With the Democrats looking more than likely to win the Senate in the Georgia run off, markets, and inflation proxies have moved accordingly.
Gold is firmly back above USD1,900 per Troy ounce. This is not just reflected in the Gold price however. The chat and the narrative around other markets is firmly focused on higher inflation. Democrat control has pushed hopes of extra stimulus and spending even higher. The Goldman Sachs US Financial Conditions index is now the easiest ever:
US Breakevens, an important inflation indicator, are also moving higher:
At the same time, equity valuations continue to appear very stretched versus the past, and versus conventional wisdom. Tesla for example, is now worth almost as much as nearly all the global automakers put together, which combined have far more revenue:
Furthermore, Bitcoin and other cryptocurrencies have been soaring higher. They key reason can be seen in the below chart. With the new Covid-19 variant, and slower than expected vaccine rollout, coupled with a more interventionist Democrat president and a potential majority in both houses of Congress, it is unlikely the below trends will be reversed soon.
And it is not just in the US:
With this trajectory, it seems rather improbable, though not impossible, that all these inflation proxies, especially gold, will fall dramatically. This chart from Charlie Bilello sums it all up rather nicely:
All this bodes well for gold investors. Yet, nearly everyone is on the same page, with similar positioning. As US General Patton once remarked:
“If everyone is thinking alike, then somebody isn’t thinking.”If inflation does runaway too quickly, the conventional wisdom is that interest rates would have to move higher in order to counter the potential danger of hyperinflation. But with central banks actions and words in recent years this is no longer a certainty.
Indeed, they have been desperate for higher inflation. If it overshoots the usual 2% target will they react so quickly to calm it down, given how hard and long they have fought to secure it? This comment from the Federal Reserve’s Charles Evans was telling:
“I welcome above-2% inflation. Frankly, if we got 3% inflation, that would not be so bad… it’s very difficult to imagine out-of-control inflation, even with the large debt that fiscal authorities have been running up”.
Comments such as these, even a few years ago, would be deemed almost blasphemy in world of central banks. It all points to even more extraordinary policies to deflate debt and devalue currencies for as long as possible within the Western world. This seems to be the only plan of action.
In the US at least, the anti-establishment movement has been hit hard. Trump has now lost the House, the Senate and the Presidency in a few short years. Fiscally conservative and anti-central bank Republicans have been totally marginalised even more. How quick that occurred from the days of the Tea-Party which was not so many years ago.
Elsewhere, other major economies are still increasing intervention both politically or economically. The days of smaller government, less government borrowing, and letting markets price assets themselves are finished for the time-being at least.
So, for the next few months keep an eye for inflation. Whether it is in the supermarket, or, when possible, restaurants, the entire complex looks to move higher. And the central banks have told the world that not only are they happy if it overshoots, but they will also do little to get it under control.
For the past ten years, the world has seen asset price inflation. Gold, stocks, house prices, cryptos but little has filtered through, at least in official statistics, to basic living costs. Wages have stayed low. Food inflation has remained low, and technological progress, as well has demographic deflationary forces have coalesced to keep the basic cost of living, while still high, from spiralling rapidly away.
But in the soft commodity space there are signs that this will no longer last:
As can be seen from stocks, property and crypto, when there is extra cash in the system, it has to find a home. There is a chance, that with valuations in those three assets already at eye-watering highs, investors will look to additional assets to invest in. If there is an influx of cash into soft-commodities, and this then begins affect real people and their disposable incomes, then it will be very interesting to see how long central bankers can really let inflation run for, and how hot they can let it run before a potential reckoning arrives.