Equities have fallen again, thanks to a string of warnings about the global economy. Selling continues across Wall Street “There has been no end to the bearish moves of the past few days, with the final session in the red following a trio of warnings about the global economy. The IMF, the World Bank and FedEx have all given investors reason to worry, and investors have opted to continue their flight from equities. Given that the Fed is expected to renew its pledge of tighter policy next week, and inflation shows no sign of slowing, these warnings may actually be on the optimistic side, suggesting the actual outcome for global markets may be worse.” Pound bounces back above $1.14 “While it touched a fresh two-year low today, the pound is trying hard to finish the day above $1.14. If it does, it might be that we have seen an end to the selling for now. But as with equities, the outlook will struggle to get much brighter, even if the BoE opts for a 75 bps move next week.”

Tuesday's Inflation story wss an anchor pair event as DXY traded 213 pips then EUR/USD and GBP/USD matched DXY at 213, USD/CAD 221 and USD/JPY at 308 pips. NZD/USD traded an extraordinary 175 pips to AUD/USD at 145. Missing in action was cross pairs as EUR/AUD traded 140 pips, GBP/JPY 185, EUR/NZD 94, EUR/CAD 107, EUR/JPY 139 and 148 for GBP/AUD. Cross pairs traded barely above 1/2 DXY ranges as compared to anchor pairs EUR/USD, GBP/USD. GBP/AUD and EUR/JPY were Wednesday's range winners at 172 and 218 pips. Dow Jones The Dow dropped 1000 points. On a 31,000 price, 1000 points lacks classification to a move. The Dow must travel at least 5,000 points to consider meaningful significance. The Dow at 1000 points is a media story rather than a market event. Next week EUR/USD expected close on Friday at 0.9986 then ranges from 1.0110 to 0.9986 and 0.9986 to 0.9863. Next week's long target is 1.0110. Deeply oversold EUR/CHF at 0.9600's lies just below EUR/USD's price and holds as EUR/USD supports. Much higher EUR/USD must clear 1.0233 to target easily 1.0300's. DXY is expected to trade from 110.64 to 107.13. At 110.64 remains below the 110.78 highs from 40 and 50 year monthly averages while 107.13 breaks to new lows. The overall market story is EUR/USD Vs USD/JPY and DXY. USD/JPY serves as the best proxy for DXY. Both are the same currencies and both massive overbought, short and long term. Expected close for USD/JPY at 142.27 then means short next week to target 140.00's and 139.00's. Any price above 142.27 is a gift for extra pips to shorts in the vicinity of 143.64. GBP/USD at the 1.1576 expected close then ranges next week from 1.1380 to 1.1576 and targets just below 1.1770's. GBP/CHF at 1.1100's holds GBP/USD as supports. AUD/USD is running into range problems. Tuesday's 145 pip day was an oversold story while last days, AUD/USD traded 50 pip days. AUD/USD's magic number for higher is 0.6930. Massively oversold NZD/USD targets next week around 0.6165 on entry anywhere. NZD/USD is the best trade rather than AUD/USD as AUD/USD will underperform NZD/USD. GBP/JPY 163.35 and EUR/JPY 139.76 hold JPY cross pairs from the big drop. Add USD/JPY at 136.00's. JPY cross pairs began the week deeply overbought and remain deeply overbought for next week on a short only strategy. To 24 Hour trades was added EUR/CHF and GBP/CHF for a 14 currency pair total. EUR/CHF was added to weekly trades for a 22 currency pair total. EUR/CAD close at 1.3045 may not trade which means EUR/CAD relegates again to last place in the trade rankings. Same story as last week. GBP/CAD so far is the better long trade for next week to target just under 1.5300's. EUR/NZD as written last week began the week overbought and traded higher this week. EUR/NZD trades in the strasosphere overbought. Good short trade to target 1.6400's. GBP/NZD at 1.9164 is do or die approach as 50/ 50 exists to guess longs or shorts. GBP/NZD last week was deeply oversold at 1.8900's and traded 300 pips higher to 1.9200's. GBP/NZD Vs EUR/NZD extreme divergence existed to oversold GBP/NZD Vs overbought EUR/NZD. GBP/NZD resolution a 1.9164 may resolve the divergent problem for next week. EUR/AUD 1.4771 holds EUR/AUD higher. Short next week at 1.4900's to target low 1.4800's. Not much excitement to EUR/AUD. GBP/AUD is materializing as the better long trade to target middle 1.7100's but like EUR/AUD no thrills exist to GBP/AUD. Overall, expected is a normal trade week without violent swings.

