The upcoming stagflation might be less severe than in the 1970s. So is the Fed’s reaction, which could mean good news for gold. There are many terrifying statements you can hear from another person. One example is: “Honey, we need to talk!” Another is: “I’m from the government and I’m here to help.” However, the scariest English word, especially nowadays, is “stagflation.” Brrr! I’ve explained it many times, but let me remind you that stagflation is a combination of economic stagnation and high inflation. This is why it’s a nightmare for central bankers as they should ease monetary policy to stimulate the economy and simultaneously tighten it to curb inflation. Although we haven’t fallen into recession yet, the pace of GDP growth has slowed down recently. According to the World Bank’s report Global Economic Prospects from June 2022, “the global economy is in the midst of a sharp growth slowdown” and “growth over the next decade is expected to be considerably weaker than over the past two decades.” The U.S. growth is expected to slow to 2.5 percent in 2022, 1.2 percentage points lower than previously projected and 3.2 percentage points below growth in 2021. This is why more and more experts raise concerns about stagflation similar to what happened in the 1970s. So far, employment remains strong, but the misery index, which is the sum of the unemployment rate and inflation rate, is already relatively high (see the chart below) and could continue to rise if economic activity deteriorates further. So, it seems that the consensus view is that stagflation is likely, but the key question is how bad it will be, or how similar it will be to the stagflation of the 1970s. As the chart below shows, that period was pretty bad. The inflation rate stayed above 5% for a decade, reaching almost 15% in early 1980. Meanwhile, there was a long and deep recession in 1973-1975 and the subsequent two in the 1980s, triggered by Volcker’s monetary tightening that was necessary to curb high inflation. Similarities are quite obvious. First, the economic slowdown came after the previous recession and rebound. Second, supply shocks. Supply disruptions caused by the pandemic and by Russia’s invasion of Ukraine resemble the oil shocks of the 1970s. Third, the burst of inflation comes after prolonged period of easy monetary policy and negative real interest rates. According to the World Bank, “global real interest rates averaged -0.5 percent over both the 1970-1980 and the 2010-2021 periods”. Fourth, consumer inflation expectations are rising significantly, which increases the risk of their de-anchoring, as in the 1970s. As the chart below shows, consumers now expect inflation to run at 5.4% over the next twelve months, according to the University of Michigan survey, the highest level since 1981. However, the World Bank also points out important differences. First, the magnitude of commodity price jumps has been smaller than in the 1970s. Oil prices are still below the peaks from those years, especially in real terms, while the economy is much more energy-dependent. Second, the fiscal stance is tighter now. In the 1970s, fiscal policy was very easy, while now it’s expected to tighten, which could help to curb inflation. According to the CBO, the federal budget deficit will shrink to $1.0 trillion in 2022 from $2.8 trillion last year. Third, the M2 money stock M2 ballooned after the pandemic by 40% in just two years. So, the increase in the money supply was much more abrupt, although it was rather a one-time outburst than a constant fast pace of money supply growth as it was in the 1970s (see the chart below). Thus, the pattern of inflation could be similar. Fourth, contemporary economies are much more flexible with the weaker position of trade unions, and income and price policies (like interest or price controls) are not popular today. It allows a faster response of supply to rising prices and reduces the likelihood of price-wage spirals. The fifth difference mentioned by the World Bank is more credible monetary policy frameworks and better-anchored inflation expectations. Although true, I would be cautious here, as the Fed remains behind the curve and people could quickly lose confidence in the central bank while inflation expectations could easily de-anchor. For me, the two crucial differences are the much higher levels of both private and public debt today compared to the 1970s (see the chart below) and less political willingness to combat inflation. Yes, Powell could have a laser focus on addressing inflation right now, but I seriously doubt whether he will stick with significantly raising interest rates, especially when the economy starts to falter. So, what are the conclusions and implications for the gold market? Well, stagflation is indeed likely, as I expect a further economic slowdown next year, which will be...

