Sive Morten
Special Consultant to the FPA
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Fundamentals
This week we almost do not have any gold specific news. Everybody already go in habit with Middle East conflict, paying very low attention to the news from this region. Except Fed minutes we have got almost nothing else, except some secondary statistics, a kind of initial claims etc. But, based on some other information, it becomes clear that investors' view is changing, and more signs appear that confirm our suggestion for gold's headwind in nearest 3-5 months.
Market overview
Hotter-than-expected U.S. inflation data last week pushed back expectations for an imminent start to the Federal Reserve's easing cycle. A rate cut is now expected in June, according to a slim majority of economists polled by Reuters, who also flagged risk of a further delay in the first cut.
The response to the interest rate outlook from asset classes other than bonds has been muted so far, but U.S. economic growth compared to elsewhere will likely change the lock-step move for central bank expectations, said Marvin Loh, senior global macro strategist at State Street in Boston. Since mid-January the market has reduced rate cut expectations by 60 basis points for the Fed, the same for the Bank of Canada, 37 basis points for the ECB and 57 basis points for the Bank of England, he said.
"The positive impact of lower interest rates on both commodity demand and supply makes the commodity price impact ambiguous in theory," Goldman said. "In practice, we find that the demand boost to prices from a lower cost of carrying inventory and from higher GDP via easier financial conditions dominates."
Data showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, suggesting that job growth likely remained solid in February. Minutes of the Fed's latest policy meeting released on Wednesday showed that a majority of the central bank's policymakers are concerned about the risks of cutting interest rates too soon.
Gold prices were set for a weekly gain on Friday, buoyed by a softer dollar and safe-haven demand from escalating tensions in the Middle East, even as U.S. Federal Reserve officials bruised hopes of early rate cuts this year.
Fed Governor Christopher Waller said on Thursday that he was in "no rush" to cut rates, firming investor bets against U.S. interest rate cuts before June.
Most policymakers at the Fed's last meeting were concerned about the risks of cutting interest rates too soon, minutes showed. Recent data showing higher-than-expected U.S. consumer and producer prices also dashed speculation about an early interest rate cut, further weighing on bullion. Meanwhile, a surge of interest in bitcoin exchange-traded funds (ETFs) is prompting investors to swap out holdings in gold-backed ETFs.
Crisis turns public
There are already so many symptoms of the crisis that it is not necessary to talk about "individual" problems, we clearly have a global systemic economic crisis. Judging by the fact that its growth rates are not particularly accelerating, but they are not slowing down either, this is a structural crisis, the specifics of which are that it passes at a constant fixed rate.
The fact that the amount of negative information has increased is most likely due to the fact that economic statistics are more political than a purely scientific discipline. Accordingly, the authorities are doing everything possible to prevent negative information from leaking into the public field. When the scale of the crisis exceeds some indicators, you have to admit the truth, and this is exactly what is happening now. Many negative processes have already started quite a long time ago (for example, we believe that the real economic downturn in the United States began in the fall of 2021), but information about them appears in the public field only today.
Somehow numbers absolutely don’t work. Bloomberg writes - global debt in 2023 amounted to $313 trillion, global GDP and this is 330% of global GDP. Divide 313 by 3.3 and we get $94.8 trillion. - world GDP for last year. But the IMF says that in 2023 the world GDP is $104.5 trillion. It was expected by the same IMF at the beginning of the year at $105 trillion. There is a wide range of estimates: $94.8 and $104.5 trillion - more than 10% (!!!). This is all you need to know about the reliability of GDP statistics
In fact, the real economic picture needs to be reconstructed based on the all available information. Last time we've explained why the economic growth in the United States in 2023 is a fiction. But the question arises, why and how do the US authorities show this growth? The answer to this question is quite simple and we will give it now. To begin with, we will show a picture of the distribution of wealth in American society:
We see a clear increase in the incomes of the rich, and interrupted twice, in 2008-2010 and 2020. These are well-known crises associated with the fall of stock assets, and for this reason, the growth of wealth is associated with an increase in the capitalization of the stock market. And here is the right moment to recall recent Nvidia statement that has increased capitalization for ~270 Bln in a one session. As P.Schiff said - this is more than the capitalization of the whole gold mining industry.
In 1924-1929 the fundamental rationale was the technological revolution in the automotive industry, In 1995-2000, the fundamental rationale was active digitalization.
In both cases, the stock market's surge was accompanied by remarkable economic success. The AI rally is more than 7 times more intense than the dot-com rally, adjusted for inflation. Never before in the entire history of trading has the market added more$1trillion in capitalization per day,being on highs(previously, this happened during the collapse). The bubble scenario is similar:
* the emergence of a factor causes excitement (technological revolution, as a rule);
* intensification of hype and mass engagement with a heightened sense of optimism and faith in a bright future(this time everything will definitely be different);
* euphoria against the background of a disparity between expectations and reality,when the rate of absorption of income and savings in the market is many times higher than their accumulation;
* sobering up and hard collapse.
And the source of savings and income has already been zeroed, AI factor is greatly overestimated, economy is not even close to the expansion phase,the market growth is many times stronger,This time the difference is that."
Despite the fact that the crisis that began in 2008 almost coincides in mechanism with the crisis of 1930-32, its apparent course differs dramatically. This is due to the fact that the crisis of that time, which led to the "Great Depression", proceeded according to a deflationary scenario, and the current one is inflationary.
Then the collapse of bubbles (land speculation in 1927 and the stock market in 1929) preceded the economic crisis, but today the situation is reversed. Emission mechanisms allowed to delay the process of the crisis, but they seriously aggravated its scale. Which we have yet to see. Nevertheless, the economic downturn has already begun, the authorities have been hiding it for about two years as part of statistical manipulations, but the result is already obvious.
Theoretically, further events can develop in two scenarios. First — the US monetary authorities will try to contain inflation, and then this year the financial bubble may collapse. And the crisis will enter the "typical" deflationary version of the 30s, only it will be about 1.5-2 times stronger. Or, the second one - they can continue to issue, then the decline will occur against the background of high inflation. Our yesterday's analysis shows that the Fed chooses the second way.
Stagflation scenario becomes real
The rally in treasuries actually ended at the end of January. Since February, the 10-year yield has risen from 3.8% to 4.3%. Thus, the depreciation of debt went in parallel with the pump of the stock markets. On February 21, a “ terrible” and worst in terms of a number of indicators auction for the placement of 20-year bonds took place. Primary dealers bought 21.2% of securities. As a result of low demand, yields jumped across the entire spectrum of government bonds. We continue to observe the re-inversion of the yield curve: in October 23 and January 24, they almost entered the positive zone. This is a key indicator that will signal the beginning of a bearish trend in Western markets in 2024. The dynamics of rate cuts expected by the market looks too optimistic given the latest inflation data.
Bank statements are a rear view mirror. The residential real estate crisis in the United States occurred in 2007-2008, and banks reflected delinquencies only in reports for 2009-2010. A similar situation is happening now – there is an obvious increase in delinquencies on credit cards and car loans. The commercial real estate crisis has been raging for a year. The banks don't care.
So far the reporting does not reflect the real problems in the economy. Bad loans are hidden and regulators overlook the collapse of 3.5 US banks over the past year. Financiers cherish the hope that inflation will soon decline and the Fed rates will follow. Then a new round of work at the dollar printing house, and then in a few years the situation will resolve.
It won't resolve! The structure of the US economy has changed in recent years. Commercial real estate is no longer in demand on the market. The issue of $3 trillion in banking assets tied up in offices and retail space will still have to be resolved somehow, since this is noticeably more than the equity capital of American banks of $2.2 trillion.
Markets are already beginning to speculate whether the next move in the Fed rate will be higher rather than lower. Former US Treasury Secretary Larry Summers said that such a scenario cannot be ruled out, given the ambiguous dynamics of inflation. it's getting hot. In principle, the very conversations and hints of the Fed about this can bring down the markets and bring a recession closer, but if just such a scenario develops, then the US elites and globalists will have to choose what is more valuable to them - the world dollar system or the national one economy(s).
The thing is that the agreement reached more than 50 years ago after the abolition of the dollar gold standard is still in effect. This agreement can be formulated as follows: “The Fed undertakes to maintain purchasing power in dollar debt through inflation targeting.”
