The USD Is Extremely Overbought And Gold Is A Coiled Spring Ready To Rally
There certainly seems to be a crossfire hurricane when it comes to economic signals. The loud bang we heard on election day came from traditional supporters of Trump and Dem voters that aren’t happy with the economy. Meanwhile the bond vigilantes are pricing bonds as if there is still too much inflation or that it will kick in for another surge.
If the voters aren’t happy with the economy and the bond market is worried about inflation, that sounds a lot more like stagflation than the Goldilocks economy Powell and the Fed are pitching.
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Usually, we are at the mercy of manipulated government statistics and the Fed’s plotting dots to assess what is happening in the economy. But, we saw an election that gave Trump a landslide victory, and voters resoundingly said they aren’t happy with the economy.
The BLS numbers on jobs are highly suspect, with even the Fed saying they think they are artificial and that Fed members adjust them for their models. But, a clear trend has been developing for over a year, with the economy shedding high paying full-time jobs with benefits and workers needing to take on one or more lower paying part-time jobs without benefits to make ends meet. This does not sound like a healthy jobs market or economy, even if the Fed tries to sell a Goldilocks economy.
The Fed is speaking with a forked tongue that can’t be trusted when they say everything is fine concerning their dual mandate of full employment and stable prices. If that were true they wouldn’t have entered a rate cutting cycle.
Powell seemed very angry at the press conference two days after the election when they announced a quarter-point cut. He seemed belligerent when asked if Trump could fire him, and what he would do if Trump asked for his resignation, and when asked if he plans to resign he had a terse one word answer of no. When pressed about what the election meant as voters clearly aren’t happy with the economy, he had no comment.
Voters aren’t pleased about the economy and proved once again that elections are all about the economy, stupid.
Equally troubling for voters was the less than transitory inflation which gives them cause for concern every time they open their wallets to buy everything. The government statistics on inflation excludes many things that make it sound better than it is, but voters don’t get to live in a world of make believe statistics, they face the real economy every day. They have lost a healthy amount of purchasing power over the past two years and need some relief.
Powell and the Fed had the chance to give them some relief at their meeting by cutting rates by a half-point and assuring more of those would be coming. Instead, they thumbed their noses at the voters by cutting a quarter-point.
Deep down, the Fed folks have to know that the economy is not fine and the Goldilocks economy narrative is a pipedream. Which is why they started the rate cutting cycle with an emergency level half-point cut. But, right after that first cut, the bond vigilantes went on a buyers strike because they feared another wave of inflation would kick in.
Bond vigilantes have reason for concern about inflation, plus massive supply of bonds and yields being paid in a currency that is constantly devaluing purchasing power due to the Death Spiral of Debt. The bond vigilantes are in no mood to help the Fed go into a significant rate cutting cycle.
Bond vigilantes heard Trump campaign on tariffs that would cause inflation and very little about his plans to slow down the Death Spiral of Debt. Plus, they can do the math, if the debt keeps growing, there will continue to be massive supply of bonds. Plus, if rates stay where they are, or close to the current level, servicing the debt will be moving to $2 trillion in 2025.
Now the Fed has to decide if they want to stay on a rate cutting cycle, they will have to increase their balance sheet. Going into another round of QE, makes selling the Goldilocks economy narrative very challenging. How is that for dot plots?
If they don’t keep cutting rates, they will throw workers and the economy under the bus and cause a hard landing.
Trump heard that voters aren’t happy with the economy and he won’t want to start his term with a recession to deal with. Which means that his team were likely making calls to the Fed and telling them to cut by a half-point and keep doing that until they get rates back toward the Free Money Era levels.
I have no way to prove that the Trump team was putting pressure on the Fed, other than Powell’s angry stance at the press conference. He sure didn’t seem like a happy camper and plenty of folks noticed his angry demeanor.
Powell already assisted in a big way to create the Death Spiral of Debt and runaway inflation. I doubt he wants to end his reign of power having caused stagflation.
But, the voters spoke that they have huge concerns about the economy and the bond vigilantes are worried about more inflation. I’m no esteemed economist, but I can add that voters concerned about a slowing economy and bond vigilantes concerned about more inflation equals stagflation.
The last bout of stagflation in the 1970s was extremely bullish for gold in US dollar terms. As it will be if it happens now and it certainly looks like it is a possibility.
How it plays out will have a lot to do with if the economy can get rolling to make voters happier, and that inflation moderates. Cutting rates aggressively, will help the economy, but also drive the debt much higher and cause more inflation. The Fed is stuck between a gold rock and a hard place.
After the election, gold got hit, but has stabilized and looks oversold and ready to rally. The US dollar rallied like it had been before the election, but it is looking extremely overbought.
All signs are pointing to gold being a coiled spring ready to rally.
All the best,
Allan Barry Laboucan
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