Things That Make Me Go Hmmm: Inflation, Crypto, Command Economies and Gold.

By Matthew Piepenburg

Over the years I’ve written almost ad nauseum about the crazy I see (and saw) around me as a fund manager, family office principal and individual investor.

The list includes: 1) an entire book on the grotesque central bank distortions of free market price discovery, 2) the open (and now accepted) dishonesty on everything from front-running Musk tweets and bogus inflation reporting to COMEX price fixing, 3) the insanity of 100-Year Austrian bonds or just plain negative-yielding bonds going mainstream, 4) the open death of classic capitalism and the rise of economic feudalism, 5) asset bubble hysteria seen in everything from BTC to Tesla; 5) rising social unrest, 6) the serious implications of Yield Curve Controland the gross mispricing of debt that has midwifed the greatest credit binge/bubble in recorded history, and 7) the ignored power of logical delusion that so characterizes the madness of crowds in the current investment era.

In short, there a great deal of things which, as our advisory colleague, Grant Williams, would say: Makes me go hmmm.

Speaking of exceptional team advisors at Matterhorn Asset Management, Ronni Stoeferle recently had a compelling discussion with the equally brilliant, and hitherto deflationary thinker, Russell Napier.

Among the many compelling take-aways from that discussion is the fact that Mr. Napier is now turning inflationary.

As we’ll see below, this broader and structural inflationary pivot, now undeniably on the horizon, has massive (and positive) implications not only for precious metal ownership, but also the very structure of the financial world going forward (negative).

In short, the inflation topic is not just an academic topic nor fodder for podcasters and economic tenure-seekers—it’s a critical signal of the repressive financial world staring us straight in the eyes today and heading toward ever-more financial repressions tomorrow.

Expect Inflation. Period. Full Stop.

In college, I once read that the only certainty is uncertainty. In short, be weary of anyone who says anything is certain.

That said, I am now arguing that inflation is certain. Hmmm.


Well, I’ve written at length in the recent weeks on the many factors which now make inflation inevitable rather than theoretical. Specifically:

Inflation, based on the hitherto honest rather than current CPI scale, is factually at 9%, not the farcical 2% range. In short, inflation is already here;

Unlimited QE, by definition, means greater money supply, and inflation, by definition, is about precisely that: Increased money supply;

QE for Wall Street (and the embarrassing new reputation of MMT) is slowly being joined by “QE for the people” in the form of unprecedented, “COVID-justified” broad money creation and fiscal deficits to directing money (and the velocity of the same) straight into Main Street, a classic tailwind for rising inflation;

The now openly felt winds of a commodity super cycle is driving commodity prices higher in everything from corn to plywood, all further (and undeniable) tailwinds of increasing inflation;

Finally, and perhaps most importantly, governments around the world have never, not ever, been as deep in debt as they are today, and the only way to dig themselves out of the Grand Canyon of debt in which they and their central banks put themselves (and us) is to now inflate their way out of it. In fact, just last week, the ECB openly confessed as much.

But in case none of the foregoing objective realities has you convinced of inflation’s arrival and growing windspeed, Mr. Napier gives us even more reasons to accept, as well as expect, its, well…certainty.

The Structural Shift Toward Open Inflation: Government Credit Guarantees.

Unknown to many, inflationary forces far stronger than just monetary and fiscal stimulus have been in open and deliberate play by the world’s major governments in the form of government credit guarantees to commercial banks.

This is a critical structural shift.


As I wrote in Rigged to Fail, central banks have been in bed with commercial banks and broke governments since their not-so immaculate conception.

Governments are all too aware that commercial banks can’t thrive or create credit and loan money at the artificially repressed rates otherwise so crucial to keeping their massive sovereign debt obligations affordable.

By recently guaranteeing bank credit risk in everything from business loans to mortgages, governments are not only aiding and abetting bank survival in a low-rate new abnormal, but are effectively (and slowly) taking greater control of the commercial banking sector.

Such credit guarantees from governments ensure bank money creation to manage everything from housing and the green agenda to consumer and corporate debt needs.

This new direction represents a permanent structural change in the banking system which, despite being largely ignored by the average citizen, will mathematically lead to an even greater expansion in broad money growth, and hence, by definition, a deliberate and now structural as well as global expansion in the inflation rate.

