Market Mayhem & Economy “Running Hot”

Much of the country has recovered or is in the process of recovering from last week’s severe Winter weather disturbance, but there is no rest for the weary in today’s financial environment, and as such, this week, market participants are facing all sorts of interesting dynamics.

There have been some remarkable movements in the markets over the last several days. From high flying tech stocks looking like they’re falling out of the sky to the rollercoaster ride that is Bitcoin, to yields on US Government debt continuing their surge higher, there has been no shortage of interesting price action.

Furthermore, the price action in the markets is screaming the word “inflation” from the rooftops, and I’m not using hyperbole when I write that either.

Let’s take just one example: The price of lumber.

Think for a moment about all of the property damage we had in the United States throughout 2020 with all of the civil unrest from the East Coast to the West Coast, think about the mass migrations from dysfunctional urban areas to the now booming suburbs & rural areas, think about all of the residential upgrades for the “work from home” lifestyle many Americans now find themselves living, think about all of the property damage we literally just had last week in conjunction with the severe winter weather, especially in Texas, and now, after spending a moment thinking about all of those things, check out the price of lumber:

Price is up from $250 in April of 2020 to over $1000 today!

Quite an expensive time for making necessary, unavoidable repairs, isn’t it?

Lumber is just one example, and the examples really do go on and on, and the overall point is this: Depending on what we’re talking about, price inflation is beyond rampant at this point in certain sectors of the economy, while in other sectors, amazingly, the talk is still of “deflationary pressures” by the mainstream media, however, I would argue that due to myriad ongoing global and national supply chain disruptions, haphazard shutdowns and inconsistent re-openings, continued travel restrictions, increased bureaucratic red tape at all levels of government for the private sector, and more, “deflation” is only really in the realm of “asset valuations”, for whatever that means, and not in the “real world”, much less for the bottom 90% of income/wage earners.

But wait, there’s more!

That’s right Silver Bugs, Stackers, and other Smart Investors because Fed Chair Jerome Powell gave some testimony to Congress yesterday, and what he said was rather shocking, especially for anybody on a fixed income or for people who are already feeling the sting of rising prices.

Let me just focus on one paragraph of his prepared testimony (bold added for emphasis and commentary):

*****

We have implemented our new framework by forcefully deploying our policy tools. As noted in our January policy statement, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace until substantial further progress has been made toward our goals. These purchases, and the associated increase in the Federal Reserve's balance sheet, have materially eased financial conditions and are providing substantial support to the economy. The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved. We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.

*****

There is so much in that one paragraph, and none of it is really any good for Main Street, USA. To say that the US economy and US markets are now totally top-down “command and control” is probably an understatement, especially when Powell says the Fed has been “forcefully deploying” its tools, which is code for “intervening in and rigging the markets as the Fed sees fit”. Notice too, the constant cheering of having inflation “moderately exceeding” 2.0% for “some time”! Here's the question: If the Fed and the Federal government understate inflation, and I think they do understate inflation by way of official policy, imagine how much pain there will be when inflation is actually above 2.0% by the Fed's own measure? Furthermore, Powell says the economy is a “long way” from achieving that inflation goal?

Yikes!

Has Powell seen the lumber chart above, that goes back ten years?

Also in that quite telling paragraph of prepared testimony, Powell is not only saying that the Fed’s printing press is going to continue to be used for buying up US Government debt and mortgage-backed securities until “substantial further progress has been made”, but the Fed will be purchasing “at least” at the current pace of purchases, which means the Fed may purchase even more!

Wow!

You can't make this stuff up!

In other words, no matter how one discusses inflation, whether it is an “increase in the money supply”, or whether it is “rising consumer prices”, or whether it is “whatever”, the signals are more than crystal clear: Inflation has arguably already been a problem, inflation is quickly becoming a huge problem right now, and very soon, inflation is about to become an emergency.

Besides, the "Green New Deal" sure is going to require a lot of copper:

And the price is up 115% from less than one year ago!

And it's going to cost a lot more to mine that copper, and to transport it, or for that matter, to transport anything:

Is $60 the new $40, or is this just a pit stop on our way to even higher oil prices?

The one single thing the mainstream is focused on for clues is the yield on the 10-Year Note:

What happens if yield hits 1.4%?

The rise in interest rates has taken the focus off of the US dollar:

All things considered, there has been little movement in the dollar index on a daily basis, but it might not be that way for long.

Especially if the stock market is in the process of correcting or even crashing:

No rest for the weary indeed, and the longer it takes the Federal government to get around to passing the next round of fiscal "stimulus", the wearier the markets will continue to become.

For now, however, market participants seem to think a huge stimulus package is pretty much a lock:

And if it's not a lock, well, the Fed has the market's back!

For now, the so-called "Fed Put" has shown to be effective, with the keywords being "for now".

Like the base metals, platinum has been on fire, year-to-date:

Platinum is up 15% since the start of the year, and in my opinion, it seems we've got both industrial demand and investment demand going on as deeper-pocketed investors see platinum as undervalued compared to gold.

Palladium carried the precious metals for years during the "capitulation stage" of the brutal bear market, and as such, palladium has been on the back burner for more than a year:

Excluding the market mayhem last February and March, of course.

The paper gold-to-silver ratio is rocking a 64-handle:

The $64,000 question, however, is this: Will the silver price catch-down to the price of gold, or will gold catch-up to silver?

It's really hard to see gold's daily chart as bullish in the short-term:

We've got a "death cross", a series of lower-highs and lower-lows, price action well below major moving averages, and the technicals are not screaming that gold is extremely oversold.

 And I wouldn't go around calling silver's daily chart "bullish" in the short-term, either:

If silver starts performing like other commodities have performed, however, the ability to scoop up physical for close to $30 will be the "good old days".

Thanks for reading,

Paul Eberhart

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Paul Eberhart
Paul Eberhart
Senior Market Analyst and Columnist

Paul Eberhart has been actively trading and writing about precious metals for more than a decade. A U.S. Army Iraq War Combat Veteran, he holds an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill.