Supply-side enthusiasts expect a renaissance in 2023. Are they right or wrong?
The big tech crash continued on January 3rd, with soaring , , and mining stocks continuing to rise. Moreover, PMs have outperformed in recent weeks despite the Fed’s hawkishness, rising real yields and weakness weighing on other risk assets.
The result was Permable salivating over the short-term price action, and even CNBC boarded the hype train.
Please refer to the following:
CNBC article
Source: CNBC
But Gold Bug would like the fundamentals to exist, but the reality on the ground is very different..
For example, a new narrative proclaims that instead of a recession, stagflation could dominate the U.S. economy, triggering a renaissance of real assets and all other despair. Therefore, a reenactment of the 1970s is imminent.
Still, while we are very bullish on inflation in 2021 and noted similarities to the imbalances that occurred in the 1970s, there are also substantial differences between the two periods. As a result, years of malaise of high inflation, high unemployment and low growth (gold bullish) are unlikely to materialize this time.
For one thing, the crowd assumed that “temporary” inflation was a function of supply-side constraints. But we warned him of the pitfalls of that paper on March 31st.
There is a misconception in financial markets that inflation is a supply-side phenomenon. In a nutshell, COVID-19 regulations, labor shortages and manufacturing disruptions are the reasons inflation reigns. So, once these problems are gone, inflation will normalize and the US economy will enjoy a “soft landing.”
But investor confidence in the narrative could lead to a lot of pain in the medium term. For example, I have long noted that the US economy remains in good shape. And their spending habits continue to elevate economic indicators as US consumers are flooded with cash and a hot labor market is fueling bloated wallets.
Similarly Most investors assumed that consumer spending and inflation would fall off a cliff once the tougher unemployment benefits ended in September, but the reality is that neither will die easily.
Up to that point, the crowd had been racking their brains over why it hadn’t abated, but it finally saw the light in December.
Core PCE Inflation Breakdown
The San Francisco Federal Reserve attempted to break down the factors behind the year-over-year (YoY) increase in its core personal consumption expenditure (PCE) index. The blue, white, and orange lines above represent supply, demand, and ambiguous inflation.
Analyzing the right side of the graph, we can see that the white line (demand) has crossed over the blue line (supply) to become the main driver of inflation. Thus, supply chains have normalized and shipment rates have fallen by up to 80% year-on-year, but output inflation has barely risen. So it’s because of resilient demand, and the crowd doesn’t understand how difficult this will make the Fed’s job in 2023.
Demand Side Inflation and Supply Side Inflation
please remember Supply-side inflation is linked to currency crisesWhen a country’s currency collapses, currency-adjusted import costs skyrocket, driving up prices for everyday essentials and forcing consumers to pay their bills regardless of their budget.
Conversely, if the currency is stable, foreign exchange-adjusted import costs will follow, consumers will be forced to pay higher prices for most commodities, and supply and demand will determine equilibrium. will be
please think about it. Discretionary companies like Ralph Lauren (NYSE:), Chipotle Mexican Grill (NYSE:) and Marriott International (NASDAQ:) have raised their prices significantly in 2021. They will lower their prices to match the demand outlook.
As a result, the data for this cycle screamed demand-side, not supply-side, inflation. Moreover, the sharp rise in the US Dollar Index from mid-2021 was another indicator that supply-side problems were not the problem. That’s why we’re bullish on the Federal Funds Rate (FFR).
yes, Storytellers are proclaiming that 1970s-style stagflation is on the horizon, but the current and likely performance of the US Dollar Index contrasts that narrative.
Please refer to the following:
US dollar index weekly chart
To illustrate, the top red line tracks YoY percentage change in headline CPI over the 1970s and early 1980s, and the top green line tracks the reversed (down means up) USD index. .
An analysis of this relationship shows that when inflation spiked in the early 1970s, it culminated in a fall in the US Dollar Index from ~120 to ~90. Similarly, his second spike in inflation in the late 1970s culminated in a fall in the US Dollar Index from ~108 to ~83.
However, the right side of the chart shows that when the US dollar index rose from the mid-1980s (green line declining), the year-on-year CPI collapsed and moved back toward the Fed’s 2% target.
The moral of the story is that the slump in inflation in the 1970s coincided with a significant decline in the US dollar index, which exacerbated supply-side inflation and created the backdrop for stagflation.
But not today. The US Dollar Index ended the Jan. 3 session north of 104 and does not believe it will fall to ~90 or ~83 in 2023. Analysis of historical records.
What drives the price of gold?
Given that stagflation is unlikely, what is driving gold prices higher? Well, it’s all about rotation. A “Lehman Moment” in the near term is unlikely, as a resilient economic environment has not provided a catalyst for liquidation.
Investors avoiding technology like the plague are therefore hiding in the “old economic sectors”.
Please refer to the following:
DJIA Index Daily Chart
To illustrate, the gray, blue, and red lines above represent (DJIA), (Germany’s benchmark), and .
Additionally, analyzing the gray vertical line near the right side of the chart shows that the DJIA and DAX indices have risen sharply from their recent lows, even as the NASDAQ Composite hits new lows. Thus, the kings of quantitative easing have been slaughtered, but the money has only moved to other areas of the market.
But while the NASDAQ Composite was the first to bounce back from its March 2020 lows and is now the first to drop, the ‘old economy’ sector should suffer a similar predicament in the coming months. It’s only a matter of time before the demand collapse of the crippled Big Tech, such as finance, industry, materials, and energy.
Overall, rotations and misrepresentations have pushed gold prices higher. Metals seem invincible for now, but there was a time when Apple (NASDAQ:) and Tesla (NASDAQ:) were considered untouchable. So while we remain bullish on PM’s long-term outlook, we should see a final sell-off before the next bull run begins.