In short, global governments are permanently taking a more centralized role in the global banking system and hence the financial system in which you now sit, wide-eyed to be sure.

The major global markets are now witnessing undeniable and intentional broad money growth—tripling the rate of growth in just the last 6 months.

But What About Interest Rates? Well, Here’s the Kicker…

Of course, everything we learned in school, in both economics and history, suggests that if inflation rises, then rates must rise as well, right?

Well, sadly, in this brave new Orwellian world of government centralization and shameless debt expansion, nothing we learned in school is now much of a guide.

In short: Everything has changed.

Given these grotesque debt levels (compliments of a politician and central banker near you, rather than the COVID excuse), policy makers literally have no choice but to inflate their debt away.

But being the clever little weasels that public policy makers are, they will, of course, make every effort to have their cake and eat it too by deliberately allowing inflation (to get out of debt) yet also repressing the cost of that debt by turning to yield curve controls to artificially repress rates.

Such rate repression is a must, rather than a choice or pundit debate going forward. 

Given current global debt levels (>$280T), naturally high nominal rates would literally kill the markets and governments with the same, rising rate bullet.

That is, if rates were allowed to rise naturally (i.e., in genuine capitalism), the interest expense on government debt would scream way past 50% of GDP in seconds and the party would end in dramatic fashion immediately.

Thus, central banks will kill free market price moves in the bond market. They have no choice.

This is no secret, by the way. Just last week, the ECB so much as confessed this new direction.

In simple speak, the only way to get out of debt is to keep inflation rates above interest rates— and the greater the gap, the faster the road out of debt, something the French (my homeland) have known for centuries…

Of course, this open sham wherein inflation runs higher than nominal yields is also a perfect, textbook setting for negative real rates, which as all gold investors (rather than speculators know), is what I recently described as the ideal setting for a structural bull market in precious metals.

But what about my favorite economists—the Austrian School?

Haven’t those Austrians always warned that the money creation needed to repress yields/rates via artificial bond buying leads inevitably and without fail to currency destruction and a bursting bomb within the financial markets and broader economy?

In short, won’t there be a terrible, terrible price to pay for this new abnormal of rising inflation?

The short answer is “yes,” but the only issue remaining is what flavor of terrible are we talking about?

Austrian School Disaster vs Command Economy Nightmare?

Austria’s Ludwig von Mises warned that all artificially rising bubbles end in catastrophe—including (and depending on the size of the bubbles) hyperinflation, crashing securities markets, and the advent of social, economic and political chaos which always follows the death of paper money. 

Today, of course, such a loss of confidence in paper money is real—from the Austrian school’s warnings to the understanable and rising popularity of alternative crypto currencies like Bitcoin.

Russell Napier, however, doesn’t see such a von Mises-like explosion or BTC solution.

Rather than allow such events, he believes modern “democracies,” now deeper and deeper under the command economy of governments aligned with central bankers (think Yellen at the Treasury and Draghi as Italian PM), will simply take over the economy rather than allow its natural death ala the von Mises forecasting.

So, pick your flavor of policy poison: Either the entire system implodes (ala von Mises), or we enter a Brave New World of command control government wherein capital controls become the new, tragic normal.

Either way, of course, we still face the inevitable slings and arrows of misfortunate-inflation.

Where to Hide from Inflation?

But in a command-control new world, where can investors go to protect themselves from rising inflation?

Well, the regulated big boys in their big banks and other institutions won’t have a lot of choices.

This is because the entire survival of an increasingly centralized, command-control economy (20% of US income now comes from government handouts) rests upon having less rather than more escape routes.

Centralized economies, whose bread and butter is by definition “financial repression,” will never, not ever allow alternative escape hatches or open channels for monetary outflows which might otherwise threaten their needed inflationary agenda or sacred currency.

Instead, they will tighten rather than expand creative and alternative solutions to inflation and dying currencies.

Bad News for Bitcoin

This also means Bitcoin is facing a dark future, for the simple reason that brilliant loopholes like Bitcoin are a direct threat to the centralized world of financial repression and currency control to which we are not only heading, but already experiencing.

