Gold and the oil price are now showing signs of an inflation and doomsday hedge, as inflation remains sticky at 12 year highs, unemployment could spike with the oil price. Which is stagflation. Central Banks rate pauses and cuts would only exasperate the problem.
Central Banks globally, although not all, are starting to go into a wait-and-see pause cycle of interest rate hikes. Which up to this point, they have been offering very little guidance and in all honestly, have been nonsensical in their day to day and monthly rhetoric. Bank of England would have to be the worst at this point, as far as credibility goes, while the U.K. is going through the worst inflation in 40 years, the BoE members are making less and less sense. Even advising on cutting rates, which is bizarre commentary to say the least. We are now poised to enter a period of stagnation, as discussed in this post, unemployment is beginning to pick up while inflation, even without the oil price being its primer, is absolutely imbedded into the global economy. The bank bailouts were just that, bailouts, not stabilization of markets per se, as the Federal Reserve opened up its balance sheet to take 'toxic' assets and flooded $300 million into a slew of banks (commercial and investment) in less than a month. The overall balance is closer to its 2020 highs of $9 Trillion.
Thus, bond and FX markets have picked up the instability of these bailouts in the shadow of inflation. The hope was a peak in inflation that has not really occurred, otherwise we would have seen a sharper decline in inflation numbers. And this has yet to occur. Rather, as Chart 1 shows, the oil price has dramatically returned to its bid position as has gold, which is both an inflation and doomsday hedge.
Chart 2 is interesting as it shows the U.S. inflation rate (bar chart) oil price (white line) and the unemployment rate (blue line) over a period of 12 years. As you can see the inflation rate is running at over a decade highs, with the oil price at 7 year highs, while the unemployment rate sits at 12 year lows; keeping in line with the low unemployment is fascinating. Considering when oil did collapse within the pandemic of 2020, the unemployment rate spiked. In turn what could be argued is that record low interest rates and assisted stimulus programs have artificially kept unemployment down over the last 10 years.
Of course, this is about to change, oil is now staying above $80 a barrel, inflation rate is sticky and the unemployment rate is beginning to tick higher. As Wall Street starts to forecast a recession and even rate cuts for 2023, as mentioned the analysis is odd, unless oil collapses to $50 a barrel and inflation crashes. So far, its been very illusive.
Stagflation is still the call for 2023
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