Andy Krieger's Thoughts on the Market - 11 October 2023

Today’s write-up will be a brief update on some recent market developments. My next write-up will address a variety of market developments in greater detail.

First, I want to touch on gold. In my “Thoughts on the Market” of April 27, 2023, I wrote that gold was getting ready to start a corrective cycle, with an anticipated sell-off towards $1800 per ounce. I thought a 10% correction would be enough to rebalance the market and get us set for the next major rally. We finally hit my buying zone last Friday, the 6^th of October, when it reached $1810. I have covered my shorts, and I am now expecting the anticipated rally to develop. Overall, I think that the mid-$1800’s are a great buying zone for a move that will likely surprise many people with its eventual force.

Otherwise, we are seeing massive volatility in the fixed income markets. In my “Thoughts on the Market” of August 8, 2023, I wrote that I wouldn’t be surprised to see a sharp move higher in the 30-year yields towards 5.3%. I have to confess I wasn’t expecting a 22% move up to 5.05% in less than two months. I thought a move of this magnitude would take longer, but I think that we might still reach the 5.35% level – a level we haven’t seen in over fifteen years – after a period of consolidation and corrective price action.

Adding to the pressure in the bond markets is the fact that the overall fiscal situation in the U.S. is very uncertain. Congress can’t get out of its own way, and their infantile divisiveness would be comical if it weren’t so important. The bitter fighting and utter lack of cooperation is not serving our country well. The U.S. will soon be paying annual interest on its debt of $1 trillion dollars, so we need our elected officials to take the budgetary process more seriously and look at the broader picture. Given the size of our economy and the robustness of our financial system, this should be manageable – although difficult -- but the paralysis in Congress could make this a daunting task.

The Fed is largely handcuffed from stepping in to provide massive liquidity and buy bonds due to its many years of addiction to printing money at every sign of trouble. I warned about the dangerous path the Fed was setting on in my writings of February 2020, and I have continued to warn about this. The Fed has sown the seeds of inflation, and the seeds are finally sprouting. When we were in a global disinflationary cycle, the Fed’s money-printing habit was manageable. We are no longer in such a cycle, and the Fed is now trapped. The situation in Europe is even worse, as people are sitting on trillions of euros of paper with zero or negative interest rates, but that is a discussion for a different day. My concern here is to address the situation we face here in the U.S.

The Fed needs to prove that it is serious about fighting inflation, and that means that rate cuts will be on hold for a very, very long time – unless the Fed is willing to tolerate a higher base inflation rate in order to avoid a catastrophic financial crisis. It also means that the Fed is unlikely to provide a near bottomless pit of buying power to absorb the increasing levels of government bond issuances that we are facing. Inflation is an ugly, insidious infection that hurts the people who can least afford to handle it. We are already seeing protests here from unions and workers due to the current levels of inflation, but this will worsen over time if the rate of inflation stays at 3%, or higher.

For retirees, this is a rough pill to swallow. $1,000,000.00 in retirement savings today is worth around $480,000 in twenty-five years with a 3% annual inflation rate. Most pension programs are heavily weighted towards equities, so a major sell-off in equities over the coming years would be a very rough scenario for many people who have worked so hard to amass their retirement savings. Given my concerns about a possible equity sell-off, I am afraid that we might face some pretty rough times ahead.

In the currencies, we have seen some wild corrective price action recently, but my overall forecasts remain intact. I still expect some continued dollar strength, with most currencies weakening at a faster pace than the yen. Eventually, the yen will become the king, but it is not yet time. The speculative market is extremely short yen, but it will take a while before the speculators are forced out of their positions on a large-scale basis.

In the equity markets, we are seeing some massive divergences among the individual stocks. The indices are showing some early signs of peaking, but it is premature to say a major sell-off has begun. There are some obvious technical levels, such as 4200 in the S&P’s, that the market needs to crack, so I remain cautiously bearish for now; although we would easily become very, very bearish depending on developments over the coming weeks.

The economy remains robust, and the labor market is still tight. The Fed has some serious work to navigate this tricky scenario, and we have some new wild cards to consider. The conflict in Israel has been extremely localized and contained so far, but it could easily spread. That could have a major impact on the oil markets, and the monetary authorities are very cognizant of this. If for any reason crude oil breaks above $100/barrel, then we will be in for a wild market ride in nearly every sector.

I will write again soon. In the meanwhile, I wish you all the best of luck.

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