Stock Market Assigns More Power to the Fed Than Gold Bugs Do

A frustration of dyed in the wool gold bugs is that a debt soaked system moves forward on little more than the confidence that all will remain as it has been. This confidence focuses on the Federal Reserve and it’s ability to inflate the system when needed.

But the flip side of that ‘in the Fed we trust’ mindset is the very real fear instilled in market participants (and implied fear programmed into their machines) when the Fed is forced by the very inflation it created to attempt to destroy its inflated Frankenstein monster at all costs.

“Forced”, you say? Yes, forced I say. From this February 10th post:

The bond market – in its long-term yields and especially short-term yields (the 2yr, green, has been demanding action since late last summer) – is demanding a rate hike now, and I don’t think the Fed will find it comfortable waiting until mid-March and the next FOMC meeting.

A post a day earlier included a chart showing the Fed’s harebrained ZIRP (2022 style) along with the ramping 2 year Treasury yield. If a lowly blogger and market report writer could see it why had not the big eggheaded brains at the Fed seen (or acted upon) it?

The Fed had already been indicated to be late getting off its ‘transitory’ inflation stance, but when the short end of the bond market really began to rebel (with the 3 mo. T-bill joining the 2yr) the Fed did the predictable and altered course in a much more loudly hawkish direction. In tow with that came the mainstream financial media, the algos, black boxes and HFTs.

And so it is still ‘in the Fed we trust’, only going in the other direction. The collection of casino patrons, machines, day traders, Ma, Pa, newsletter wiseguys and whoever is left over is completely in tow with the Fed, with confidence that it means what it says.

What they should remember though is that the Fed was late (proven at nftrh.com in real time) to its hawkish stance and today with Jay Powell reiterating the Fed will do whatever it takes to slay its inflated monster, they will probably over shoot to the downside because as often repeated, the Fed will not willingly incinerate itself in an inflationary bonfire. Better to tank asset markets – including inflation beneficiary markets – and ride to the inflationary rescue some day in the future.

But to a gold bug, or at least the kind of gold bug I am, the whole thing is illegitimate and a patience play in the run up to the end of the system of ‘Inflation onDemand’ as I’ve been calling it for the better part of 2 decades. And that is the point; it’s 2 decades and counting since my personal alarms went off and nearly that long since I started to realize that illegitimate may be terminal, but terminal has no clearly defined end point.

Hence, what the most ardent and ideological gold bugs refuse to factor – touting gold 24/7, 365 as they do – is that confidence in the system is implied to be intact by the very fact that every time Powell opens his mouth the markets do the expected. There is little in the way of contrarian value during this slack summer season when it could be argued that market reactions are more machine driven than human driven anyway.

Frankly, I wish I’d shorted the day before Powell and every other Fed jawbone ate a mic this year, but being wired contrarian I was unable to do so. But that does not change the fact that the market has been incredibly predictable. So predictable that blue pill gulping Fed followers have it right (Fed’s hawkish, stay out of the way!) and contrarians – including the ultimate contrary contingent, gold bugs – have it wrong.

Rest assured, Labor Day will pass, summer will end, the September FOMC and its ‘in the bag’ .50% or .75% rate hike will pass and at some point ‘contrarian views’ will again be of value. Especially since the Fed has proven itself tardy to important macro market/economic turns.

But the point I’ve been making all along – perceived by some bugs as picking on them (okay well, I give you that) – is that you’ve got to know the casino you’re playing in and what its rules are. This casino still has implied confidence to the Fed. The tardy, inept and ultimately system-damaging Fed. But for the moment it is what it is. You can have a pure, even correct view but it’s best not to force it upon the markets at any given time. That leads to disaster. The markets will come around and unless my headline of last December is wrong, there’s still a shot that it will come around in 2022.

Oh and unlike gold promoters, if 2022 ends with gold still in the dumps I am going to put up another headline stating what turned out to be my incorrect view. If you can’t be honest with yourself and others you can’t deal with the markets effectively because you simply lose your way in what is, after all, an already complex situation with many variables, psychological and otherwise.

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