Easily speaking, after the dollar was no longer backed by gold, the only thing that made it possible to maintain the purchasing power of dollar reserves was to ensure a return on treasuries that would cover inflation. We see the other side of this coin now - a high rate slows down the real economy. Everything would be fine, but inflation will quite possibly accelerate in the near future. The commercial real estate market is already bursting at the seams; as debt is refinanced, corporates will become worse off, and the population will spend less. Moreover, the number of hours worked per week is decreasing, which means that the number of layoffs will subsequently increase. In general, official recession is approaching (although in reality it already goes for 2+ years).
When inflation starts to rise, the Fed will be forced to hold rates to meet its obligations. If inflation rises high enough, the Fed would have to raise rates. But then the real sector, which relies solely on the expectation of a rate cut, will become much worse and a recession will begin.
Following the example of the 70s, there may be more than one such wave. But if the Fed keeps the rate high and doesn’t even think about lowering it, then this will mean years of GDP decline as bubbles burst, accumulated “paper” losses are written off, and debt-laden entities go bankrupt. The state, of course, can come to the rescue, but the state is precisely one of such entities.
An alternative option is to ignore inflation, lower the rate and start saving everyone who is falling at the expense of the printing press (and not only in the USA, but also in Europe and Japan, for example), which in itself is a pro-inflationary story. Judge for yourself - if dollar-denominated debts bring real losses, then who needs them? Only the Fed/other central banks and banks that will take free liquidity from the Fed. Well, at least as long as they have enough capital.
By the way, there will still be a recession in the economy. If only because the purchasing power of the population (and their savings) will fall, but without sudden movements and gradually, especially taking into account the possible introduction of the necessary media narratives.
Actually, this is the exchange - lower the rate, save the real sector, covering unrealized losses and allowing debts to inflate, or continue to fight for the status of the dollar (and the euro and the yen, linked to the dollar in a single system) as a world reserve currency that allows maintaining purchasing power reserves.
In general, first scenario will trigger de-globalization, since the world financial system, which is the circulatory system of the entire global investment and trade network, will begin, if not to die, then to be rebuilt. A decision will have to be made soon, and Trump is the one who, it seems to me, is not only ready, but plans to make such a decision.
US hard landing bets rise in rate options market after Fed hikes. Analysts said they have seen increased demand from hedge funds in the U.S. options market for so-called "receiver swaptions," a type of trade that pays off when interest rates fall. In general, receiver swaptions give buyers the right to enter into an interest rate swap where they receive the fixed rate and pay the floating one.
Receiver swaptions typically reflect concerns about the U.S. economic outlook, analysts said. This is the opposite of "payer swaptions" where investors buy the right to pay fixed and receive a floating rate, benefiting when rates rise as the Federal Reserve tries to slow a robust economy.
Interest rates traders also start betting on higher rates level. The options market is currently pricing in a 7% chance that the Fed won't change rates by the end of 2024, and a 6% chance of one or more hikes.
JPMorgan Chase & Co.’s Marko Kolanovic, who drew attention for his gloomy stock-market calls through last year’s rally, is raising a risk that’s mostly gone out of vogue on Wall Street: a return of 1970s-style stagflation. The bank’s chief market strategist said a recent pickup in consumer and producer prices has cast a shadow over the economic enthusiasm that powered equity markets in recent months.
Investor hopes of “parabolic stock markets” and “platinum-locks” — an even more optimistic version of Goldilocks — reflect excessive optimism. The strategist also disagreed with a theory that stocks can trade higher because the neutral rate of interest, or so-called R-star, is making financial conditions easier.
While big banks still try to assurehamsters household that rosy futures awaits the stock market - insiders somehow turn to active sell. JPMorgan Chase, opens new tab CEO Jamie Dimon has sold about $150 million of his shares in the bank, a SEC filing showed on Thursday, marking the first time the head of the largest U.S. lender has sold shares since taking charge in 2005. Additionally to B. Gates, Zuckerberg and Bezos massive sell-off. W. Buffett also sits on cash.
A bit of conspirology
While gold market volatility drops to all times lows, US government is coming to potential shutdown. Low volatility usually is forming during raising market and jump sharply when price falls. It also could raise in a case of big shocks. Now On February 15, the Chamber went on recess, which will last until next Wednesday, February 28.