One of the key appeals of Bitcoin, for example, is its anonymity profile. This brilliant and revolutionary blockchain move has my greatest intellectual respect, but sadly, centralized governments will not tolerate such tax less “coins” or anonymous ownership.

Bitcoin is simply too scary a threat to increasingly repressive financial systems. In fact, if Bitcoin where to truly succeed as viable currency, governments would truly fail.

Which bet will you want to take?

This is why governments, including at the US Congress, are already submitting legislation to strip BTC of its anonymous profile.

This does not mean an outright ban of the sexy crypto (yet), but such a move will certainly remove much of Bitcoin’s lipstick, price action and investor appeal.

Turning Back to Gold…

As I like to say, all roads, and discussions, turn back to gold, currently biding its time as the ugly girl at the dance as all these structural changes and asset bubble hysterias (including BTC) grab the forever myopic attention of sell-siders, deflationary pundits and bubble-lovers worldwide.

Unlike Bitcoin, however, physical gold held outside an over-regulated, financially repressed command-economic system, does not rely upon anonymity to maintain (and grow) its value.

In the coming years, we will see more and more capital controls imposed on institutions, where sadly, most of the great national wealth (and even “gold”) is held.

At Matterhorn Asset Management, however, we don’t believe in holding gold in commercial banks, for the simple reason that a) such “gold” is not truly “owned” by the banks or even its account holders, and b) those banks are increasingly under the control of governments not depositors.

Instead, the smart money holds real gold, in individual names, stored in real vaults outside of the commercial banking system–typically in a Swiss jurisdiction where privacy rights and capital controls are NOT determined by the central banks in Tokyo, Brussels, London, Beijing or DC…

Gold is a wise investment in an increasingly broken, desperate and hence repressive environment. 

But how one purchases, owns and secures it is a critical matter.

Individuals going forward will have more freedoms than regulated institutions to hold portions of their wealth outside of such openly and increasingly centralized financial systems.

The Financial Crisis the World Forgot

The Federal Reserve crossed red lines to rescue markets in March 2020. Is there enough momentum to fix the weaknesses the episode exposed?

By Jeanna Smialek

            Jasper Rietman

By the middle of March 2020 a sense of anxiety pervaded the Federal Reserve. The fast-unfolding coronavirus pandemic was rippling through global markets in dangerous ways.

Trading in Treasurys — the government securities that are considered among the safest assets in the world, and the bedrock of the entire bond market — had become disjointed as panicked investors tried to sell everything they owned to raise cash. Buyers were scarce. The Treasury market had never broken down so badly, even in the depths of the 2008 financial crisis.

The Fed called an emergency meeting on March 15, a Sunday. Lorie Logan, who oversees the Federal Reserve Bank of New York’s asset portfolio, summarized the brewing crisis. She and her colleagues dialed into a conference from the fortresslike New York Fed headquarters, unable to travel to Washington given the meeting’s impromptu nature and the spreading virus. 

Regional bank presidents assembled across America stared back from the monitor. Washington-based governors were arrayed in a socially distanced ring around the Fed Board’s mahogany table.

Ms. Logan delivered a blunt assessment: While the Fed had been buying government-backed bonds the week before to soothe the volatile Treasury market, market contacts said it hadn’t been enough. To fix things, the Fed might need to buy much more. And fast.

Fed officials are an argumentative bunch, and they fiercely debated the other issue before them that day, whether to cut interest rates to near-zero.

But, in a testament to the gravity of the breakdown in the government bond market, there was no dissent about whether the central bank needed to stem what was happening by stepping in as a buyer.

That afternoon, the Fed announced an enormous purchase program, promising to make $500 billion in government bond purchases and to buy $200 billion in mortgage-backed debt.

It wasn’t the central bank’s first effort to stop the unfolding disaster, nor would it be the last. But it was a clear signal that the 2020 meltdown echoed the 2008 crisis in seriousness and complexity. Where the housing crisis and ensuing crash took years to unfold, the coronavirus panic had struck in weeks.

As March wore on, each hour incubating a new calamity, policymakers were forced to cross boundaries, break precedents and make new uses of the U.S. government’s vast powers to save domestic markets, keep cash flowing abroad and prevent a full-blown financial crisis from compounding a public health tragedy.