We have expanded our Executive Briefing to also give a high level update on Nordic Economies and financial markets. We hope you find it useful. Fear of inflation is increasingly supplemented by fear of recession as a market theme, not least in credit markets where spreads have widened very substantially. However, there were also large parts of June where markets moved in the other direction, and uncertainty and volatility is high in many markets. Both Sweden and Norway had 50bp rate hikes in June. Rate hikes look set to continue this year. Read the article here

We have expanded our Executive Briefing to also give a high level update on Nordic Economies and financial markets. We hope you find it useful. Fear of inflation is increasingly supplemented by fear of recession as a market theme, not least in credit markets where spreads have widened very substantially. However, there were also large parts of June where markets moved in the other direction, and uncertainty and volatility is high in many markets. Both Sweden and Norway had 50bp rate hikes in June. Rate hikes look set to continue this year. Read the article here

As trading kicks off for the month of July and the second half of the year, investors are hoping for a third quarter rebound.  It’s been a brutal year so far in financial markets. The S&P 500 is down over 20%. Bitcoin has crashed by 60%. Bonds have provided no safe haven amid hot inflation. And spiking mortgage rates point to a potential calamity in the housing market.  As for gold, the monetary metal is essentially flat for the year. It may not be cause for celebration, but gold holders have at least obtained some shelter from broader market volatility.  Metals markets are caught between the forces of inflation and the threat of recession.  Signs point to an economic downturn already being underway. It could be accelerated by another outsized Federal Reserve rate hike later this month.  The Fed continues to feel pressure to do something about inflation.  The central bank’s preferred core Personal Consumption Expenditures index came in this week at 4.7%.  That represents a decrease for the third consecutive month, although the annual rate remains well above the Fed’s 2% target. The core rate also excludes food and energy costs. Factoring those critical costs of living back in puts the PCE at 6.3%.  Alternative measures show inflation is running even hotter. But the recent plunge in commodity prices is likely to provide at least some temporary respite from inflation running at multi-decade highs. Whether inflation is truly contained remains to be seen. Fed policymakers may be forced to scale back their tightening campaign if financial markets continue to plunge and the economy inches closer to recession. Political pressures will also be bearing down on the Federal Reserve Board as the mid-term elections approach.  President Joe Biden claims he supports the Fed’s independence and isn’t trying to sway monetary policy decisions. But at the same time he has been moving to try remake the Fed into a more partisan institution and force it to pursue a radical new mandate for Woke social engineering. Biden recently cheered the House of Representatives for narrowly passing the so-called Financial Services Racial Equity, Inclusion, and Economic Justice Act.  The Act requires the Fed to “exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit.” That means the central bank will have to veer from its dual mandate of full employment and price stability to prioritize race in monetary policy decisions and regulatory actions. The same central planners who failed to anticipate the high rates of inflation their policies have caused will now be tasked with using their tools to engineer equal outcomes among groups. Earlier this year, Biden appointed radical activist Lisa Cook to the Fed’s Board of Governors. Cook has called for a racial “reckoning” that might, among other things, include reparations for slavery. Last year, the Federal Reserve Bank of Boston put out a paper calling for “restorative housing reparations.” If there’s any silver lining for the sound money movement, it’s that the overt politicization of the Fed will hasten the fall of public trust in it.   From falsely proclaiming that inflation would be transitory to more recently denying that a recession is coming, the Fed has already lost a great deal of credibility with the public. It will lose even more if it goes full Marxist on redistributing wealth.    Other countries that have tried empowering central banks to radically reshape society have gone down the road to hyperinflation and economic ruin.   Such an outcome can potentially be avoided if voters force the political trajectory in Washington to shift. But it is still prudent to prepare for a worst-case scenario just in case.   Collapsing confidence in central bankers is an opportunity for sound money advocates and precious metals investors. The more apparent it becomes that the Fed is wielding its tools for ends other than a stable currency, the more people will realize the need for a sound alternative.   The soundest currencies historically have been gold and silver. They remain irreplaceable today as the ultimate stores of real wealth.

