It is time to bunker down and prepare.
I strongly suspect that we are on the precipice of something wild, and probably nasty. As you may have noticed, 2022 has been a tough year, driven mainly by the Fed and other central banks switching to tightening, not loosening monetary policy. We are also reeling from a great many supply constraints, especially in the commodity sector.
However, when you see commodities getting this rekt, this quickly, it usually signals we are headed into a deflationary period. A recession or a depression.
Copper in particular is a reflexive asset. Being a staple in so munch infrastructure we build in the modern digital and electrified age, it has earned the name Dr Copper, as it is quite good at diagnosing when things are not quite right.
We also have warning signs across the Euro, British Pound, and the Japanese Yen, with all three currencies getting absolutely rekt against the USD. These are all signals that things are not going so good in the other major economies.
There are a few things on the horizon to pay attention to, and unfortunately, it is unlikely many of them will spell good news.
- CPI Inflation data in the US is due out shortly, and there are estimates it will be yet another high, 8.5% to 9.0% is expected. This would signal further tightening by the Fed.
- Earnings Season which is likely to be horrific in the US. This is a result of supply gluts, and poor consumer confidence, essentially the exact opposite reaction to coming off the sugar rush of $4T in stimulus.
- GDP Numbers for Q2 2022. Some of you may have already seen some of the jawboning going on, that perhaps GDP isn’t measured correctly, or don’t worry, the economy is strong.
All three of these are likely to be bad in that they will either motivate the Fed to hike (high CPI), whilst simultaneously confirming the economy is up the creek (poor earnings and GDP).
This was the most interesting chart I came across this week. It is an attempt to model the average interest rate over the short term (0 to 5yrs), multiplied by the US governments debt. In other words, how angry, large and bad is the US gov interest bill, and how has that related to Fed Policy.
Essentially, the market is at a point at which historically, the Fed has broken something. The interest to service the debt is now at a level which has historically triggered a policy pause and then reversal.
Notice how the Fed Policy seems to miraculously shift at the apex? This is literally a result of the Fed blocking something up. Hiking until something breaks. We could be on the verge of something breaking.
The fear I have, is that this particular Fed, is politically motivated. I fear they will hike an additional 75 basis points in July and actually do serious damage.
I am very concerned we are on the edge of a disaster.
That disaster will likely be financial pain, and in all possibility, the start of what COULD be a depression.
…However, there is one thing I am very sure of, and that is that neither the Fed, nor the government WANT a depression. There is only one tool that works in such a situation. It rhymes with grrrrrr. And it is going to be spitting out more money than we could possibly imagine before long.
But it will be a rocky road between here and there.
Sit tight. Prepare. Be ready.