The rescue worked, so it is easy to forget the peril America’s investors and businesses faced a year ago. But the systemwide weaknesses that were exposed last March remain, and are now under the microscope of Washington policymakers.

How It Started

The Fed began to roll out measure after measure in a bid to soothe markets. John Taggart for The New York Times

Financial markets began to wobble on Feb. 21, 2020, when Italian authorities announced localized lockdowns.

At first, the sell-off in risky investments was normal — a rational “flight to safety” while the global economic outlook was rapidly darkening. Stocks plummeted, demand for many corporate bonds disappeared, and people poured into super-secure investments, like U.S. Treasury bonds.

On March 3, as market jitters intensified, the Fed cut interest rates to about 1 percent — its first emergency move since the 2008 financial crisis. Some analysts chided the Fed for overreacting, and others asked an obvious question: What could the Fed realistically do in the face of a public health threat?

“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain,” Chair Jerome H. Powell said at a news conference, explaining that the Fed was doing what it could to keep credit cheap and available.

But the health disaster was quickly metastasizing into a market crisis.

Lockdowns in Italy deepened during the second week of March, and oil prices plummeted as a price war raged, sending tremors across stock, currency and commodity markets. 

Then, something weird started to happen: Instead of snapping up Treasury bonds, arguably the world’s safest investment, investors began trying to sell them.

The yield on 10-year Treasury debt — which usually drops when investors seek safe harbor — started to rise on March 10, suggesting investors didn’t want safe assets. 

They wanted cold, hard cash, and they were trying to sell anything and everything to get it.

How It Worsened

Nearly every corner of the financial markets began breaking down, including the market for normally steadfast Treasury securities. Ashley Gilbertson for The New York Times

Religion works through churches. Democracy through congresses and parliaments. 

Capitalism is an idea made real through a series of relationships between debtors and creditors, risk and reward. 

And by last March 11, those equations were no longer adding up.

That was the day the World Health Organization officially declared the virus outbreak a pandemic, and the morning on which it was becoming clear that a sell-off had spiraled into a panic.

The Fed began to roll out measure after measure in a bid to soothe conditions, first offering huge temporary infusions of cash to banks, then accelerating plans to buy Treasury bonds as that market swung out of whack.

But by Friday, March 13, government bond markets were just one of many problems.

Investors had been pulling their cash from prime money market mutual funds, where they park it to earn a slightly higher return, for days. But those outflows began to accelerate, prompting the funds themselves to pull back sharply from short-term corporate debt markets as they raced to return money to investors. Banks that serve as market conduits were less willing than usual to buy and hold new securities, even just temporarily. That made it harder to sell everything, be it a company bond or Treasury debt.

The Fed’s announcement after its March 15 emergency meeting — that it would slash rates and buy bonds in the most critical markets — was an attempt to get things under control.

But Mr. Powell worried that the fix would fall short as short- and long-term debt of all kinds became hard to sell. He approached Andreas Lehnert, director of the Fed’s financial stability division, in the Washington boardroom after the meeting and asked him to prepare emergency lending programs, which the central bank had used in 2008 to serve as a support system to unraveling markets.

Mr. Lehnert went straight to a musty office, where he communicated with Fed technicians, economists and lawyers via instant messenger and video chats — in-person meetings were already restricted — and worked late into the night to get the paperwork ready.

Starting that Tuesday morning, after another day of market carnage, the central bank began to unveil the steady drip of rescue programs Mr. Lehnert and his colleagues had been working on: one to buy up short-term corporate debt and another to keep funding flowing to key banks. Shortly before midnight on Wednesday, March 18, the Fed announced a program to rescue embattled money market funds by offering to effectively take hard-to-sell securities off their hands.

But by the end of that week, everything was a mess.  Foreign central banks and corporations were offloading U.S. debt, partly to raise dollars companies needed to pay interest and other bills; hedge funds were nixing a highly leveraged trade that had broken down as the market went haywire, dumping Treasurys into the choked market. Corporate bond and commercial real estate debt markets looked dicey as companies faced credit rating downgrades and as hotels and malls saw business prospects tank.

