Market Update September 28 2022
As of 9.28.22
Bank of England First to Cry Uncle – Unlimited QE to Support Gilt Market
UK politicians put forward a major fiscal stimulus package last week to counter economic weakness tied to inflation and the European energy crisis. The markets have reacted violently, sending the pound to 40 year lows and collapsing the UK bond market. The Bank of England responded by (BOE) announcing it was halting plans to start Quantitative Tightening (QT) and would step in to print whatever amount of pounds was necessary to shore up the no bid Gilt market. The Gilt market that has seen 30 year rates rise from 3.5% to 5% over the past week. The UK situation may be a forerunner of what to expect from the ECB and Fed. Political agendas, progressive or not, rely on an endless supply of printing press money in the Western world. With inflation running at 10% in the UK, the BOE has been forced to pivot away from the inflation fight to save the UK financial system from locking up. The question is which central bank is next to pivot?
Dollar Rampage Impacting US dollar Gold Price – Gold Rising Against Most Major Currencies ex U.S. Dollar.
The definition of a bull market in gold is when gold is rising versus all currencies. Conversely, a gold bear market is when gold is declining versus all currencies. Year to date, gold prices are rising versus yen, euro, pound and Aussies dollar among others. In our opinion, the USD decline against gold will be triggered the moment the Fed is forced to provide liquidity to the leveraged Western financial system, in essence to meet a global margin call again.
20 plus years of monetary madness cannot be unwound within a period of months without triggering a credit “event”, in our opinion. Powell’s tough guy inflation stance will quickly give way if the Fed sets off the domino that triggers a cascading sequence of credit defaults. A market layered with derivatives based on years of subsidized interest rates is primed for a liquidity event, in our opinion.
Debt Multiplied by Fed Funds Rate is Screaming Code Red
As corporations, municipalities, and the sovereigns roll over debt at higher rates, the interest rate burden promises to expose vulnerable institutions across the board, in our opinion. Debt outstanding multiplied by the Fed Funds rate gives some sense of the implied debt burden facing the U.S. govt.
Chart from Patrick Karim
Currency Markets Turmoil
This chart from Morgan Stanley is a good representation of how currency markets have entered a high stress zone, indicating the possibility of an “event” needing Fed intervention. We believe the nature of the market is to seek out the most vulnerable as easy hunting prey. In the case of the markets, it is most generally the leveraged participant. Western financial system is perhaps the most leveraged. China and Putin appear to have the Western financial system in their cross hairs.
Gold Mining Shares – Waiting for Non- Correlation
Precious metals equities started the year off non-correlated to the broader market and bonds, which one would typically expect in a period of declining financial assets and rising inflation. However, since the first quarter ended when the scramble for liquidity accelerated to include selling anything with a gain, precious metals equities have been correlated with financial assets. The sell off no doubt helped prompt a recent front-page article in the Wall Street Journal that gold was no longer a safe haven, even though gold has performed better than many asset classes year to date. Clearly, confidence placed in Powell’s hawkish stance to aggressively fight inflation has impacted gold assets. In our opinion, it appears that like the rest of the market, gold assets are waiting for Fed capitulation. It is our belief that gold will smell out the Fed’s next move ahead of time, which will set the stage for the next up leg, perhaps the biggest leg of the secular bull market in gold that goes all the way back to 1971.
Paper Gold versus Physical Gold
“This is a similar set-up to the final bottom of the precious metals sector in late October 2008, when the precious metals sector turned on a dime and shot higher while the stock market continued to head south quickly for six more months.”
Thanks for reading,