Month: May 2022

MoneyWeek/Merryn Somerset Webb/5-23-2022

“I’m not often glad I am no longer the young person in the room, but this month I am. If you have only been knocking around in markets for, say, 15 years, you are seeing the collapse of everything that you have been told is true and have observed to be true about markets.”

USAGOLD note: As the new verities fall one after the other and Somerset Webb returns to an old verity saying that what is new to most market participants is actually old and a return to the 1970s. “With that in mind, ” she says, “hold gold.” But that is the bottom line in a very interesting longer analysis of the economic times at the link. The Misery Index – the combination of inflation and unemployment – became the poster child of the stagflationary 1970s.  As it rose, so did the price of gold, as shown in the chart below.

The Misery Index and the price of gold
(% change from year ago,1970s)

Sources: St. Louis Federal Reserve [FRED], ICE Benchmark Administration, Bureau of Labor Statistics

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Bloomberg/John Authers/5-20-2022

“It’s very unlikely that the Fed will blink this time.… It needs share prices to fall enough to influence behavior, which means that policymakers need this to turn into a true bear market, and not like one of the 20%-ish declines that were followed by rescues and resumed exuberance. It needs to avoid disorderly conditions that could create systemic problems, and a serious crash that would drive a recession.”

USAGOLD note: The difficulty comes in controlling a panic once it begins, particularly if the Fed’s stated intention is to stand aside. Authers cites the comment from Kansas City Fed President Esther George: “I think what we are looking for is the transmission of our policy through markets understanding, and that tightening should be expected. It is one of the avenues through which tighter financial conditions will emerge.” If that is the consensus view at the Fed, it might end up with more than it bargained for. Wall Street’s memory is notoriously short, but some will remember that the Fed’s tightening into a slowdown in the late 1920s instigated the crash of 1929 and the subsequent full-scale depression.

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