This week the news is marked by the crisis of confidence in the entire cryptocurrency sector following the spectacular fall of the FTX exchange platform. This bulletin will not return to this event, which has been extensively commented on in the financial press. Our goal is not to follow this particular market.
However, we can logically expect this new “black swan” to further complicate matters in the markets, which will face a liquidity problem related to margin calls caused by the victims of the cryptocurrency crash. These margin calls are likely to affect all paper assets and make future sessions uncertain.
One important element, however, protects the indices from a decline: the number of open bearish positions on the SPX has reached a record high. These pessimistic peaks very often coincide with market rebounds. Market makers love this type of setup to trigger “squeezing” when too many “Put” positions are open.
The reaction of the markets to the consequences of the collapse of cryptocurrencies is therefore likely to prove difficult to read.
The other event of the week is the release of the latest US inflation data.
The CPI index came out below expectations in October, at 7.7% over one year.
“I think we are on top of inflation” is the key phrase of choice for most watchers and portfolio managers in mid-fall 2022.
Several indicators support this view:
The decline in shipping costs is accelerating, especially on ship rotations between China and Western countries. This is a sign of an economic slowdown, but in these figures we can also see the first signs of an economic embargo on Chinese products. During recent talks with mining producers, I felt concerned about the likely trade restrictions with China, in a geopolitical environment that will no doubt deteriorate in the coming months.
This indicator is therefore the cumulative effect of the onset of deglobalization and a global economic slowdown. Deglobalization is not deflationary, on the contrary. That said, a global economic slowdown would be very bad for the price of some commodities.
Among these raw materials, those related to the construction sector are the most interested. 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 the residential real estate figures in the United States are currently experiencing a steep decline. Initial housing volumes are plummeting at an unprecedented rate, even at the height of the 2008 housing crisis.
But the real estate sector is not the only one affected by the decline in activity.
The used car market is experiencing its largest annualized decline since 2008 this month, following last year’s surge:
The Fed seems to have achieved its goal: the demand for homes and cars in the United States has literally disappeared!
Will this be enough to lower inflation for a long time? If demand can arise on the other side of the Atlantic, we are far from seeing a decline in inflation in Europe.
The PPI index, which measures the prices paid by European manufacturers, is rising everywhere. This is a big difference with the United States where this index is, on the contrary, stabilizing.
In Italy, the PPI index even exceeds the 50% threshold for the first time, announcing an uncontrolled increase in consumer prices in the coming months:
In addition to having devastating effects on business, persistent inflation is also increasing the losses of European savers.
This is even more visible in Germany: even though rates have risen to 2%, inflation is rising faster and real rates continue to plummet. The ECB’s lack of responsiveness to inflation is turning into a financial repression for German pensioners and savers, with a further deterioration in negative real yields.
Fixed income managers will need to explain to their clients how an investment that is considered “non-risky” has such large losses. Let’s take the example of a client who has invested 10,000 euros in a European government bond product (life insurance, for example) that makes him very little (less than 2%, because at the time he signed this contract, the rates were very low). He discovers that the unrealized losses on his investment are significant at the end of the year. His financial advisor will reassure him by explaining that if he does not sell he will not realize his losses, so he will continue to receive his (very low) remuneration of a few tens of euros and will receive his 10,000 euros in after 10 years. But the adviser will probably be careful not to tell him that at the current inflation rate, these 10,000 euros won’t be worth much in real terms in 10 years. Neither he will tell him that an equivalent bond product signed today would yield much more, because rates are now much higher. Except that the customer will not be able to switch from one product to another without realizing his losses on his old contract! The client will leave the interview with the impression of having been deceived by his advisor, while the latter had nothing to do with it. He is the victim of an absurd monetary policy that damages the relationship of trust that he had so much trouble establishing 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 facilitation for quantity it hasn’t really been stopped yet. What will happen when Europe goes into recession? Will the ECB be forced to launch a new QE? How can we not 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 euro area.
In the face of these risks, it makes sense to see euro gold rebound above its uptrend line. The price of an ounce of gold is attacking its next resistance, at 1,750 euros.
In the physical gold market, the Perth Mint sold a record 183,102 ounces of gold and 1,995,350 ounces of silver in bullion and coin form in October. A historic record in Australia!
Australian real wages are plummeting, en route to levels not seen since 2008. And forecasts do not indicate a significant rebound from those levels.
It is likely to cope with this real income loss that many individuals have decided to invest part of their savings in physical gold and silver.
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