Next week is packed with central bank meetings. The Fed is likely to match the European Central Bank in hiking rates by 75bp, while the Bank of England and Norges Bank are expected to make 50bp moves. US: 75bp is our favoured call, however there's a chance for the Fed to go even further All eyes will be on the Federal Reserve meeting next Wednesday. The market was favouring a 75bp hike ahead of the August CPI report, but the much higher-than-expected inflation print has seen the market price in a 20% chance that the Fed will go over and above that by opting for 100bp. A 75bp hike is still our favoured call, but we acknowledge the risk that with inflation proving to be stickier than we had suspected, the subsequent meetings in November and December could see more aggressive action from the Fed than we are currently pencilling in. While the geopolitical backdrop, the China slowdown story, the potential for energy rationing in Europe, the strong dollar and fragile-looking domestic equity and housing markets argue for a more moderate path of tightening in the coming months, if inflation momentum doesn’t slow the bank will hike by a further 75bp in November and possibly 50bp in December. The message from the Fed next week is likely to emphasise data dependency, but its updated economic forecasts are likely to show the end-2022 Fed funds rate at 4.125% rather than 3.4% (July forecast) and we suspect it will be kept at that for 2023, before dropping back to a long-term average rate of 2.5%. UK: Bank of England to stick to 50bp rate hike despite Fed and ECB doing more We narrowly favour a 50bp hike on Thursday, taking the Bank Rate to 2.25%, although 75bp is clearly on the table and we would expect at least a couple of policymakers to vote for it. The announcement of an energy price cap from the government will drastically lower near-term CPI, reducing concerns about consumer inflation expectations becoming de-anchored and reducing the urgency to act even more aggressively. However, the hawks will be worried about the recent independent sterling weakness, and will also argue that the government’s support package could increase medium-term inflation given it reduces the risk of recession. That means it’s a close meeting to call, but if we’re right and the committee does move more cautiously than the Fed and ECB next week, then we expect another 50bp move in November and at least another 25bp in December. That would take Bank Rate to the 3% area. Read our full Bank of England Preview here. Sweden: Riksbank to match ECB’s 75bp hike – And there’s a risk of more With only two meetings left this year, and facing higher-than-expected inflation and a tight jobs market, we expect the Riksbank to hike rates by at least 75bp on Tuesday. We expect a repeat move in November. Norway: Norges Bank to repeat August’s 50bp rate hike Norway’s central bank stepped up the pace of rate hikes in August, and core inflation has continued to push higher than Norges Bank’s most recent forecasts in June. The message from the August meeting was that the central bank is keen to continue front-loading tightening, and we expect another 50bp hike next week. That would take the deposit rate to 2.25%, and we’d expect another 50bp move in November. Switzerland: SNB will follow the lead of other central banks and hike rates by 75bp The Swiss National Bank (SNB) meets next week and is ready to raise its key interest rate for a second time, after the 50bp increase in June. Inflation in Switzerland stood at 3.5% in August, still above the SNB's target of 0-2%, although well below the inflation rate in neighbouring countries. The fact that the Swiss franc is relatively strong against the euro is no longer a problem for the SNB, as it reduces imported inflation. The SNB focuses much more on the real exchange rate, which takes into account the inflation differential and has remained very stable in recent months. With no fears of too much appreciation and with inflation above target, there is little reason for the SNB not to follow the lead of other central banks, especially as it only meets once every quarter, so the next meeting will be in December, while the ECB and the Fed will meet in between. We expect a 75bp rate hike next week. Eurozone: PMIs expected to remain below 50 In the eurozone, we get the first look at economic activity in September with PMIs due on Friday. After two months below 50, we expect another one to follow as manufacturing production cuts due to high energy prices and the end of the tourist season are set to impact business activity. Consumer...

