John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website DollarCollapse.com in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.
The US just reported that core PCE, “the Fed’s favorite inflation measure,” accelerated in April. This worsens the central bank’s dilemma: Growth is clearly slowing, while inflation, already at crisis levels, is rising.
Luckily, the genius chart makers at Incrementum AG are on hand with a new “In Gold We Trust” report that addresses this very issue. Here’s a short excerpt from the much longer report:
If you search the dictionary for the meaning of showdown, you will get the following definition:
1. “the laying down of one’s cards, face upward, in a card game, especially poker.
2. a conclusive settlement of an issue, difference, etc., in which all resources, power, or the like, are used; decisive confrontation.“
In our opinion, the term showdown is an apt description of the current situation, in which economic, political and social developments are on the brink of a fundamental change of course.
Jerome Powell’s insistence that inflation was merely transitory is now as legendary as Christine Lagarde’s belittling description of the inflation surge as a hump. Not surprisingly, confidence in central banking is in a steep decline.
With the economic slowdown now underway and inflation rates still clearly too high, the monetary policy trilemma – price stability vs. financial market stability vs. economic support – that we warned about is now a reality.
The strongest and fastest interest rate hikes in the industrialized nations in over 40 years have already claimed their first victims. The pension fund debacle in the UK, the closure of the Blackstone Real Estate Income Trust, various calamities in the crypto sector, – above all the spectacular FTX bankruptcy – are just a few examples of the consequences of the abrupt interest rate turnaround.
In March, another economic problem front opened up when Silicon Valley Bank (SVB ) collapsed without warning, followed shortly by Signature Bank. In early May, another regional bank, First Republic, followed suit. We believe it would be too simplistic to blame the regional bank collapse solely on poor management or on their exposure to the stumbling technology sector, which is known to be highly interest rate sensitive. Three of the four largest US bank failures in history took place in the past few weeks; only the collapse of Washington Mutual in September 2008 caused significantly higher losses, both in nominal and real terms.
All in all, more than USD 500bn has already had to be written off since the beginning of March. This is a clear warning signal that the financial system is much more fragile than generally assumed. And on this side of the Atlantic, too, a major bank has already had to pull up stakes, and with the venerable Credit Suisse, it is not just any bank that has been hit. In mid-March, the bank was sold off to UBS in a smoke-and-mirrors operation.
For all those familiar with the Austrian Business Cycle Theory pioneered by Ludwig von Mises and Friedrich August von Hayek, it is no surprise that the radical turnaround in interest rates is causing acute pain.
Financial history is full of precedents where flooding the markets with liquidity triggers an artificial boom. When the artificial stimuli are withdrawn, the misallocations are ruthlessly exposed and then cleaned up by painful price collapses, insolvencies, and recessions. “Only when the tide goes out do you discover who’s been swimming naked,” is how Warren Buffett so aptly described this phenomenon. And there is much to suggest that many more swimmers will turn out to be nudists. In this context, we particularly recommend our chapter on the crack-up boom in this In Gold We Trust report to interested readers.
Moreover, money supply growth in the US, calculated on a monthly basis, is negative for the first time since the 1950s, and on an annual basis for the first time since the Great Depression. As the proponents of the Austrian Business Cycle Theory point out, the flattening of money supply growth is already enough to end the artificially created boom and the bubbles on the markets. A declining money and credit supply is a sure sign of profound economic dislocation.
For us, one thing is certain: The soft landing much invoked by the Federal Reserve seems to become less likely by the day. The coming showdown will reveal whether the Federal Reserve is actually holding the strong hand it claims to be holding, or whether it will be called by the market and its strategy exposed as a bluff.
This leads us to the central topic of our In Gold We Trust report, the showdown in the gold price. We are convinced that the monetary and geopolitical situation as well as the chart development of the gold price suggest that a showdown in gold is imminent.
Central banks have been net buyers of gold since 2009. This momentum has accelerated significantly again in the past year. In 2022, central banks increased their purchases by 152%, to over 1,136 tons. Foreign exchange reserves, on the other hand, fell by a record USD 950bn. Asian central banks again made the bulk of gold purchases. For the first time in many years, China also made an official appearance as a buyer. It is noteworthy that with Qatar, Iraq, and the United Arab Emirates, three major energy exporters are now among the top ten gold buyers. We expect that central bank demand will become a key driver of this gold bull market.
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