Recession the new ‘Transitory’

The US Fed has a new yarn to spin you.  After months and months of trying to convince the market that inflation was just ‘transitory’ despite all the data, Fed Chair Powell was last night, with a straight face, telling us: “There is no sign of a broader slowdown in the economy that I can see.”  Meeting market expectations they hiked rates by a still huge 75bps, the biggest hike since 1994 and taking the Fed Funds Rate to a range of 1.5-1.75%, now again comfortably above our own 0.85%.

Maybe because the market feared a full 100bps rise or they believed the ‘everything’s awesome’ narrative from Powell who assured us that the US is "well-positioned to deal with higher interest rates", Wall Street shares rallied strongly!?

Maybe more tellingly though, the ‘smarter’ markets of US Bonds and gold saw this for what it was and both rallied strongly whilst selling off the USD.  The smart money aint buying it, so why?

Well for a start the Fed’s very own Atlanta branch who have knack for forecasting GDP better than the big finance houses yesterday came out with a big downgrade of their Q2 GDP forecast from an already weak 0.9% to a dead 0%.  After the negative 1.5% print in Q1, a negative print in Q2 puts the US into a technical recession. If one considers they have dropped their forecast every week from 1.9% just 3 weeks ago, the trajectory to sub zero appears almost baked in.  Stagflation anyone?

We mentioned last week the simply awful consumer sentiment in the US and given consumption is a major component of GDP the pressure was always on.  Well last night it flowed through to retail sales which fell 0.3% against expectations of a 0.1% rise and making this the first negative print in 6 months.  It gets worse when you measure it in inflation adjusted terms, an economic reality, where real retail sales fell for the 3^rd consecutive month.  We also saw PPI print another strong 10.8% dispelling any hopes the 40 year record 8.6% CPI print was in any way ‘transitory’ with prices at the factory door still higher.  Again, that either means more inflation or more bad news for company earnings if they absorb it.  Hardly news for a share rally and a ‘nothing to see here’ assurance from the Fed.

It is therefore hard to believe the sharemarket rally last night was in any way anything other than a short relief rally with more pain to come.  Fed Chair Powell doggedly maintained inflation was transitory and he is doggedly maintaining the US economy can handle him removing the monetary stimulus it has become so hopelessly addicted to.  Remember too its not just the rates.  They are also reducing their balance sheet (QT) to the tune of $47.5b/month (now 15 days into it) and that ramps up to $95b/month in September.  Just reflect on what sharemarkets have done since QT started,,,

What is maybe most scary for the time being is he is now so firmly on public record that he has one and one only objective and that is to reduce inflation to 2% regardless of how markets might react. Maintain that stance and crash markets and cause a recession, pivot on it and lose ALL credibility and signal double debasement redux.  Gold wins on either scenario.

Some are questioning why gold isn’t already taking off to the moon amongst such conditions.  There are 2 things to consider in such an observation.  Firstly, everything is relative.  Compared to shares, crypto and property gold has held doggedly steady whilst they are either falling or outright crashing.  Secondly, one of gold’s key attributes is that it is a very liquid asset that is usually strong amongst carnage and hence the easiest and most effective to sell to cover the margin calls being triggered or the perceived dips to be bought.  That is the usual course.  If one looks at all previous sharemarket crashes, gold goes down with everything very initially but then rebounds whilst they continual to fall, on average putting you over 60% better off than having been in shares.

Gold has on average returned you 8.6% every year this century putting it ahead of the ASX200 over the same period.  Gold called BS on the ‘transitory’ inflation narrative of the Fed by rallying very strongly last year on that script.  It’s holding strong now amid liquidations everywhere as it apparently makes that same call on ‘not going to cause a recession’ narrative now.  If you believed his transitory narrative on inflation, by all means believe his “no sign of a slowdown” dribble too.  I for one will sleep soundly owning gold and enjoying my own dreams not his….