Fed Predicts Frightening Stagflation That Will Be Very Bullish For Gold, Silver And The Stocks With Those Metals
The Fed sat tight on rates while also predicting problematic stagflation at their meeting this week. They have no tools to fight stagflation and it won’t be transitory. Gold already had the Death Spiral of Debt and unsustainable cost of servicing the debt. Stagflation will put even more wind behind the sails of gold and silver. Which will be extremely bullish for the stocks in those metals.
Often you can learn a lot about the Fed’s thinking by what is not said. A perfect example is from the members' forecasts for economic growth and inflation. They are expecting 1.4% GDP growth and 3% inflation. Which means they are expecting significant stagflation, but of course Powell didn’t mention that word in the press conference. He doesn’t want to say it because he knows that they haven’t any tools to fight stagflation.
I was mistaken to think that the reporters at the press conference on Wednesday would ask Powell about the Fed members forecasting significant stagflation. But, not one of them asked the most important question they could have, instead they chose to go with the partyline talking points coming from the Fed and trying to dissect them. It is astonishing that not one of them asked the most important question about stagflation.
One of the consistent problems with paying attention to government statistics is that they always overstate growth of the economy and strength of the jobs market while understating inflation.
After they are initially released, later they are revised to show that the economic strength and jobs market are weaker and that inflation is stronger. A lot is made about the initial releases while little is mentioned about the revisions which helps keep the smoke and mirrors show going.
What seems to have the Fed folks concerned about inflation are the tariffs, Powell talked about the lag caused by the build up of inventories prior to the tariffs. At points he sounded realistic about the fact that inflation from the tariffs is coming, but was wishy-washy about who would pay for them.
He mentioned the chain of who could pay for them when he mentioned how an import goes through intermediaries before it ends up on the shelf for sale. But, was reluctant about saying what he seems to know, which is that it will inevitably be the consumers that pay for the tariffs that work like a tax on them.
To show that they haven’t learned from the dead wrong analysis that past inflation would be transitory, Powell said that expects inflation to go up then down. Making the case that inflation from tariffs will be transitory.
Tariffs are problematic for two reasons, it will send prices higher when they work their way to the consumer, and they will make the economy slow down.
There is a very real possibility that they are looking at GDP of 1.4% growth and 3% inflation with rose colored glasses and putting forth estimates that won’t cause panic.
They can pitch whatever estimates they want, but consumers are concerned about the economy slowing toward recession and inflation being much higher. The same can be said about sentiment coming from surveys of CEOs. The consumer surveys are dismissed as being biased to left leaning people, but that same argument can not be used when it comes to CEOs.
Even more telling about how CEOs feel about their businesses and by extension the economy and inflation, is that Wall Street CEOs are not able to give guidance due to economic uncertainty.
The Fed may be full of economists pumping data into their models (which are usually wrong and keeps them behind the curve) while consumers and CEOs have their fingers on the pulse of the real economy. They are predicting much more stagflation than the Fed is willing to admit in their outlooks for GDP growth, the jobs market and inflation.
On cue, Trump came out after the meeting to throw insults at Powell thinking that would motivate him to cut rates. It won’t, as the Fed will follow the lagging data to plot dots into their models and hope that stagflation doesn’t get away on them. Hope is not a good strategy and they are already behind the stagflation curve.
Trump is a debt and spending junkie so of course he wants lower rates so he can make the Death Spiral of Debt worse. He will have to wait until he can replace Powell in 2026 that will give him what he wants. Meanwhile his big spending bill and tariffs will make it so that the new Fed Chairman will have to deal with stagflation causing severe economic problems.
Consumers and CEOs have it right and the stagflation genie is being released from the bottle. Putting the stagflation genie back in the bottle won’t be easy because the Fed has no tools to fight it which is why they won’t mention it, even when their own forecasts are predicting it to happen in a more frightening way this year.
The last time stagflation got going it persisted for much too long, which then led to hyper-inflation and when Volcker had to slam on the brakes by jacking rates up caused a painful recession.
Take a wild guess what happened during this period, gold and silver blasted off. The way gold has been performing since early in 2024, it seems to already be pricing in higher inflation and troublesome stagflation.
Recently, silver has joined the gold bull market by having an important breakout. They say that history doesn’t always repeat but it rhymes. These days it rhymes a lot with stagflation.
Gold didn’t need stagflation, it already had the Death Spiral of Debt made worse by the cost of servicing the debt. Neither the debt crisis, nor the cost of servicing the debt are going to get better any time soon because of Trump’s big spending bill.
Trump and the GOP are no different than Biden and the Dems, they all refuse to do anything about the Death Spiral of Debt and cost of servicing the debt. Instead they prefer to keep building on the house of cards.
Another looming problem is that with excessive debt, bond vigilantes are going to come calling and go on a buyer’s strike to drive yields up to justify lending money to degenerate spenders that have no cares about the Death Spiral of Debt.
Bessent sees the writing on the wall to some degree as he wants to allow bankers that buy debt to be able to increase their leverage. He is also making the case that stablecoins could help by loading up on US debt. It is kind of surprising that more people aren't as alarmed by these plans as they should be.
More evidence that nothing is going to get better with the spending and debt junkies in Washington is that both Trump and Bessent want to raise the debt ceiling by $4-5 trillion or even eliminate it. They should be slashing the spending and lowering the debt ceiling.
So much for Bessent being the economic adult in the room. Lately, his pitch is that with the big spending bill, the economy will grow faster than the growth of the deficits and debt. That is nothing more than wishful thinking as Bessent has turned into the cheerleader for Trump’s addiction to spending and growing the debt.
The more Powell, Trump and Bessent talk the more it becomes clear that investors have to choose from being a victim of the Death Spiral of Debt and unsustainable cost of servicing the debt and stagflation, or bulls on gold, silver and the stocks in these metals.
All the best,
Allan Barry Laboucan