This week we almost do not have any gold specific news. Everybody already go in habit with Middle East conflict, paying very low attention to the news from this region. Except Fed minutes we have got almost nothing else, except some secondary statistics, a kind of initial claims etc. But, based on some other information, it becomes clear that investors' view is changing, and more signs appear that confirm our suggestion for gold's headwind in nearest 3-5 months.
Market overview
Hotter-than-expected U.S. inflation data last week pushed back expectations for an imminent start to the Federal Reserve's easing cycle. A rate cut is now expected in June, according to a slim majority of economists polled by Reuters, who also flagged risk of a further delay in the first cut.
The ECB has pointed to wages as the biggest risk to its 1-1/2 year crusade against inflation. An ECB analysis of salary agreements indicates wage growth will remain high this year, while the number of companies that expect price increases is rising again, Commerzbank's senior economist Marco Wagner said in a note.
The response to the interest rate outlook from asset classes other than bonds has been muted so far, but U.S. economic growth compared to elsewhere will likely change the lock-step move for central bank expectations, said Marvin Loh, senior global macro strategist at State Street in Boston. Since mid-January the market has reduced rate cut expectations by 60 basis points for the Fed, the same for the Bank of Canada, 37 basis points for the ECB and 57 basis points for the Bank of England, he said.
Copper and gold are expected to see the largest immediate price boost in the commodities sector from potential U.S. Federal Reserve interest rate cuts, analysts at Goldman Sachs said.
"The positive impact of lower interest rates on both commodity demand and supply makes the commodity price impact ambiguous in theory," Goldman said. "In practice, we find that the demand boost to prices from a lower cost of carrying inventory and from higher GDP via easier financial conditions dominates."
Data showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, suggesting that job growth likely remained solid in February. Minutes of the Fed's latest policy meeting released on Wednesday showed that a majority of the central bank's policymakers are concerned about the risks of cutting interest rates too soon.
The conflict in the Middle East has intensified with Israel's bombardment of Rafah in Gaza's south.
Gold prices were set for a weekly gain on Friday, buoyed by a softer dollar and safe-haven demand from escalating tensions in the Middle East, even as U.S. Federal Reserve officials bruised hopes of early rate cuts this year.
Fed Governor Christopher Waller said on Thursday that he was in "no rush" to cut rates, firming investor bets against U.S. interest rate cuts before June.
Most policymakers at the Fed's last meeting were concerned about the risks of cutting interest rates too soon, minutes showed. Recent data showing higher-than-expected U.S. consumer and producer prices also dashed speculation about an early interest rate cut, further weighing on bullion. Meanwhile, a surge of interest in bitcoin exchange-traded funds (ETFs) is prompting investors to swap out holdings in gold-backed ETFs.
Crisis turns public
There are already so many symptoms of the crisis that it is not necessary to talk about "individual" problems, we clearly have a global systemic economic crisis. Judging by the fact that its growth rates are not particularly accelerating, but they are not slowing down either, this is a structural crisis, the specifics of which are that it passes at a constant fixed rate.
The fact that the amount of negative information has increased is most likely due to the fact that economic statistics are more political than a purely scientific discipline. Accordingly, the authorities are doing everything possible to prevent negative information from leaking into the public field. When the scale of the crisis exceeds some indicators, you have to admit the truth, and this is exactly what is happening now. Many negative processes have already started quite a long time ago (for example, we believe that the real economic downturn in the United States began in the fall of 2021), but information about them appears in the public field only today.
Somehow numbers absolutely don’t work. Bloomberg writes - global debt in 2023 amounted to $313 trillion, global GDP and this is 330% of global GDP. Divide 313 by 3.3 and we get $94.8 trillion. - world GDP for last year. But the IMF says that in 2023 the world GDP is $104.5 trillion. It was expected by the same IMF at the beginning of the year at $105 trillion. There is a wide range of estimates: $94.8 and $104.5 trillion - more than 10% (!!!). This is all you need to know about the reliability of GDP statistics
In fact, the real economic picture needs to be reconstructed based on the all available information. Last time we've explained why the economic growth in the United States in 2023 is a fiction. But the question arises, why and how do the US authorities show this growth? The answer to this question is quite simple and we will give it now. To begin with, we will show a picture of the distribution of wealth in American society:
We see a clear increase in the incomes of the rich, and interrupted twice, in 2008-2010 and 2020. These are well-known crises associated with the fall of stock assets, and for this reason, the growth of wealth is associated with an increase in the capitalization of the stock market. And here is the right moment to recall recent Nvidia statement that has increased capitalization for ~270 Bln in a one session. As P.Schiff said - this is more than the capitalization of the whole gold mining industry.
