Crypto crashes, out-of-control inflation in Europe and record gold purchases

This week, the news has been marked by a crisis of confidence in the entire cryptocurrency sector after the spectacular fall of the exchange platform FTX. This newsletter will not return to this event, which was widely reported in the financial press. Our goal is not to pursue this particular market.

However, we can logically expect this new “black swan” to further complicate matters in the markets, which will have to deal with a liquidity problem related to margin calls caused by the victims of the crypto crash. These margin calls are likely to affect all paper assets and make future sessions uncertain.

However, one key element is protecting the indexes from a decline: the number of short positions open in the SPX has reached a record high. These peaks of pessimism very often coincide with market reversals. “Market Makers” love this type of setup to cause a “squeeze” when many Put positions are open.

Therefore, the markets’ reaction to the fallout from the crypto crash is likely to be difficult to read.

The next event of the week is the release of the latest US inflation figures.

The CPI index came in at a lower than expected level in October, at 7.7% over the year.

“I think we’re headed for inflation” is the favorite catchphrase of most observers and portfolio managers in the middle of this 2022 fall.

Several indicators support this view:

The decline in shipping costs is accelerating, especially in the rotation of ships between China and Western countries. This is a sign of the economic slowdown, but in these figures we can also see the first signs of an economic embargo against Chinese products. During recent interviews with mining producers, I felt concerned about possible trade restrictions with China, in a geopolitical context that will undoubtedly worsen in the coming months.

Therefore, this indicator is the cumulative effect of the beginning of de-globalization and a global economic slowdown. De-globalization is not deflationary, on the contrary. That said, a slowdown in the global economy would be very negative for the price of certain commodities.

Among these raw materials, those related to the construction sector are the most concerned. Especially since this sector has been one of China’s growth engines in recent years.

The price of timber has returned to these pre-Covid levels:

It is true that residential real estate figures in the United States are currently experiencing a staggering decline. Housing starts are falling at an unprecedented rate, even at the height of the 2008 housing crisis.

But the real estate sector is not the only one suffering from the decline in activity.

The used car market is posting its biggest annual decline since 2008 this month, after rising last year:

The Fed seems to have succeeded: the demand for houses and cars in the United States has literally disappeared!

Will this be enough to keep inflation down for a long time? If the question may arise across the Atlantic, we are far from seeing any decline in inflation in Europe.

The PPI index, which measures the prices paid by European producers, is rising everywhere. This is a big difference with the United States, where this index, on the contrary, is in the process of stabilization.

Even in Italy, the PPI index crosses the 50% mark for the first time, which warns of an uncontrolled increase in consumer prices in the coming months:

In addition to the devastating effects on activity, persistent inflation is also increasing the losses of European savers.

This is even more evident in Germany: even if rates have risen to 2%, inflation is rising faster and real rates continue to collapse. The ECB’s lack of response to inflation is turning into a financial squeeze for German pensioners and savers, with negative real yields worsening further.

Fixed income managers will have to explain to their clients how an investment considered “risk-free” represents such large losses. Let’s take the example of a client who has invested €10,000 in a European government bond product (life insurance, for example) which yields very little (less than 2%, because at the time he signed this contract, rates were very low). He finds that the unrealized losses from his investment are large at the end of the year. His financial advisor will reassure him by explaining that if he doesn’t sell, he won’t realize his losses, that he will still get his (very low) bonus of a few tens of euros and will receive 10,000 euros. after 10 years. But the adviser will probably be careful not to tell him that at the current rate of inflation, this €10,000 won’t be worth much in real terms in 10 years. Nor will it tell him that an equivalent bond product issued today would yield much more because rates are now so much higher. It’s just that the customer won’t be able to switch from one product to another without realizing his losses on his old contract! The client will come out of his interview with the impression that he was deceived by his adviser, while the latter had nothing to do with him. He is the victim of an absurd monetary policy, which damages the relationship of trust that he had so much trouble to establish with his client!

This crisis of confidence now extends to the very value of the European currency.

There are more doubts about the situation in Europe.

The ECB has not yet reduced its balance sheet. The program of quantitative easing it hasn’t really stopped yet. What will happen when Europe goes into recession? Will the ECB be forced to launch a new QE? How not to consider, then, that the only result is hyperinflation? This is the risk that the European monetary authorities are taking. Such a situation would be dangerous, because it would threaten the social and political cohesion of all countries in the eurozone.

Faced with these risks, it is logical to see gold in euros jump above the uptrend line. The price of an ounce of gold is attacking its next resistance, at €1750.

In the physical gold market, the Perth Mint sold a record 183,102 ounces of gold and 1,995,350 ounces of silver in coin and bullion form in October. A historical record in Australia!

Australian real wages are falling, on track to levels not seen since 2008. And forecasts do not point to a significant rebound from those levels.

Perhaps to cope with this loss of real income, many individuals have decided to invest part of their savings physical gold and silver.

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