Critical Report Due Out On Wednesday

Chairman Powell’s testimony before Congress this week painted a dire economic outlook which will include the continued contraction of the national GDP coupled with continued interest rate hikes.

During his testimony, it was evident that there was a subtle difference in his word track that was uncharacteristic and a dramatic change from his usual refined method.

The chairman made it clear that the Federal Reserve has one goal in mind above all others and that is to reduce the level of inflation. They emphatically stated that the actions of the Federal Reserve will most likely lead to a recession rather than a soft landing.

Yahoo finance captured his overall demeanor in a most articulate manner saying, “He said a recession caused by the Fed’s own monetary tightening remains a “possibility.”

A soft landing, with higher rates but a still-healthy economy, would be “very challenging” to achieve. And Powell said the Fed’s fight against inflation was “unconditional,” meaning nothing will stand in its way.”

The revisions by the Federal Reserve to their monetary policy most certainly would contract the economy and bring on a recession.

A recession is defined as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”

The last GDP report revealed that the United States had an economic expansion leading to a 6.9% growth in the GDP for Q4 of 2021. If advanced estimates for the GDP Q1 are correct it will indicate a decrease in the real gross domestic product (GDP) for the first quarter of this year.

The last occurrence of a contracting GDP quarter to quarter occurred during Q2 of 2020. However, the following quarter (Q3 2020) revealed a robust increase in national GDP.

This is why next week’s report is so critical. On Wednesday, June 29 the BEA (Bureau of Economic Analysis) will release the U.S. GDP first-quarter report.

According to the advanced estimate released on April 28, “Real gross domestic product (GDP) decreased at an annual rate of 1.5 percent in the first quarter of 2022, according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 6.9 percent.”

Currently, there is a high probability that the actions of the Federal Reserve will lead to a recession. The question is not whether or not the United States will enter recession but rather when the recession will begin and how long the recession will last.

Daily Gold Chart

While a recession can stabilize gold pricing, and higher inflation certainly creates a bullish undertone for the precious yellow metal, rising interest rates have become a primary focus on the future price of gold and has pressured pricing lower since March of this year.

Gold has declined just over 12% from the highs of $2070 in March to gold’s current pricing of $1828. While it seems as though there is strong support for gold at $1800 depending on how aggressive the Federal Reserve becomes in regard to further rate hikes.

Besides the GDP report due out on Wednesday, on Thursday the government will release its latest core inflationary numbers when the U.S. PCE price index report is published.

For those who would like more information simply use this link.

Wishing you, as always good trading,
Gary S. Wagner
The Gold Forecast

Wishful Thinking

Relax, folks. There isn't going to be a long recession, if there is one at all, and you're probably not going to lose your job, and inflation will be down below 3% by next year. The Fed’s got your back.

That's the story from the Federal Reserve’s incredibly optimistic projections released after the end of Wednesday's interest rate-setting meeting. I use the word “incredibly” deliberately, because these projections seem anything but credible. But we can hope.

Somewhat lost in the release of the Fed's 75 basis-point hike in the federal funds rate last Wednesday is that U.S. GDP growth will remain fairly positive this year, next year, and into 2024, according to the Fed’s latest projections.

The Fed now forecasts U.S. GDP will grow by 1.7% this year as well as in 2023, rising to 1.9% in 2024. Now those are down from the Fed’s March projections, to be sure, but they still remain above recessionary (i.e., negative) levels.

Likewise, the Fed is projecting that the unemployment rate will end this year at 3.7% and 3.9% next year, before rising to 4.1% in 2024. Again, those are worse than the March projections but not overly so, considering all the scare talk about how the Fed’s newly hawkish rate-rising policy will inevitably cause a recession and a jump in unemployment.

Meanwhile the Fed is also projecting that the PCE inflation rate will end 2022 at 5.2% before dropping in half to 2.6% next year and to 2.3% in 2024, again higher than its March projections but dramatically lower than where we are today at more than 8%.

How does the Fed plan to manage all this, you ask? It sees the fed funds rate reaching 3.4% by the end of this year and 3.8% in 2022, again above its March projections but a lot lower than what you would have expected, given that the yield on the two-year Treasury note is already well above 3%.

In other words, the Fed is merely playing catch-up to where the market has already been for a while.

All in all, I would say, a pretty positive story, a lot better than what we had been expecting. But how much of it can be believed? What the Fed is telling us is that it believes it can really engineer a soft landing, meaning only a moderate rise in the unemployment rate and no recession, at the cost of just slightly higher interest rates, at least compared to today’s inflation rate and current bond market rates.

In other words, the Fed says it can tame inflation back down to less than 3% all while leaving interest rates five percentage points below the current 8% inflation rate. Is that possible?

Meanwhile, what is President Biden doing for his part in trying to drive down inflation? Other than not interfering with Fed policy, which he claims is basically all he can do, he is blaming oil executives for the high price of gasoline.