In 1924-1929 the fundamental rationale was the technological revolution in the automotive industry, In 1995-2000, the fundamental rationale was active digitalization.
In both cases, the stock market's surge was accompanied by remarkable economic success. The AI rally is more than 7 times more intense than the dot-com rally, adjusted for inflation. Never before in the entire history of trading has the market added more$1trillion in capitalization per day,being on highs(previously, this happened during the collapse). The bubble scenario is similar:
* the emergence of a factor causes excitement (technological revolution, as a rule);
* intensification of hype and mass engagement with a heightened sense of optimism and faith in a bright future(this time everything will definitely be different);
* euphoria against the background of a disparity between expectations and reality,when the rate of absorption of income and savings in the market is many times higher than their accumulation;
* sobering up and hard collapse.
And the source of savings and income has already been zeroed, AI factor is greatly overestimated, economy is not even close to the expansion phase,the market growth is many times stronger,This time the difference is that."
Despite the fact that the crisis that began in 2008 almost coincides in mechanism with the crisis of 1930-32, its apparent course differs dramatically. This is due to the fact that the crisis of that time, which led to the "Great Depression", proceeded according to a deflationary scenario, and the current one is inflationary.
Then the collapse of bubbles (land speculation in 1927 and the stock market in 1929) preceded the economic crisis, but today the situation is reversed. Emission mechanisms allowed to delay the process of the crisis, but they seriously aggravated its scale. Which we have yet to see. Nevertheless, the economic downturn has already begun, the authorities have been hiding it for about two years as part of statistical manipulations, but the result is already obvious.
Theoretically, further events can develop in two scenarios. First — the US monetary authorities will try to contain inflation, and then this year the financial bubble may collapse. And the crisis will enter the "typical" deflationary version of the 30s, only it will be about 1.5-2 times stronger. Or, the second one - they can continue to issue, then the decline will occur against the background of high inflation. Our yesterday's analysis shows that the Fed chooses the second way.
Stagflation scenario becomes real
The rally in treasuries actually ended at the end of January. Since February, the 10-year yield has risen from 3.8% to 4.3%. Thus, the depreciation of debt went in parallel with the pump of the stock markets. On February 21, a “ terrible” and worst in terms of a number of indicators auction for the placement of 20-year bonds took place. Primary dealers bought 21.2% of securities. As a result of low demand, yields jumped across the entire spectrum of government bonds. We continue to observe the re-inversion of the yield curve: in October 23 and January 24, they almost entered the positive zone. This is a key indicator that will signal the beginning of a bearish trend in Western markets in 2024. The dynamics of rate cuts expected by the market looks too optimistic given the latest inflation data.
Bank statements are a rear view mirror. The residential real estate crisis in the United States occurred in 2007-2008, and banks reflected delinquencies only in reports for 2009-2010. A similar situation is happening now – there is an obvious increase in delinquencies on credit cards and car loans. The commercial real estate crisis has been raging for a year. The banks don't care.
So far the reporting does not reflect the real problems in the economy. Bad loans are hidden and regulators overlook the collapse of 3.5 US banks over the past year. Financiers cherish the hope that inflation will soon decline and the Fed rates will follow. Then a new round of work at the dollar printing house, and then in a few years the situation will resolve.
It won't resolve! The structure of the US economy has changed in recent years. Commercial real estate is no longer in demand on the market. The issue of $3 trillion in banking assets tied up in offices and retail space will still have to be resolved somehow, since this is noticeably more than the equity capital of American banks of $2.2 trillion.
Markets are already beginning to speculate whether the next move in the Fed rate will be higher rather than lower. Former US Treasury Secretary Larry Summers said that such a scenario cannot be ruled out, given the ambiguous dynamics of inflation. it's getting hot. In principle, the very conversations and hints of the Fed about this can bring down the markets and bring a recession closer, but if just such a scenario develops, then the US elites and globalists will have to choose what is more valuable to them - the world dollar system or the national one economy(s).