Bank of England rate meeting – 22/09 – put off by a week as a period of national mourning takes place due to the death of Queen Elizabeth II the UK central bank could follow in the footsteps of the ECB two weeks ago by raising interest rates by 75bps, although UK policymakers have been slightly more silent about the need to hike aggressively. Whether this is by accident or design only they know, but with the battle for the UK Prime Minister position putting the central bank right at the forefront of the affray, their competence has never been more scrutinised. It’s been no secret amongst a lot of people in financial markets that the Bank of England has been notably one-dimensional when it comes to dealing with the problems of the UK economy since 2008. The consistent groupthink, and the unwillingness to acknowledge its mistakes mean that it’s inevitable that questions are raised about its competence. These same questions are being directed at its peers overseas as well, and yet these same financial markets who have criticised the central bank approach of the last ten years are now freaking out that these mandates could be changed. The problem isn’t so much the mandates, but that central banks have singularly been unable to meet them. This week the Bank of England will in all likelihood raise rates again with the market split between the prospect of another 50bps rate move, or a more aggressive 75bps hike. How much will the new fiscal measures to freeze energy bills, announced by the UK government influence the latest decision? While this month’s move is likely to cap the upside and prevent the sort of double-digit numbers touted by Citigroup and Goldman Sachs, it still won’t make it any easier to bring inflation levels down, even with last week’s modest decline to 9.9% in the August numbers. What was slightly more worrying is the increase in core prices which would appear to show inflation becoming stickier. The challenge the Bank of England faces now is not so much trying to stop inflation rising, they also need to drive it lower, and that arguably is likely to be a lot harder. Current market pricing is tilted slightly toward 75bps than 50bps, however with the Fed set to do 75bps the night before the Bank may well have to match that in order to help keep the value of the pound above the 1.1000 level. UK Mini Budget – 23/09 - new Chancellor of the Exchequer Kwasi Kwarteng is set to deliver a mini budget this week in the wake of the recent decision to impose a price cap on gas and electricity prices for the next two years. This week’s event should also give us an indication of how much taking this action could cost, and what other measures the new Truss government might take when it comes to resetting the economic agenda, over the next two years. Will we see the reversal of the rather misguided increase in National Insurance in April, and will the increase in corporation tax, which is set to kick in next year, be reversed. These should be easy wins as they were criticised extensively at the time, which means that reversing them should be an easy win. The bigger question is whether Kwarteng goes further, and more importantly what measures he takes to protect business from the same energy price rises that consumers are protected from. A failure to act decisively here could prompt a tsunami of unemployment in the coming months, so the stakes are high.                  US Federal Reserve rate decision – 21/09 – the last 2 months have seen US CPI fall back quite sharply from 40-year highs of 9.1% in June, to 8% in August, although core prices have proved to be slightly stickier. A few months ago, such a decline in US inflation would prompt a considerable amount of speculation about the prospect of a Fed pivot, and the prospect of that the US central bank might embark on a set of smaller interest rate rises. The fact that it hasn’t says much to the change of tone by Fed chair Jay Powell at Jackson Hole at the end of August when he indicated that the central bank was in any mood to pivot on rate hikes yet. The consensus from various Fed policymakers is that the Fed will continue hiking until the job is done. When you have the likes of a typical Fed dove like Minneapolis Fed President Neel Kashkari talk about the unlikely prospect of rate cuts in 2023, it’s hard to envisage a scenario of anything other than a 75bps rate hike this week, as the Fed continues to insist that their...