Short of charging them with getting in bed with Vladimir Putin, he's laying the blame for high energy prices on their failure to explore and drill for oil, leaving out his administration's role in basically forbidding them to do just that and putting pressure, through the Fed and other means, not to lend them money in order for them to do so.

You would think Biden would have been happy that they are not drilling for oil, contributing as they are to the blissful carbon-free future he imagines. But he seems to believe he can have it both ways, namely no new oil production and low gas prices. But I guess that’s the same type of logic the Fed is using in trying to convince us it can whip inflation with a few interest rate hikes with little harm to the overall economy.

The market reaction to all this was fairly predictable. Right after the Fed rate announcement was greeted with euphoria on Wednesday, people woke up the next morning and said, “Hey, wait a minute. This can't possibly be true,” and the selling resumed with renewed fervor.

And why not? Can we take any comfort in what the Fed and our government are telling us, which is that after a dozen years of easy money, quantitative easing, artificially low interest rates, and massive fiscal and monetary stimulus, they can undo all that in a year or so without anyone being inconvenienced?

If only it worked that easily. If Powell wanted to be honest, he could have said, “Folks, there will be a lot of pain over the next couple of years to undo all we have done over the past decade, so brace yourselves for it.”

But people don’t want to hear that, especially in an election year. Although the market seems to know better.

Visit back to read my next article!

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

What All The Recession Talk Really Means

If you’ve been following along here over the past year, I won’t have to remind you that I have no problem telling it just like it is. And that includes the good news, and the bad news, about Bitcoin (BTC), cryptocurrencies in general, stocks, and the economy. You name it, and I try to be upfront and transparent.

In fact, in last week’s post, I gave you the grisly details behind the sell-off in just about every asset class. I showed you how much every major stock index was down for the year in gory detail. I then showed you how Bitcoin was a member of that dubious club.

I also got under the hood of what I consider to be the biggest factor right now, which is hammering stocks and Bitcoin: Inflation.

The fact is inflation is at nosebleed levels, and it’s got just about everyone in a tizzy. And with good reason: Inflation eats away at incomes and makes products and services super-expensive. And since inflation now stands at multiple decade highs, you ignore it only at your own peril.

But as bad as inflation is, I have to remind you that down deep, what really makes investors nervous is not inflation itself but the tool of choice that gets used to fight it: Higher interest rates. Continue reading "What All The Recession Talk Really Means"

Happy Halloween

The last week of October is likely to be an eventful one. Halloween is on Thursday, the last day of the month, and Major League Baseball will crown a new World Series champion. And, oh yes, the Federal Reserve will hold its next-to-last monetary policy meeting this year, at which it is expected to continue on its path of easing monetary policy in the face of not-so-terrible economic news that doesn’t appear to warrant another interest rate cut.

The Fed meeting begins on Tuesday and culminates on Wednesday afternoon at 2:00 EST, with a likely announcement that it is cutting its federal funds rate by 25 basis points for the third time in as many meetings. The Fed hasn’t cut rates this often since the financial crisis when the world economy and financial markets looked like the world was coming to an end. Now we’re looking at the U.S. economy weakening from about a 3% annual growth rate to about 2%, and the Fed is acting like its 2008 again.

Of course, the Fed may not be looking to do another rate cut for economic reasons, but because it has pretty much painted itself into a corner by practically promising the markets that yet another rate cut is coming. What would the market’s reaction be if the Fed decides on Wednesday to leave rates unchanged? No doubt it would be ugly, which is why I’m siding with the consensus market view that the Fed will indeed lower rates this week, whether it’s “data-driven” or not.

Speaking of data, Continue reading "Happy Halloween"

What If They Had A Recession And Nobody Came?

There are two main constituencies in the U.S. that are hoping for a recession. The financial markets, both stocks, and bonds seem to have a vested financial interest in there being one.

For the bond market, which has been the biggest rooter for a recession, a weak economy means lower loan demand and lower interest rates, which means higher bond prices. For the stock market, a weaker economy, although not necessarily a full-blown recession, promises more accommodation from the Federal Reserve and, therefore, lower interest rates, which generally translates into higher corporate earnings and, therefore, higher stock prices.

The Democrat Party and its allies in the press naturally want a recession simply because it makes it less likely that President Trump will be re-elected. So they are rooting strongly for a recession, although they can’t actually come out and say so.

The recession lobby got some fresh ammunition last week when the Institute for Supply Management’s purchasing managers’ indexes for September came out. They were some of the worst in years, which ignited a rally in the bond market.

On Tuesday, the ISM manufacturing index slipped further into contraction territory, dropping more than a point from 49.1 in August to 47.8, its lowest level since June 2009, during the Great Recession (there’s that word again).

Unfortunately for the pro-recession crowd, a lot of the rest of the economic numbers aren't telling the same story. The ISM’s index for the services sector – which covers about three-quarters of economic activity – also came in lower than expected, dropping nearly four points from 56.4 to 52.6, its slowest pace in three years. But it remained well in expansion mode (i.e., over 50). That part of the story got little attention. Continue reading "What If They Had A Recession And Nobody Came?"