Pressure Cooker: Hot Metals, Hot Prices, and a Cooling Jobs Picture
Something's got to give: We either have lower yields, a slowing economy and lower inflation or higher rates, a robust economy and higher inflation.
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Much ink has been spilled writing about the Fed's dual mandate -- maximum employment and inflation at 2% -- and how the central bank has chosen to focus on the former at the cost of the latter. Since the Fed's rate cut last month, and dovish commentary, focusing on the seasonally weak labor market data instead of understanding the outliers that caused the weakness in the first place has convinced investors that the Fed no longer cares about inflation and is ready to sacrifice it just to keep the economy running hot. This has caused a 15% surge in silver, 30% rally in palladium, 20% rally in platinum, and a 10% rally in gold in just the last month.
This is on top of the 50%-plus performance in most of these precious metals since the start of the year. We all know the fiat debasement thesis, but Bitcoin, which was the main beneficiary of this very same phenomenon, is only up 20% this year. Everyone is long, yet it continues to fall along with the other cryptos. So, what is going on? For one thing, most hedge funds and investors are short this space, as most are busy chasing large cap technology, AI, and data center/cloud names like Nvidia (NVDA) and Oracle (ORCL) . The precious metals sector had been forgotten about for over a decade, given its last peak was in 2011.
Despite gold having a stellar year last year, most have still been quite apprehensive about its recent run, even though it is up 50% vs. the S&P 500 up 15%. But October is seeing a huge shift into the underweight positions as they scramble to cover their shorts and sell down their consensual longs, the systematic long/short funds are having a terrible October. The story remains intact, but as always timing is more important. We know the U.S. and its $37 trillion-plus debt with $1.2 trillion in interest expense leaves it no choice other than to run the economy hot to lower its deficit in notional terms. But there is one problem with that, prices of raw commodities are going AWOL, and this will not bode well for consumer-inflation expectations as the forward breakevens suggest. You can't inflate the economy willy nilly and not expect inflation to rear its ugly head.
The next few prints may shock the central bank, and this may urge it to step back on their dovishness, especially as the U.S. economy is quite robust and weakness in August limited. Today, with most short the dollar, expecting just a one way move lower as the Fed starts its rate-cutting cycle, any push back on this can cause some severe damage to the shorts scrambling to buy precious metals today. Central banks may be able to control the front end of the bond markets, but not the back end. With trillions of new debt being issued in the next few months, despite Trump's genius act, the back end of the bond market is simmering like a pressure cooker and is about to collapse with the weight of higher raw material prices and higher debt issuance.
Something's got to give, we either have lower yields with a slowing economy with lower inflation or higher rates, robust economy and higher inflation -- both cannot work, no matter the innovative financial engineering of Scott Bessent and Trump. It seems Bitcoin has figured this out and continues to trade lower despite all the big whales bidding it up, we know how this risk asset tends to be a leading indicator, as it was back in March this year. Perhaps equities and commodities need to pay closer attention to why the most leveraged and riskiest asset is choosing to go the other way.
At the time of publication, Bengali had no position in any security mentioned.