The University of Michigan is expected to edge up, but all eyes are on inflation expectations.  Three days after the shocking CPI report, investors are closely watching every related figure. Any 0.1% deviation in long-term inflation expectations could trigger major dollar moves.  Early fireworks on Friday – that is what US Consumer Sentiment Index promises traders, and for several good reasons. It is hard to exaggerate the spotlight put on this release.  The University of Michigan's preliminary gauge for September is set to rise to 60, from 58.2 in the final read for August, but the main focus is on long-term inflation expectations, which stood at 2.9% in August.  Why is it so important? It is because Federal Reserve Chair Jerome Powell said so. Back in June, he dwelled upon the surprising increase in that month's measure to justify a last-minute shift in policy. The Fed hiked by 75 bps instead of the 50 bps initially telegraphed.  Will the bank opt for a jumbo 100 bps increase next week? At the time of writing, markets are pricing in a 30% chance of such a move happening – a relatively high chance that leaves room for volatility in both directions. A quadruple-sized hike seemed off the cards until US inflation smashed estimates in a release earlier this week. The Core Consumer Price Index (Core CPI) MoM printed 0.6%, which was double the earlier expectations and obliterating investors that had bet on the narrative of peak inflation and peak Fed hawkishness.  The baseline scenario remains a third consecutive triple-sized 75 bps increase in borrowing costs, but uncertainty is much higher than beforehand. The Fed's silence – due to its self-imposed blackout period ahead of the decision – adds to tensions.  All in all, the timing of the publication, sandwiched between the shocking CPI report and the Fed decision, and ahead of the weekend, promises wild action. Trading the data As I have described above, the most important figure is long-term inflation expectations. These stood at 2.9% in August, at the bottom of the 2.9-3.1% range recorded in the past 12 months.  Here are three simple scenarios: 1) An increase: A 3% print or higher would signal faster price rises are becoming anchored, or entrenched in Americans' minds, and that it would take higher rates to crush them.  Odds of a 100 bps hike would rise and investors would wait for the Fed to leak it changed its intentions. The dollar would jump and stocks would tumble.  2) A drop: If the figure comes out at 2.8% or lower, it would indicate that the drop in gasoline prices and the Fed's hikes have impacted consumers' expectations and that future inflation could be lower. It would allow the Fed to slow down the pace of tightening. The dollar would tumble on firming expectations for a 75 bps hike, and stocks would advance. More importantly, expectations for the peak rate would decline as well.  3) Unchanged: A 2.9% read would be neutral, but markets cannot be on the sidelines, and they will have to pick a side. In this case, the fact that inflation expectations have remained stable in September despite a jump in inflation during August would probably be seen as positive for stocks and would weigh on the dollar.  Final thoughts If you are asking yourself: I understand the importance of the figure and the straightforwardness of the trade, but what does this analyst think the outcome will be? My answer is: I do not know. It is essential to remember that the preliminary estimates have been revised either up or down in the final publications. It is easier to bet on a scenarios of a change from last month's 2.9% than a repeat. However, if pushed to a corner, I think the drop in gasoline prices has impacted consumers' minds more than the rise in everything else. That could trigger a 2.8% print and send the dollar down – at least temporarily. 

The Chinese culture says that one picture is worth a thousand words, and the exhibition below from the analysis of Goldman Sachs shows us all the drops in the U.S market, as well as their comebacks. Source: Goldman Sachs First of all, they divide the Bear Markets into Structural, Cyclical, and Event-driven declines. As you can see, the recent Structural ones were in 2000 – 2002 (dot.com crisis) and 2007-2009 (Lehman Brothers crisis). An Event-driven bear market took place in 2020 for only one and a half months. The way they label the corrections of the market is right, because in the first 2 examples, the fault came from the structural policy of the stock exchanges and the supporting money supply through the banking-loan system respectively, and the third example came from the event of the virus COVID-19, which in turn spread fear for the humanity. That said, let’s see if we are supporting the argument they depicted for the nowadays correction as a Cyclical one, with only 8 months duration till now. The most recent Cyclical decline was in 1990 (only 3 months), where after the month of June and the unemployment rate at 5,2%, and the all-time highs for DOW30 at 2900 points, President Bush decides to turn the lights into threatening Iraq with an embargo and an inevitable war, and last but not least, he broke his promise about not raising taxes. After a month, the U.S entered into a recession and till the end of the year, the unemployment rate was at 6,3%. In my opinion, these facts are not considered