the know.

Related: The economists self-censored and inflation is the result, Bhattacharya and Packalen, Brownstone Institute, 9/21/2022

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Ray Dalio does the math

Bloomberg/Ye Xie/9-14-2022

illustration of the inflation iceberg“A mere increase in rates to about 4.5% would lead to a plunge of around 20% in equity prices based on the present value discount effect, [Dalio] said. On top of that he estimates a 10% negative impact from declining incomes.”

USAGOLD note: Dalio also thinks the markets are “too complacent about long-term inflation.” Few have considered the economic impact of dropping incomes combined with stubborn inflation.

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The Fed will raise rates to 5% to get a grip on inflation, Deutsche Bank says

MarketInsider/Jennifer Sor/9-16-2022

photograph of FOMC participants March meeting

“The Federal Reserve will have to raise its policy rate to 5% in order to get a grip on high inflation, according to Deutsche Bank. That defies any hope for a policy pivot in the near future.”

USAGOLD note: A couple quick observations…… if the inflation rate stays above 8% or goes higher, a 5% fed funds rate will not be enough to contain inflation. A policy pivot does not necessarily have to be the product of inflation being contained. It could be forced by a breakdown in the credit markets, as was the case in 2019, or a rapid meltdown in the stock market. The Fed meets mid-week with the interest rate decision and a press conference scheduled for Wednesday.

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What to watch as commodity traders prepare for Powell

Bloomberg/Staff/9-18-2022

“Funds are already fleeing gold. Hedge funds and money managers have turned net bearish on the precious metal. Some traders reckon there’s worse to come for gold until Fed language on inflation moderates, although others point to residual support for prices from heightened geopolitical and economic risks.”

USAGOLD note 1: In this largely unsettled investment environment, influenced greatly by algo-based trading systems, It would be a mistake in our view to draw quick conclusions. The jury is still out on how the investment community will adjust to the current inflation trend. Keep in mind it has not even been a year since Wall Street fully embraced Fed reassurances that inflation was transitory. For better or worse, it still clings to that notion when it is more and more looking like wishful thinking. In fact, there is a growing perception that headline inflation could rise above the 9.1% high in June of this year. (See post below.)

USAGOLD note 2: Bloomberg uses reduced managed money Commitment of Traders’ positions as proof that institutional investors are ambivalent about gold’s uses as an inflation hedge. Such logic might be a case of trying to make the data fit the presumption rather than the other way around. Managed money gold positions can also serve as a contrary indicator. If you look closely at the extended chart posted below, you can see that when managed money positions dipped near or below the zero line (most notably in 2006, 2015, and 2018), it was a precursor to a reversal and much higher prices.

overlay line chart showing managed money positions on the COMEX 2006 to presentChart courtesy of GoldChartsRUs/Nick Laird

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‘The world doesn’t work like that’

Seeking Alpha/The Heisenberg/9-19-2022

Ramirez cartoon showing President Biden piloting the BidanicCartoon courtesy of MichaelPRamirez.com

“[Bloomberg’s Vincent] Cignarella put the blame for inflation on fiscal policy, whereas I’m more inclined to cite what, try as I might, I can’t avoid describing as the self-evident notion that when, as Pozsar put it, “the price of everything is thrown around randomly,” inflation is just a kite without a string — condemned to whipping around wildly, and notwithstanding episodic downward spirals, always at risk of being carried away into the wild blue yonder.”

graphic image of a book and reading glasses A Good Weekend ReadUSAGOLD note: A detailed refutation of the notion that inflation can be readily controlled with rate policy, and rate policy alone. In short, The Heisenberg, like Zoltan Pozsar, believes the world doesn’t work like that.

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Carl Icahn to investors: ‘The worst is yet to come’

MarketWatch/Charles Passy/9-21-2022

photo of $100 bills rolling off the printing press at the Bureau of Engraving and Printing“Not surprisingly, Icahn said inflation was playing a significant role in the market’s downturn. ‘Inflation is a terrible thing,’ he said, observing that it led to the downfall of the Roman Empire. ‘You can’t cure it.'”

USAGOLD note: Icahn says we’ve “printed-up too much money”… and now “the party’s over.”

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Silver inventories plummet at LBMA and COMEX

Numismatic News/Patrick A. Heller/9-15-2022

photo of three silver bars“Where is the physical silver going that is leaving the LBMA and COMEX? Metals Focus India reports that silver demand in that country, perhaps the world’s top silver consuming nation, is now so strong that the silver price in India is trading at a premium to the world silver spot price. In July 2022, almost 58 million ounces of physical silver was imported into India. This was at least 50 percent higher than in any month in the previous four years and may be an all-time high record amount of imports into India in any month.”