The world’s most powerful central bank was throwing solutions at the markets as rapidly as it could, and it wasn’t enough.

How They Fixed It

The Fed likely saved the nation from a crippling financial crisis that would have only intensified the economic damage the coronavirus went on to inflict. John Taggart for The New York Times

The next weekend, March 21 and 22, was a frenzy. Officials dialed into calls from home, completing still-secret program outlines and negotiating with Treasury Secretary Steven Mnuchin’s team to establish a layer of insurance to protect the efforts against credit losses. After a tormented 48-hour hustle, the Fed sent out a mammoth news release on Monday morning.

Headlines hit newswires at 8 a.m., well before American markets opened. The Fed promised to buy an unlimited amount of Treasury debt and to purchase commercial mortgage-backed securities — efforts to save the most central markets.

The announcement also pushed the central bank into uncharted territory. The Fed was established in 1913 to serve as a lender of last resort to troubled banks. On March 23, it pledged to funnel help far beyond that financial core. The Fed said it would buy corporate debt and help to get loans to midsize businesses for the first time ever.

It finally worked. The dash for cash turned around starting that day.

The March 23 efforts took an approach that Mr. Lehnert referred to internally as “covering the waterfront.” Fed economists had discerned which capital markets were tied to huge numbers of jobs and made sure that every one of them had a Fed support program.

On April 9, officials put final pieces of the strategy into play. Backed by a huge pot of insurance money from a rescue package just passed by Congress — lawmakers had handed the Treasury up to $454 billion — they announced that they would expand already-announced efforts and set up another to help funnel credit to states and big cities.

The Fed’s 2008 rescue effort had been widely criticized as a bank bailout. The 2020 redux was to rescue everything.

The Fed, along with the Treasury, most likely saved the nation from a crippling financial crisis that would have made it harder for businesses to survive, rebound and rehire, intensifying the economic damage the coronavirus went on to inflict. Many of the programs have since ended or are scheduled to do so, and markets are functioning fine.

But there’s no guarantee that the calm will prove permanent.

“The financial system remains vulnerable” to a repeat of last March’s sweeping disaster as “the underlying structures and mechanisms that gave rise to the turmoil are still in place,” the Financial Stability Board, a global oversight body, wrote in a meltdown post-mortem.

What Comes Next

Policymakers are now focusing on the vulnerabilities that March 2020 exposed, though regulatory overhauls are far from guaranteed. Stephanie Keith for The New York Times

The question policymakers and lawmakers are now grappling with is how to fix those vulnerabilities, which could portend problems for the Treasury market and money market funds if investors get seriously spooked again.

The Fed’s rescue ramps up the urgency to safeguard the system. Central bankers set a precedent by saving previously untouched markets, raising the possibility that investors will take risks, assuming the central bank will always step in if things get bad enough.

There’s some bipartisan appetite for reform: Trump-era regulators began a review of money markets, and Treasury Secretary Janet L. Yellen has said she will focus on financial oversight. But change won’t be easy. 

Protests in the street helped to galvanize financial reform after 2008. There is little popular outrage over the March 2020 meltdown, both because it was set off by a health crisis — not bad banker behavior — and because it was resolved quickly.

Industry players are already mobilizing a lobbying effort, and they may find allies in resisting regulation, including among lawmakers.

“I would point out that money market funds have been remarkably stable and successful,” Senator Patrick J. Toomey, Republican of Pennsylvania, said during a Jan. 19 hearing.

Matt Phillips contributed reporting.

Emerging markets need support to avoid a ‘lost decade’

The IMF must use its firepower to stave off a debt crisis in poorer nations

Megan Greene

IMF managing director Kristalina Georgieva says the fund will look into a reallocation system whereby wealthier countries can lend SDRs to poorer countries © Stephen Jaffe/IMF/Getty

The Latin American debt crisis in the 1980s and eurozone debt crisis in the 2010s both led to a lost decade of economic growth for those regions. 

A key question now is whether emerging markets are heading down the same path, saddled with debt incurred in response to the pandemic. 

Signs another crisis may be looming should prompt a rethink of the IMF’s tools.

There are two main scenarios ahead for debt-laden EM countries. 

One argues big twin deficits driven by trillions in American fiscal stimulus have pushed down fair value for the US dollar. 

