Central Bank Incompetence Sparks Damaging Boom-Bust Cycles

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Another tumultuous week of trading in asset markets is raising hopes for a peak in the U.S. dollar and a bottom in precious metals.

The Federal Reserve note spiked again versus the euro and other troubled foreign currencies on Monday before pulling back sharply mid-week. Metals markets moved predictably in the opposite direction.

As of this Friday recording, gold is registering a weekly gain of 1.5% to bring spot prices to $1,675 per ounce. Silver is trading well above its low point from earlier in the week and currently comes in at $19.34 an ounce – also up 1.5% since last Friday’s close.

Platinum prices are unchanged on the week to trade at $875. And finally, palladium is leading the pack with weekly gain of 3.8% to trade at $2,226 per ounce.

Markets continue to be rattled by hawkish Fed pronouncements that defy deteriorating economic data. The story central bankers have been telling with aggressive rate hikes is that the U.S. economy – especially the jobs market – is running hot.

But the latest GDP report released Thursday confirms that the economy is shrinking. The final revision to gross domestic product for the second quarter shows it declined by 0.6%. That’s two consecutive quarters of negative GDP growth.

And in the third quarter, trillions of dollars in wealth have been erased from stock and bond markets amid relentlessly rising rates.

The extent of the damage that will be inflicted on the housing market remains to be seen. But mortgage rates recently spiking to as high as 7% translates into a massive drop in affordability – which will translate into a massive plunge in buying until prices correct. Most experts predict a double-digit drop in average home prices.

What have Jerome Powell and company gotten themselves into? Longtime Fed watchers are perplexed at the Fed’s manic efforts to cool an economy that is careening toward a deep recession.

Obviously, central bankers are trying desperately to restore their inflation-fighting credibility. They became a laughingstock after so wrongly and stubbornly insisting inflation was transitory and leaving ultra-loose monetary policy in place for way too long. The markets wised up to the reality that the Fed doesn’t take its mandate to promote price stability the least bit seriously.

Now the Fed is using monetary blunt force to try to command the respect of investors. But by hiking rates faster than market were prepared to bear, the Fed is demonstrating that it simply lacks any ability to competently set interest rates.

Instead of smoothing out the business cycle – like economic textbooks state central banks are supposed to do – Fed policymakers are amplifying the boom-bust cycle. They inflate asset bubbles with artificial stimulus, then prick them when they capriciously decide to take away stimulus. And sometimes with disastrous results on both ends of the deal.

Of course, one of the main arguments for replacing the classical gold standard with a fiat standard controlled by central bankers is that gold causes boom-bust cycles. Central planners overseeing the economy would tame the animal spirits and foster stability. Or so we were told.

But under the discipline of a gold standard, debt-fueled excesses in markets and in government spending never reached the epic proportions they have under the centrally managed fiat currency regime.

At a time when the Fed’s failures have never been more obvious, it is ironic that the Federal Reserve note version of the dollar appears to be stronger than ever – at least when measured on foreign exchange markets. The U.S. dollar’s appreciation against the euro, the yen, and other fiat currencies has masked the extent to which it is falling in real terms.

MRCTV recently put headline dollar strength into perspective:

MRCTV: Since 2020, inflation has added $961 per month to the average household’s preexisting expenses. Which equates to $11,532 a year, or nearly 19% more for the same standard of living. One must remember, this is for U.S. price increases so far. Now it’s possible that the green agenda meets Ukraine fandom, economic self-destruction of many Eurozone nations, and the concomitant devaluation of the euro and European national sub currencies could actually promote the U.S. Federal Reserve note, also known as the dollar, wink, wink. Into a relatively safer position, making it look like a safe haven. But the U.S. government mandates taxation and reckless favoritism have crushed American productivity. So, the old playbook for the U.S. economy looking brighter than others, might not be in the cards.

The Fed made millions of Americans poorer through inflation and is now in the process of potentially making millions jobless as the economy craters under the weight of higher rates.

Of course, at some point central bankers will reverse course and flood markets and the economy with stimulus again. Fed apologists will herald them for coming to the rescue. In reality, they will just be stimulating the next wave of inflation.

The Fed’s current tightening campaign has decimated many investors’ portfolios and left precious metals bulls frustrated. But gold has, in fact, held up better than stocks and bonds. And silver in recent weeks has begun to show signs of relative strength.

When markets get wind of the Fed’s impending dovish turn, the U.S. Dollar Index will likely break sharply to the downside. And amid a bad economy, precious metals could supplant equities as the premier asset class to own among investors who don’t want to fight the Fed.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

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