Cyclical, but since they come from decisions of higher officials, such as the President of the USA, should be considered Structural. So as be for the declines. Hence, for me, we have a Structural Bear Market which came from the monetary policy of the overheating M2(money supply through the Federal Reserve buying senior bonds) for over a decade. But the article aims to prove whether we have a Structural/Cyclical or an Event-driven decline, the reasons for not having seen the trough yet. The 3 reasons are: The transition from a bear market to a bull market tends to be strong and driven by the expansion of valuations, regardless of the type of bear market. Here, we have a good picture of the giants, like Apple, Tesla, etc., but the overall economic conditions and valuations are poor and strongly declined. Sentiment-based Risk Appetite Indicator and Fundamentals-based Bull/Bear Indicator, (GSRAII) and (GSBLBR) respectively, help identify potential turning points. When both indicators come to an end/edge provide strong signals. Approaching the worst point of the business cycle, peaking inflation and interest rates and negative positioning are also important to recognize the turning point. Also, as you can observe in the picture, the average for a Structural/Cyclical Bear Market is between 26-42 months and the recovery takes between 50 -111 months. As much as double the correction phase. Therefore, because we eliminate the Event-driven one, since we are in the middle of an uncertain result of the Russia – Ukraine war, persistent inflation caused by the high prices of energy (crude/brent oil and natural gas), and the lack of supply affecting the commodities (corn, wheat), the upcoming global recession is inevitable and the one that we do not know yet is the depth. With that being said, we believe that stocks are trapped in a higher degree consolidation. On SP500 we are observing two ideas for wave (IV). The first and primary count shows room for wave C to retest the 2022 lows. VIX known as a fear index also suggests that fear is not at the extreme yet, meaning that there is room till we see more pessimism, which should reach extreme readings before we may finally see a bottom. Unfortunately, that’s how market and crowd behavior works. If price would stay sideways for a longer-period in this 48099 3659 reange than triangle is also one valid scenario, but even this one is incomplete. So it appears that based on two counts there can be more volatile moves by the end of the year. Get Full Access To Our Premium Analysis For 14 Days. Click here!

EUR/USD - 0.9976 Despite extending erratic rise from last Tuesday's 20-year bottom at 0.9865 to a 3-week high of 1.0197 on Monday, Tuesday's selloff on hot US CPI to 0.9956 (AUS) yesterday suggests correction over, as 1.0023 has capped recovery, weakness to 0.9930/32 is envisaged but 0.9865 should hold. On the upside, only a daily close above 1.0033/43 would risk stronger gain to 1.0071/76. Data to be released on Thursday New Zealand GDP, Japan exports, imports, trade balance, tertiary industry activities, Australia employment change, unemployment rate. Germany wholesale price index, France CPI, EU trade balance, labor costs. Canada housing starts, U.S. NY Fed manufacturing, import prices, export prices, initial jobless claims, continuing jobless claims, Philly Fed manufacturing index, retail sales, industrial production, capacity utilization, manufacturing output and business inventories.

Europe Up until this afternoon’s US CPI number it had all been going so well, with European markets initially picking up where they left off yesterday, trading at two-week highs, despite another sharp deterioration in the latest German and EU ZEW expectations survey for September, with both indicators falling further below their pandemic lows of March 2020. The pessimism around German business is being driven by concerns over the possibility of energy shortages, which is driving a decline in orders production and exports. This week’s initial US dollar weakness was being fed by a belief that perhaps the peak for inflation is now behind us. That may well be true, and today’s US CPI numbers do nothing to change that narrative, because we have still seen a modest fall to 8.3%, but the rise in core prices means inflation is likely to be a lot stickier than perhaps markets had been pricing. It also helps explain this afternoon's sharp reversal, with the DAX and FTSE100 both falling back sharply. This means that while the narrative of peak inflation may well be still valid, getting it down from these levels is likely to be a much tougher battle, requiring a continuation of more aggressive rate hikes in the months ahead, starting with 75bps next week. It’s been another poor day for consumer discretionary, after the strong gains of the past few days, we’ve seen further weakness today after the latest Kantor grocery numbers showed food inflation rise by 12.4% in August, adding as much as £571 to the annual food bill. With Ocado also warning that its Q4 numbers were likely to be hit by higher energy and dry ice costs, food retail shares have given back some of yesterday’s gains, sending Ocado shares down over 10% on the day, while Tesco, Sainsbury and Marks & Spencer have also slipped back.  