When America Sneezes…

… the world catches the cold… is how the saying goes.  But what happens when the world is already sick?  Unless you live under a rock you will have seen the US CPI print on Friday night was a whopping 8.6%.  That was higher than expected and a new 40 year high.

Watching gold react live and thereafter was an interesting journey of market cognitive dissonance.  On the print gold fell sharply, probably on the ‘higher rates are bad for gold’ narrative. But then gold rocketed up over AUD57 or 2% on the realisation that a. that historically is a false narrative as we’ve previously written, and b. this can only end very badly – there will be no ‘soft landing’ as was earlier hoped.

Gold wins in two ways on this realisation.  

Firstly, it is the historic ‘safe haven’ play when markets crater.  Case in point Friday night, S&P500 was down 2.9% (now down 10 of last 11 weeks making it the worst run since Great Depression), NASDAQ down 3.5% and gold was up 2.2% (and silver up 2% too).  Crypto too took a hammering over the weekend and as we see each time we sold a heap of our Gold Standard (AUS) and Silver Standard (AGS) bullion backed tokens on CoinSpot as, just like sharemarkets, people sought the safety of gold and silver in the storm.

The second value proposition for gold in such times is the growing expectation that the Fed (and other central banks) will end up pivoting and start cutting rates, further debasing currency and credibility, and only after they’ve triggered a recession.  The financial markets are now pricing in 10 more rates hikes to the end of the year and then 3 rate cuts thereafter!

That long v short set up saw the yield curve flatten and we are back into 3s10s, 5s10s and 5s30s all inverted in yet another clear signal of recession ahead.

The market keeps getting these ‘shocks’ as it seems to keep betting on better news than that delivered.  The chart of truth in this sense is Bloomberg’s Surprise Index which is now plumbing lows not seen since August 2019.  “It couldn’t possibly be that bad” is not working…

The carnage is not simply high inflation alone.  The US is facing clear signs of imminent job layoffs and surging openings, meaning no more wage inflation; all the economic data prints seeing the misses measured in the chart above and Economic Conditions per the chart below culminating in falling financials on Wall St; and ‘Main St’ know it too with the worst Consumer Sentiment print for June on record (EVER!) in the chart below:

If Australia were in a different situation we may be somewhat immune, just as China and our commodities saved us from a recession in 2008.  But the stark reality, as we discussed last week, is anything but.  When you have ‘houses and holes’ as your economic base and the biggest housing lender in the country, CBA, is predicting 15% house drops, and China is stepping away from the commodities table, the US ‘sneeze’ is a very very real threat.