Even though the real effective exchange rate has weakened since last summer, the Institute of International Finance calculates that the US dollar is 12 per cent overvalued. 

This should be good news for countries that have issued debt in US dollars, as it makes their burdens more sustainable.

But there are two powerful forces offsetting this narrative. 

Huge fiscal stimulus and a relatively successful vaccination rollout should boost US growth, strengthening the dollar. 

Treasury yields are rising and that could push the Federal Reserve to withdraw accommodation sooner than other major central banks. 

The resultant policy divergence would also cause dollar appreciation.

Higher Treasury yields are also an issue for debt-laden countries. 

The 10-year note yield, which recently topped 1.6 per cent, hasn’t been this low relative to growth estimates since 1966 — so there may be room to climb higher still. 

The rise in US long-term interest rates has dragged rates up globally. 

For some EM countries such as Turkey and Russia, borrowing costs are already rising due to accelerating inflation.

Investors seem to be voting with their feet on which scenario to believe. The IIF’s daily capital tracker (excluding Chinese debt), shows capital outflows in early March approaching levels seen during the 2013 “taper tantrum” as the Fed prepared to pare back quantitative easing. 

EM currencies have nearly all depreciated in the past two weeks. 

With rising debt levels, sagging potential growth rates and borrowing costs coming off their lows, the conditions that rendered EM debt sustainable for the past decade may be shifting.

Before a crisis comes, the IMF must beef up its firepower. 

G20 finance ministers recently signalled their support for a new allocation of special drawing rights. 

The distribution is likely to be as much as $500bn, dwarfing the $250bn and $33bn allocations during the global financial crisis. 

That helps but is not a silver bullet. 

Because the SDRs are distributed based on existing IMF quotas, the lion’s share (around 70 per cent) goes to developed markets and large EM countries with plenty of foreign exchange reserves. 

But, as a percentage of foreign exchange reserves, the SDR allocation would give some of the poorest and most debt-distressed countries the biggest lift.

IMF head Kristalina Georgieva says the fund will look into a reallocation system whereby wealthier countries can lend SDRs to poorer countries. 

According to JPMorgan, if G20 countries set aside just 10 per cent of their SDRs, it would more than double the additional funding for low-income countries.

But reallocating SDRs could come with demands for traditional IMF programme conditions, which borrowers would seek to avoid. Instead, the reallocated SDRs could top up funds for cheaper concessional IMF lending. 

Even so, given low income countries’ small quotas and high budget deficits, some could be pushed into insolvency. 

Reallocated SDRs could be offered as grants for pandemic spending and sustainable development goals, but this could face opposition in creditor countries.

Beefing up firepower isn’t enough; lending programmes must also be adjusted. 

The IMF has traditional bailouts with strict conditionality for basket case countries and facilities for countries with a stellar record. 

If borrowing costs continue to rise, a number of EM countries could fall in the middle: too robust to accept conditions but too weak to make it without support as the pandemic toils on.

Unlike in 2013, EMs (excluding China) were in current account surplus in the four quarters to September 2020, and foreign exchange reserves have risen sharply in recent years as well. 

Rapid distribution of vaccines to EM countries and faster-than-forecast global growth could forestall a new debt crisis. 

But the recent trend is worrying. 

This may be a perfect opportunity for US President Joe Biden’s administration to continue embracing multilateralism and re-establishing American leadership in the world. 

The US is doing a lot to boost its own economy. 

Supporting new programmes at the IMF will ensure help for EM countries as well.

The writer is a senior fellow at Harvard Kennedy School  

Wisdom & Warnings from the Commodity Market

By Matthew Piepenburg

In our own recent reports (and frankly any report) addressing the topic of precious metals, we confronted inflation topics, including, its many tailwinds.

One critical tailwind for rising inflation is rising commodity prices, which are doing precisely that: Rising.

Below, we tackle the commodity issue in greater detail so that you can invest with greater perspective.

Super Cycle

Commodities, like all asset classes, enjoy periods of prolonged upward price trends which can last for years.

Often referred to as “super cycles,” these price moves are significant and demand that informed investors assume two key responsibilities in navigating the same, namely: 1) identifying the cycle and 2) entering early rather than late.