UK drinks company Fevertree has seen its shares jump sharply higher after the company reported a 14% increase in H1 revenues to £160.9m, although gross margins fell to 37.4%, reducing gross profits by 4%. In July, the company warned that rising glass costs were likely to impact in its gross margins to the extent of 670bps. Despite this the shares have rallied strongly with the company maintaining its guidance for full year revenue of £355m to £365m and EBITDA of £37.5m to £45m.  US US markets had been looking to open higher until the release of the latest CPI inflation numbers showed that while inflation slowed in August to 8.3% from 8.5%, we saw an unexpectedly bigger than expected rise in core CPI, from 5.9% to 6.3%, which saw any potential of a positive open wiped out at a stroke. The big rise in core prices would appear to suggest that inflation is likely to be much stickier over the next few months that markets had originally been hoping, thus adding to the risk we could see the Federal Reserve, not only be much more aggressive on rate hikes, but keep those rates higher for longer. It’s certainly not a number that Fed officials are going to be happy with and will merely serves to reinforce Powell’s message that the Fed will keep at it until there is clear evidence that inflation is on a sustainable downward path. This number doesn’t do that and helps to explain the outsized reaction today in stocks, yields and the US dollar. The resulting spike in US 2-year yields has seen the Nasdaq 100 lead the way lower, led by the likes of Meta Platforms which is amongst the worst performers on both the Nasdaq 100 and S&P500. Bitcoin exposed stocks are also getting crushed as the crypto currency slips back towards the $20k level, having hit a 3-week high earlier today. Coinbase is lower, as is Riot Blockchain and MicroStrategy.  FX The pound got off to a decent start to the day moving well above the 1.1700 area after the latest wages numbers, saw average earnings including bonuses rise by 5.5% in July, while the unemployment rate fell to its lowest level since 1974 at 3.6%. More disappointingly, the fall in unemployment also coincided with a rise in the number of people who are long term sick, which rose to 21.7% and a 6 year high. Vacancy rates nonetheless remained high, despite falling by a modest 34k to 1.3m. All so far so good, however the hotter than expected US CPI reading saw these sterling gains unravel quickly, as the US dollar rebounded in anticipation of an almost nailed on 75bps rate hike next week, and then it’s a question of what comes after that? The euro also slid back sharply in the wake of this afternoon’s US inflation numbers as markets priced in the near certainty of 75bps next week, with the...

The US equities ended last week on quite a high note, and the latest market optimism could be explained by hope to see a second month of softening inflation in the US at this week’s CPI release. Due Tuesday, the US will reveal its latest CPI figure which is expected to have eased to 8.1% in August, from 8.5% printed a month earlier, and from the 9.1% peak printed the month before that. If the data is soft enough, or ideally softer than expected, the equities will likely continue pushing higher this week as well. If, however, the data is not as soft as expected, or worse, if we see a higher figure than last month’s read, then last week’s gains in equities will likely be quickly given back. In the FX markets, we saw a decent pullback in the US dollar index last Friday, following the 75bp hike from the European Central Bank (ECB), and news that Japanese are increasingly uncomfy regarding the abnormally stronger USD. The EURUSD tests the important 50-DMA to the upside, gold benefits from a broad-based pullback in US dollar, meanwhile crude oil is softish as high energy prices hit the prospects of economic growth, and global demand. Bitcoin traded at $22K during the weekend on overall positive sentiment, while the much expected Ethereum upgrade will happen around the 15th of September.

Equity markets end the week higher as risk appetites are back. Bitcoin bounces sharply to drag in more trend followers. Tuesdays CPI data point the highlight of the week ahead. Equity markets bucked a three-week losing run when they closed higher on Friday and completed a positive week for all the leading indices. Talk of 75 basis points failed to dent enthusiasm as investors flocked to all sectors including oil. Oil prices had taken a severe downturn last week as fears grew for the health of the global economy. But some further words of encouragement about supply cuts from OPEC+ and in-line economic data convinced oil bulls to return. The US SPR being drained even further was taken as a further bullish sign for oil as traders see it as needing replenishing sooner rather than later. Even Europe's energy woes could not dent the bullish enthusiasm and at least German electricity prices collapsed somewhat but are still sky high compared to this time last year. The ECB stepped up to the plate and swung for the bleachers when announcing its biggest rate hike ever, 75 bps, which seems to be the favorite number from central bankers these days. So is this rally the bottom or yet another bear market rally? Well, the last squeeze moved lower but failed to set a new low (so far). So the potential is definitely there for a bottom. But historically things don't really bottom in this type of environment.