The thing is that the agreement reached more than 50 years ago after the abolition of the dollar gold standard is still in effect. This agreement can be formulated as follows: “The Fed undertakes to maintain purchasing power in dollar debt through inflation targeting.”
Easily speaking, after the dollar was no longer backed by gold, the only thing that made it possible to maintain the purchasing power of dollar reserves was to ensure a return on treasuries that would cover inflation. We see the other side of this coin now - a high rate slows down the real economy. Everything would be fine, but inflation will quite possibly accelerate in the near future. The commercial real estate market is already bursting at the seams; as debt is refinanced, corporates will become worse off, and the population will spend less. Moreover, the number of hours worked per week is decreasing, which means that the number of layoffs will subsequently increase. In general, official recession is approaching (although in reality it already goes for 2+ years).
When inflation starts to rise, the Fed will be forced to hold rates to meet its obligations. If inflation rises high enough, the Fed would have to raise rates. But then the real sector, which relies solely on the expectation of a rate cut, will become much worse and a recession will begin.
Following the example of the 70s, there may be more than one such wave. But if the Fed keeps the rate high and doesn’t even think about lowering it, then this will mean years of GDP decline as bubbles burst, accumulated “paper” losses are written off, and debt-laden entities go bankrupt. The state, of course, can come to the rescue, but the state is precisely one of such entities.
An alternative option is to ignore inflation, lower the rate and start saving everyone who is falling at the expense of the printing press (and not only in the USA, but also in Europe and Japan, for example), which in itself is a pro-inflationary story. Judge for yourself - if dollar-denominated debts bring real losses, then who needs them? Only the Fed/other central banks and banks that will take free liquidity from the Fed. Well, at least as long as they have enough capital.
By the way, there will still be a recession in the economy. If only because the purchasing power of the population (and their savings) will fall, but without sudden movements and gradually, especially taking into account the possible introduction of the necessary media narratives.
Actually, this is the exchange - lower the rate, save the real sector, covering unrealized losses and allowing debts to inflate, or continue to fight for the status of the dollar (and the euro and the yen, linked to the dollar in a single system) as a world reserve currency that allows maintaining purchasing power reserves.
In general, first scenario will trigger de-globalization, since the world financial system, which is the circulatory system of the entire global investment and trade network, will begin, if not to die, then to be rebuilt. A decision will have to be made soon, and Trump is the one who, it seems to me, is not only ready, but plans to make such a decision.
US hard landing bets rise in rate options market after Fed hikes. Analysts said they have seen increased demand from hedge funds in the U.S. options market for so-called "receiver swaptions," a type of trade that pays off when interest rates fall. In general, receiver swaptions give buyers the right to enter into an interest rate swap where they receive the fixed rate and pay the floating one.
Receiver swaptions typically reflect concerns about the U.S. economic outlook, analysts said. This is the opposite of "payer swaptions" where investors buy the right to pay fixed and receive a floating rate, benefiting when rates rise as the Federal Reserve tries to slow a robust economy.
Interest rates traders also start betting on higher rates level. The options market is currently pricing in a 7% chance that the Fed won't change rates by the end of 2024, and a 6% chance of one or more hikes.
JPMorgan Chase & Co.’s Marko Kolanovic, who drew attention for his gloomy stock-market calls through last year’s rally, is raising a risk that’s mostly gone out of vogue on Wall Street: a return of 1970s-style stagflation. The bank’s chief market strategist said a recent pickup in consumer and producer prices has cast a shadow over the economic enthusiasm that powered equity markets in recent months.
Between 1967 to 1980, stock returns were nearly flat in nominal terms as inflation came in waves, with fixed-income investments significantly outperforming. Kolanovic sees “many similarities to the current times.”
Investor hopes of “parabolic stock markets” and “platinum-locks” — an even more optimistic version of Goldilocks — reflect excessive optimism. The strategist also disagreed with a theory that stocks can trade higher because the neutral rate of interest, or so-called R-star, is making financial conditions easier.
While big banks still try to assure
A bit of conspirology
While gold market volatility drops to all times lows, US government is coming to potential shutdown. Low volatility usually is forming during raising market and jump sharply when price falls. It also could raise in a case of big shocks. Now On February 15, the Chamber went on recess, which will last until next Wednesday, February 28.