As to the first task, it’s time to consider the broader asset class of commodities (base metals, agriculture, precious metals and energy sectors) and determine if such a cycle is indeed at hand.

(Hint: It is.)

It’s equally critical to place such a cycle within the broader context of what a commodity tailwind implies for the bigger picture of the global economy (from inflation to currency matters) as well as the risks (currency debasement) and opportunities (in precious metals) we all face going forward.

First the Obvious: Rising Commodity Prices

Looking at the broad basket of commodity sectors and pricing, as exemplified by the Bloomberg Commodity Index (1 year), it’s fairly safe to confirm that commodities are, and have been of late, taking off.

Prior Commodity Cycles

Placing such price action and cycles into historical perspective, the last super cycle in commodities occurred in a macro backdrop quite unlike the current stage.

During the early 2000’s, for example, we all remember the infamous “BRIC’s” era wherein emerging market economies in Brazil, Russia, India and China (in particular!) began a headline-making period of expansion and infrastructure building that continued right up and until the Great Financial Crisis of 2008.

Such expansion provided a demand-driven tailwind for hard assets within the broader commodity space, with, again, China’s extreme (and debt-driven) build-outs leading the way.

Today’s commodity tailwinds, however, are blowing for very different reasons.

The COVID Setting

Just prior to the COVID outbreak, historically distorted central-bank monetary policies added extreme steroid support for risk assets like stocks and bonds.

Hence, money euphorically chased over-priced equities and credits rather than the far wiser (and far-sighted) allocation to capital projects (“Cap-Ex”). This greatly diluted demand (and pricing) for commodities.

Needless to say, the subsequent shut-down policies of the pandemic did even more to stunt global demand for Cap-Ex allocations or demand for assets like oil, openly crushed by an energy sector suffocating under global travel restrictions.

With this in mind, what, then, explains the chart above and the tilt toward a new commodity super cycle?

Are such commodity price rises demand-driven? Supply-driven? Or is the world simply bracing for higher inflation, and hence higher commodity allocations?

Well, the short answer is yes to all three.

Oil Prices

As to an energy sector which has seen oil prices climb from -$40 to $60+ per barrel, rising demand is certainly not the core explanation for such a dramatic price surge.

Instead, covid-related supply chain bottlenecks, deliberate OPEC supply cuts and reduced supply from the Bakken Shale zip codes have all converged to send oil prices higher.

Soft Commodities, Agriculture

Supply-chain disruptions tied to the pandemic can also, in part, explain the rising costs of agricultural products seen at the checkout line as well as within the rising commodity index above, but the real determinant for such soft commodities has always been, and always will be, weather-dependent factors.

Base Metals

But supply constraints in the energy and ag sectors alone do not even come close to explaining the new, and rising price cycle in the above commodity index.

With a “green” Biden administration in the White House, campaign promises for an environmental revolution all point toward a rising demand in specific metals and raw materials needed to build a new economy away from carbon.

This, alas, is a major tailwind for base metals.

Additionally, whatever one thinks of the grossly over-valued tech sector (which it clearly is), technology is the future, and a tech consumer economy directly impacts demand for base materials (i.e. lithium, platinum, copper, nickel etc.) needed for continued tech expansion, and a more “carbon-free” tomorrow.

As economies crawl out of the Covid hysteria on the back of still debatable vaccine solutions, the base metals so critical to the electrification needed to spur further technological and modern environmental projects will be a boon for the foregoing hard assets.

Inflation Expectations

In addition, the much-heralded post vaccine re-opening of the economy won’t come cheap.

As in just about everything that global policy makers now do to address any “recovery” project, they will “pay” for the same with a coordinated strategy of more debt (i.e.  fiscal policies of extreme deficit spending) and more printed/debased currencies (i.e. monetary policies of extreme money printing).

And guess what folks? Such a “strategy” is a text book set-up for more inflation ahead.

As more money flows into the real economy in the form of direct checks to displaced workers and funding projects within the real economy, “QE for the people” will slowly rival “QE for Wall Street.”

Thus, unlike the hitherto closed-loop of printed dollars going from the Fed to the big banks and the U.S. Treasury and an inflated securities bubble, we’ll see money flowing directly into the open (and public) loop that is the real economy.