USAGOLD note: Silver, like gold, is traveling west to east. We cited this article in Tuesday’s DMR and repost it here for those who may have missed it.

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Gold miners look beyond Fed hikes to predict return to $1800

Yahoo!Finance-Bloomberg/Yvonne Yue Li/9-20-2022

photo of two gold miners' bars“Not even the most hawkish Federal Reserve in decades can beat down the exuberance of gold enthusiasts at the industry’s biggest annual gathering. Bullion prices will reach $1,806.10 an ounce by year-end, according to the average estimate in a survey of 10 participants at the Denver Gold Forum, the yearly meetup of mining executives, investors, bankers and analysts.”

USAGOLD note: That’s a pretty good move if it does in fact materialize before year-end …… The consensus has gold rising on “heightened geopolitical and economic risks.”

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Charlie Munger predicts a horrible economic crisis where everything will collapse

NewTraderU/Steve Burns/9-3-2022

photgraph of a cumpled greenback“I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of a recession. So I think the new troubles are likely to be different from the old troubles. You may wish you had you had a Volcker style recession instead of what you’re going to get.”

USAGOLD note: It is worth noting not just what Munger has to say, but the conviction with which he says it. These are deeply held views, Though not a full transcript, the link above includes some of the key quotes from his YouTube interview in text form. “I think the safe assumption for an investor,” he says, “is that over the next hundred years, the currency is going to zero. That is my working hypothesis.” (For more, please see Wednesday’s Daily Market Report.)

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Yesterday’s CPI showed why nearly all people who pretend they know really have no clue

ZeroHedge/Michael Every/9-14-2022

graphic image of inflation genie out of the bottle“Yesterday’s US CPI report was one of those market-moving blockbusters that underline why nearly all the people who like to pretend they know what is going on really have no clue. I include myself in that group too for having been swept away by the trend expecting a weak inflation number for August on the back of lower gasoline prices – though in my defense I have been warning ‘not transitory’ for over a year, and yesterday specifically flagged that US CPI was only going back to 2% again in magical DSGE models, not real life.”

USAGOLD note: As the 1970s Fed learned the hard way, talking about getting the genie back in the bottle and actually doing it are two different things. The Fed chased the inflation rate for a decade before actually getting interest rates above the inflation rate (thus putting an end to inflation). As we mentioned in Wednesday’s Daily Market Report, if the Fed was hoping for a sign of future convergence between the interest and inflation rates, it didn’t get it from Tuesday’s data. In fact, inflation might very well be headed in the opposite direction.

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Still on ‘Crash Watch’

SprottMoney/Craig Hemke/9-20-2022

photograph of red hurrican warning flags stiff wind“Through the month of September, we’ve been on ‘Crash Watch’ over concerns that a global equity market drop could lead to a liquidity-driven margin call across all asset classes. The watch continues through this week’s FOMC meeting and then into October. What is ‘Crash Watch’? It’s sort of like a Tornado Watch for those of us in the American Midwest.”

USAGOLD note: Not a totally unreasonable reaction to current Fed policies in the face of a developing recession…… “Beware and be wary,” Hemke warns.

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‘This New Period Is Very Different, And Far Worse In Many Ways Than The 1970s’

ZeroHedge/Eric Peters/9-19-2022

graphic image red sticker with the word "inflation"“There’s an assumption that this transition will be disinflationary, but I really don’t think that’s right. Most big transitions are inflationary with a lot of volatility and relative instability. In general, predictability, stability, peace, cooperation, etc. are disinflationary for goods prices and inflationary for asset prices. Instability, less confidence about the future, more combative markets/governments all add extra costs that translate into higher goods prices and lower asset prices,” she said. “Not all transitions are inflationary but transitions that will require a significant rerating of existing capital because of its obsolescence, transitions that create scarcity, transitions that shift power dynamics; those tend to be inflationary.” – Lindsay Politi, One River Asset Management

USAGOLD note: Insights on where we are headed…… Politi does a good job of offering some perspective and food for thought on the profound changes underway in the global economy. “Expecting there to be limits on things like inflation or price movements because they existed in the past will also prove to be very wrong,” she says.