In this week’s Live from the Vault, Andrew Maguire examines the unprecedented scale of the physical silver shortage that is draining COMEX inventories and causing havoc in the oversold, futures-driven silver market. The London wholesaler analyses the glaring disconnection between the physical and paper silver markets, evidencing investors capitalising on massive, risk-free arbitrage profit opportunity. Timestamps 00:00 - Start 01:10 - What is happening in these crazy silver markets? 07:55 - The similarities between the nickel and the silver markets. 12:45 - How does the situation in silver affect the gold price? 18:20 - The wholesale market - Andrew’s update. 27:30 - The short-term effects of the arbitrage process.

Economic contraction is unfolding – but how painful will it be? The deeper the recession, the better for gold. Let’s make it clear: an economic downturn is coming. We are already in a technical recession (GDP contracted in the first two quarters of this year), despite the White House’s attempts to change its definition. A full-blown recession is just around the corner and will likely come out next year. At this point, another question is more interesting: how long will the pain last? Or, how deep will the contraction be? Will it be a short and shallow recession like in 1990-91 or in 2001, or a long and severe one like the Great Recession? Or maybe a short but deep one like the pandemic recession of 2020? I don’t know . I forgot to take my crystal ball. However, I would exclude the last possibility, as the latest recession was mainly caused by the Great Lockdown – this is why it was so deep and short. This recession will be more normal – as long as recessions have anything to do with normality. Actually, this won’t be a normal recession, as it will be accompanied by high inflation, which implies that we will experience stagflation. This is a strong argument for a deep recession. Why? Well, the Fed is already engineering a recession (although Powell prefers talking about bringing demand and supply into balance) to slow inflation. Given how high inflation remains and how long the U.S. central bank has been in denial and inaction, it will have to continue its unprecedentedly large interest rate hikes. Such an aggressive tightening cycle could lead to a serious economic decline. This is also what history suggests. There was no period of such high inflation that didn’t lead to a severe recession. There was a long recession in 1973-1975 and later a double-dip recession in the early 1980s. The recession of 1990-91 was milder, but inflation was lower, while the Fed’s reaction to it was faster. Another argument that strengthens the pessimistic view is the size of monetary stimulus during the boom phase of this business cycle. The broad money supply increased by more than one fourth in 2020 in a response to the pandemic (see the chart below), as the central and commercial banks created trillions of dollars to tranquilize the population into accepting lockdowns. However, the higher the flight, the more painful the fall will be. Last but not least, there is a lot of debt accumulated in the economy. The public debt is $30.6 trillion, or 124.7% of GDP, and there is also the private debt, which is actually larger than the public. Thanks to recent declines, asset valuations are less stretched, but the financial system remains fragile. It’s true that banks are now in better shape than before the financial crisis of 2007-2009 and that they were rather unaffected by the pandemic. Hence, the replay of the Great Recession – when banks were severely hit, which resulted in a credit crunch – doesn’t have to occur. However, there is so much debt that hikes in interest rates and withdrawal of liquidity in the form of quantitative tightening – not to mention any sudden events – could trigger a financial crash or an economic crisis. What does it all mean for the gold market? Well, the mild recession, not to mention a soft landing, would be a relatively negative scenario for the yellow metal. It could still gain somewhat, but markets are forward-looking and when a recession is shallow, they would anticipate a quick recovery (which would rather support equities and other risky assets). The mild recession would also allow the Fed to stay relatively calm and to not fire all the monetary ammunition – while gold would prefer the U.S. central bank to go fully dovish. On the other hand, a deep recession would be much better for gold. During severe economic downturns, moods are really pessimistic, and risk aversion is high. Hence, investors shift into safe-haven assets such as gold. What’s more, the Fed would then break out all available weapons to avoid a full economic catastrophe, even in the face of high inflation. This would create excellent conditions for gold to rally. If a deep recession is accompanied by a financial crisis or sovereign-debt crisis, when confidence in a financial system and fiat money is ultra low, it would be a really perfect scenario for the yellow metal. Which scenario is most likely? Given how high inflation is and how (relatively) aggressive the Fed’s tightening cycle is in response to price instability – the federal funds rate is historically still low, but the increase from 0-0.25 to 2.25- 2.50% is huge in percentage terms (1800%) – I bet on a deep recession. It’s true that the boom...