The Dollar Wakes Up to the Bear Years
On Thursday, we said that I like the odds with silver. For whatever reason, the market heard me because Friday was magnificent.
With gold at $1,999.70, the writing is on the wall.
If we truly think about what just transpired, we can only come to one conclusion: rate hikes have left the banking system vulnerable to classic liquidity events.
The FED must acknowledge this or face being the face of this crisis.
Again, we saw that America is built and designed to save the system when push comes to shove. The Federal Reserve had to abandon aggressive shrinkage of the balance sheet and inject billions into the panic to contain it!
This move was sudden. We can’t stress how much, but we can illustrate by the below chart that tells the story.
First, let’s look at the background.
Chairman Powell went to Congress to appear in front of the banking committee just DAYS before the SVB bank run and was asked time and again if there were any issues of instability lurking in the shadows.
He replied that there were none.
He continued to show hawkishness and was radiant with confidence that the task at hand was to stabilize prices and fight inflation with more hikes.
Not everyone believes Chairman Powell, it seems… The folks at SVB and other banks couldn’t fathom that the FED would be this aggressive. They loaded up with bonds and were left stranded with a portfolio that has lost 25%-50% on paper, leaving some banks in a situation where deposits are greater than assets.
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The consensus is that Powell didn’t understand the extent to which FED policy has left a massive pool of bonds underwater. In that split second, the narrative flipped to one that says the era of high yields on short-term Treasuries is over. You can see how quickly this changed:
The FED told a story, and the market began to believe it. Very few realized the extent to which fixing inflation by hiking rates this fast would lead to damage in the housing sector, tech, and venture capital, but it wouldn’t even scratch the service sector, which remains tight and strong.
The FED was again schooled by the real world.
The simplistic school of thought that says higher rates slow down hiring was only partially correct.
It goes back to what I said months ago: we live in an inflationary period. No matter what the FED does, it can only slow it down or smoothen it out, but the dam can only manage the flow of water and never stop it.
We think last week’s rally in precious metals was just the appetizer. The main course is yet to come.
De facto, the FED fought inflation, lost, and now the truth is in everyone’s face: inflation is here to stay at 5%-6% on CPI, which means more like 8%-12% in real-world terms for the next 3-5 years.
If you can’t imagine that this sort of reality gets us gold prices north of $3,000 and silver hitting $50, start to picture that because it’s in the oven.
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