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Bridgewater’s Rebecca Patterson: Fed risks credibility in inflation fight

Pensions&Investments/Jennifer Ablan/8-25-2022

graphicimage of 'are you secure' sign“Bridgewater, [Patterson] said, is bullish on inflation-linked securities and gold, to name a few investments in this environment, as well as Chinese equities, whose valuations she calls ‘attractive’ and ‘a way to get diversification in a portfolio.’ Bridgewater is ‘bearish on equities broadly, including the United States, including Europe,’ Ms. Patterson said.”

USAGOLD note: We missed this interview of Bridgewater’s chief investment strategist, Rebecca Patterson, when it first came out, so we’re playing catch up. She says that Bridgewater’s institutional investors are preparing for “a prolonged stagflationary period,” and “sustained bear markets.” Bridgewater, and its famed founder, Ray Dalio, as you probably already are staunch advocates of gold ownership and have been for a long time.

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El-Erian warns Fed rate hikes may fail to squash inflation – but could tank the US economy and job market anyway

MarketsInsider/Theron Mohamed/9-19-2022

graphic image of a bull and bear with the words 'stagflation ahead'“Mohamed El-Erian has raised the prospect of a worldwide economic disaster in the form of slowing growth, stubbornly high inflation, and surging unemployment.”

USAGOLD note: El-Erian pitches his tent in the stagflation camp……And warns that another central bank policy mistake is “uncomfortably high.”

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Bond market volatility is as high as it was in the 2008 financial crisis as the Fed accelerates the runoff of its $9 trillion balance sheet

MarketsInsider/Matthew Fox/9-14-2022

artistic ink rendering of black swan“The Federal Reserve has two big levers to pull in its bid to influence the economy and tame inflation, and while most investors are fixated on interest rate policy, the Fed’s balance sheet plans can have an even bigger impact.”

USAGOLD note:  Ned Davis Research worries about quantitative tightening and its spillover effect in the corporate bond and stock markets. Many experts believe that serious economic deterioration will force the Fed to pivot, but it could also arrive on the wings of a suddenly escalating credit crisis akin to the repo market meltdown in 2019. Beware the black swan……

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Ukraine army is winning but its economy is losing

Bloomberg/Niall Ferguson/9-12-2022

photgraph of Ukraine flag“Economically, the nation’s parlous fiscal and monetary situation is leading the country in the direction of high inflation if not hyperinflation. Diplomatically, the approach of winter and the shifting sands of European and American politics pose a threat to Western unity that the Russian president, Vladimir Putin, is hoping will give him leverage. Without an immediate increase in Western support, Ukraine will struggle to sustain its success on the battlefield.”

USAGOLD note: For those keeping close tabs on the war in Ukraine, historian Niall Ferguson provides deep background resulting from his attendance at the Yalta European Strategy conference. Ukraine retook a big chunk of ground while the conference was in session. In a speech, Zelensky warned of a “winter of discontent” for Ukraine and all of Europe without mentioning the Eastern offensive. The inflation rate is 24% in the war-torn country.

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Image attribution: Alex Maisuradze based on 3d work by UP9, CC BY-SA 3.0 <https://creativecommons.org/licenses/by-sa/3.0>, via Wikimedia Commons

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Powell playing tough guy with the math stacked against him

The Bear Traps Report/Larry MacDonald/9-11-2022

artist rendering of an abacus“There is nearly $200T more debt on earth today relative to the days of Paul Volcker – so why does much of Wall St. constantly compare Fed Chair Jay Powell to central bankers from an entirely less levered era? The Fed and their collection of well-placed pawns keep lecturing us on their policy path filled with endless rate hikes to fight inflation  – but the math tells us the sales pitch is all bs.”

USAGOLD note:  A practical accountant-like view of government finance that lays out the Fed’s limitations as to how far it can go with rates and quantitative tightening. “No one,” says MacDonald, “is doing the math.”

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Jittery markets? Just wait ’til QT really kicks in

Reuters/Jamie McGeever/9-19-2022

stein cartoon Treasury bonds as paper towels

“Investors’ focus on the Fed’s policy rate is understandable, but they should not underestimate how much the Fed’s other policy lever – quantitative tightening – could tighten financial conditions and crush asset prices even further.”

USAGOLD note: Another stark warning of a potential left field event …… The markets will be forced to absorb $2 trillion in Treasuries and mortgage back securities that previously were going on the Fed’s balance sheet and no one has a clear understanding how that is going to work out – not even the Fed.

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