Higher for Longer

Investors brace for more hikes, plus the $23 trillion equity bonfire and the "cash now, gold later" strategy...

(Source: Getty Images)

Joel Bowman, checking in today from Buenos Aires, Argentina...

Higher for longer. 

No, it’s not the name of Snoop Dog’s new album. It’s what investors are forecasting the Fed will do with interest rates in the face of persistent, decidedly non-transitory inflation. Here’s MarketWatch:

What the sellside is slowly realizing is not just that the Fed is going to be aggressive in September after the latest shocking inflation figure, but that the central bank will have to keep rates higher, and for longer. The British pound, in some respects a proxy for financial market conditions, fell to its lowest level since 1985 vs. the U.S. dollar on Friday, moving below $1.14.

And if the Fed takes an even more aggressive approach than the market is expecting? Economists Dominic Wilson and Vickie Chang of Goldman Sachs ran the numbers. MarketWatch again:

The results are not great. If the Fed has to hit the economy hard enough to get the unemployment rate up to 5%, the S&P 500 would have to fall 14% to below 3,400, the yield on the 5-year note would have to rise 91 basis points, and the trade-weighted dollar would rise 4%.

In the more severe scenario where the jobless rate would have to hit 6%, the S&P 500 would fall 27%, to below 2,900, the yield on the 5-year Treasury would climb 182 basis points, and the dollar would rise 8%.

King Dollar

We didn’t see the “Back 9” of Friday’s market action (it’s spring vacation here in the southern hemisphere, so we were either at the airport... or in a mad traffic jam en route to it) so let’s stick with King Dollar for the moment...

According to Bloomberg, global equities have coughed up $23 trillion dollars this year... so far. Meanwhile, at $1,665/oz, gold is down 9.2% year-to-date. The only “safe haven” so far in 2022 has been cash. USD, that is. Bloomberg:

The Bloomberg Dollar Spot Index, which tracks the US currency against 10 global peers, has surged more than 11% this year, [and is] set for a record annual performance in data compiled by Bloomberg starting in 2004. 

“Cash now, gold later” has been the mantra of Bonner Private Research’s Investment Director, Tom Dyson, taking his cues from the late, great Richard Russell. 

An equal weighting to gold and greenbacks has proven reliable ballast so far in 2022, part of a strategy Tom calls “Maximum Safety Mode.” (His select few “tactical trades” have averaged a +7% return... not bad considering the S&P 500 was down ~18.5%, last we checked.)

So while the market anticipates “higher for longer,” cash will be king... but if and when the winds change, the Midas Metal will be the last man standing.

On just that point, a couple of Dear Readers wrote in with some anecdotes which underscore well the idea that gold is a way to preserve wealth over the long haul... 

Reader MoodyP writes...

We bought our first and only house in 1984 when interest rates were 16-17%. It would have taken 238 Oz of gold to buy the house back then. We noted the other day that it is for sale at a price nearly 3x what we paid. We also computed it would take 168 Oz of gold to buy it. A 300 percent increase in dollars. A 30% decrease in ounces. Fascinating. I’ll be picking up another 5 Oz tomorrow.

Responds Reader Pete...

Precisely. Contrast that with home prices in Canada, specifically Vancouver, in CAD terms. 1984 approx 521 ounces. Today? Approx 625 ounces! In CAD terms an 8x increase. My numbers may be off some but the results speak for itself.

What about prices in your neighborhood? Do you recall what you paid for your first home (in Oz) compared to what it’s worth today? It would be interesting to compare real estate across the country – and the world! – ounce to ounce. Drop your thoughts in the comments section below or emails directly at: BonnerPrivateResearch@gmail.com

(Don’t worry, even if we publish your insights, we’ll never include your full name).

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Meanwhile, on the topic of “epic debt deflation,” Tom had this to say to Bonner Private Research members in his Wednesday note...

Each quarter the Federal Reserve releases a report titled “The Financial Accounts of the United States.” It’s a comprehensive breakdown of the US’s debt load, broken out by corporate debt, mortgage debt, consumer debt, agency debt, bank debt and federal debt. I reference its data frequently in these pages. 

The Fed published its latest report – for the three months April 2022 to June 2022 – last week. If you want to dive into the data on your own, be my guest. Here’s the link. 

One of our core positions here at Bonner Private Research is that we are living through the greatest debt bubble of all time. This bubble could pop at any time. When it does, it will touch off an epic debt deflation in the US and around the world. 

Given the heavy stock and bond market losses in Q2, rapidly rising short term interest rates, Quantitative Tightening and the dearth of corporate bond issues, I expected the Fed’s report would show the debt load had started contracting… that lenders were becoming reluctant to extend credit and borrowers were becoming reluctant to accept it… 

In short, I expected the report to show that the credit bubble had popped. I was wrong. Debt in the US economy continues to grow at near record rates. See the chart below. Total non-financial debt is just under $68 trillion. 

Mortgage debt, bank loans, consumer loans and agency debt all showed large increases. Total system debt – labeled “non-financial debt” in the report – expanded at an annualized rate of 6.49% or $4.3 trillion, one of the greatest quarterly debt growth rates in history and more than double the average growth rates of the decade 2010-2019, which was itself one of the greatest decades in history for debt expansion. 

In other words, the historic debt bubble was still alive and well, at least for the period March through June. 

Could this be one reason why consumer prices are continuing to rise? 

Will the Fed have to reverse the debt expansion in order to break inflation? 

How much longer can this debt bubble continue inflating before it topples over?

Questions, questions, questions. One thing is for sure, the really hard times are still ahead of us. The losses we’ve seen so far this year are just the first dark clouds of the huge storm gathering offshore.

Readers looking to access all of Tom’s investment research, including his maximum safety mode strategy, his “tactical trades” and stock watchlist, are invited to join us here...

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And now for Bill Bonner’s missives from the past week...

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And finally today…

Just in case you missed it, Dan unlocked a couple of “preview posts” during the week in which he invited loyal readers to take a look “under the hood” at some of our paid research. This is not a regular thing, to be clear, but is should help give you an idea of the kind of work Tom and Dan are doing for our members… and help you decide whether it’s the kind of research you think might help your own investment strategy.

Take a look at the post – which includes links to two (slightly redacted) paid “preview posts” – right here…

Your antipodean editor will be “gone walkabout” for the rest of the weekend, trekking somewhere off the beaten path in Brazil. But fear not! Dan has a special guest essay in store for you that will take you right into the heart of the “World Island.” Look out for that one, tomorrow.

We’ll be back next week with your regular missives.

Until then...

Cheers,

Joel Bowman