As trading kicks off for the month of July and the second half of the year, investors are hoping for a third quarter rebound.  It’s been a brutal year so far in financial markets. The S&P 500 is down over 20%. Bitcoin has crashed by 60%. Bonds have provided no safe haven amid hot inflation. And spiking mortgage rates point to a potential calamity in the housing market.  As for gold, the monetary metal is essentially flat for the year. It may not be cause for celebration, but gold holders have at least obtained some shelter from broader market volatility.  Metals markets are caught between the forces of inflation and the threat of recession.  Signs point to an economic downturn already being underway. It could be accelerated by another outsized Federal Reserve rate hike later this month.  The Fed continues to feel pressure to do something about inflation.  The central bank’s preferred core Personal Consumption Expenditures index came in this week at 4.7%.  That represents a decrease for the third consecutive month, although the annual rate remains well above the Fed’s 2% target. The core rate also excludes food and energy costs. Factoring those critical costs of living back in puts the PCE at 6.3%.  Alternative measures show inflation is running even hotter. But the recent plunge in commodity prices is likely to provide at least some temporary respite from inflation running at multi-decade highs. Whether inflation is truly contained remains to be seen. Fed policymakers may be forced to scale back their tightening campaign if financial markets continue to plunge and the economy inches closer to recession. Political pressures will also be bearing down on the Federal Reserve Board as the mid-term elections approach.  President Joe Biden claims he supports the Fed’s independence and isn’t trying to sway monetary policy decisions. But at the same time he has been moving to try remake the Fed into a more partisan institution and force it to pursue a radical new mandate for Woke social engineering. Biden recently cheered the House of Representatives for narrowly passing the so-called Financial Services Racial Equity, Inclusion, and Economic Justice Act.  The Act requires the Fed to “exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit.” That means the central bank will have to veer from its dual mandate of full employment and price stability to prioritize race in monetary policy decisions and regulatory actions. The same central planners who failed to anticipate the high rates of inflation their policies have caused will now be tasked with using their tools to engineer equal outcomes among groups. Earlier this year, Biden appointed radical activist Lisa Cook to the Fed’s Board of Governors. Cook has called for a racial “reckoning” that might, among other things, include reparations for slavery. Last year, the Federal Reserve Bank of Boston put out a paper calling for “restorative housing reparations.” If there’s any silver lining for the sound money movement, it’s that the overt politicization of the Fed will hasten the fall of public trust in it.   From falsely proclaiming that inflation would be transitory to more recently denying that a recession is coming, the Fed has already lost a great deal of credibility with the public. It will lose even more if it goes full Marxist on redistributing wealth.    Other countries that have tried empowering central banks to radically reshape society have gone down the road to hyperinflation and economic ruin.   Such an outcome can potentially be avoided if voters force the political trajectory in Washington to shift. But it is still prudent to prepare for a worst-case scenario just in case.   Collapsing confidence in central bankers is an opportunity for sound money advocates and precious metals investors. The more apparent it becomes that the Fed is wielding its tools for ends other than a stable currency, the more people will realize the need for a sound alternative.   The soundest currencies historically have been gold and silver. They remain irreplaceable today as the ultimate stores of real wealth.

The EURUSD survived the "End of Month/Quarter/H1" flows today as the market was widely expecting strong US Dollar buying into today. The EURUSD reversed course from the 1.0400 probe below and by the end session ended near the highs of the session. The EURUSD continues to compress in a wedge as the descending trend line is at 1.0570 and remains key resistance for the bears to hold. A Dips below the 1.0400 level are finding eager buyers. Considering the pair has not broken down following the move lower in risk assets sets up the risk of a reversal higher in the coming days. RSI is mid-range and also compressing.