This, of course, means a greater velocity of money at the ground level, and that, of course, is a mathematically-confirmed setting for more and rising inflation.

As most investors know, commodities do well as inflation rises, of which the commodity super cycle of the 1970’s is an extreme reminder.

The Current Inflation Lie

This, however, does not mean we’ll be seeing anything like the reported inflation numbers of that bygone (bell-bottom) era in the near-term—but higher inflation is coming.

As explained elsewhere, once inflation rates exceed nominal bond yields (and hence turn into rapidly descending negative real yields) the precious metal sector of the broader commodity pool will skyrocket.

In many ways, of course, inflation is not just coming; it’s already here.

We’ve written, for example, about the open CPI lie that places inflation at 2% rather than the more honest 10% felt by anyone living in the real world:

But in case you still trust government inflation reporting, consider the following excerpt from the Chapwood Index (sent to me by a recent reader).

The data speaks for itself: The real cost of living increase index vs. the CPI is rising city by city at double-digit rates, far surpassing the “2%” range comically promulgated by our so-called data providers in DC.


Precious Metals

But as broader commodities race higher, many are naturally wondering why gold and silver have seen declines rather than surges since their 2020 highs.

After all, monetary policy is loose, currencies are being printed (i.e. debased) by the second and higher inflation expectations are going mainstream. This should be a boon setting for precious metals, no?

In short: What gives?

We’ve addressed this question via a wide variant of angles, from 1) direct COMEX distortion of paper gold prices and 2) speculative money flows into tech stocks and cryptos or 3) the rising U.S. dollar.

But as we’ve also made repeatedly clear, the primary headwind for gold stems from the fact that right now there is an artificial rise rather than fall in real yields, and that is momentarily bad for gold and silver pricing.

By this, we simply mean that the current (and openly bogus/dishonest) inflation rate is not significantly outpacing the current yield on the 10Y US Treasury.

What investors need to know, however, is that this current scenario is as temporary as an “honest man in Parliament.”

That is, for all the reasons stated above and elsewhere, more inflation is coming, and like Paul Revere on horseback through Boston, we’re here to warn you of its arrival as well as implications.

This is an absolutely critical point to understand, for the common notion that commodities perform poorly in low-rate environments is an error.

What really matters to boost prices in commodities like gold and silver is not that interest rates are low or high, but that on a relative basis, rates just need to be lower than inflation rates.

And this, folks, is precisely the optimal environment (inflation strongly outpacing yields) toward which precious metals are headed.

Stated otherwise, their prices will go up because inflation is going up.

Once the inflationary convergence of 1) rising commodity prices (above), 2) government cash inflows from stimulus payments and infrastructure spending (i.e. money velocity) are re-directed into Main Street and 3) continued, as well as unlimited Quantitative Easing (i.e. increased money supply) become impossible to hide behind the length of that Pinocchio nose otherwise known as the CPI scale, inflation rates will far surpass openly repressed Treasury yields.

This, by definition, means that “inflation adjusted” (i.e. real) Treasury yields will go deeper and faster into negative territory, which is the ultimate and historically-confirmed scenario for spiking gold and silver prices.

In sum, rising commodity prices (in general) will help drive inflation rates higher, which, in turn, will drive gold prices (in particular) well past their August 2020 highs.

For now, all that informed precious metal buyers need to do is allow inflation to take its natural course higher and watch gold enjoy its inevitable, as well as natural, climb northward.

The Post-Pandemic Labor Market’s Long-Term Scars

Even before the COVID-19 crisis, African-Americans, Hispanics, women, and workers without a post-secondary education faced dimming prospects as a result of automation and other trends. Now, these forces have been strengthened, creating an even bigger mismatch between worker qualifications and available jobs.

Laura Tyson, Susan Lund

BERKELEY – Thanks to the rapid deployment of vaccines, COVID-19 infections, hospitalizations, and deaths in the United States are declining, and pandemic restrictions on economic activity are being eased. 

But even with labor markets gradually improving, the economic recovery has been slow and uneven, and there is a long way to go.

According to the latest official figures, overall US employment is still down by about 9.5 million jobs from when the recession hit, and by nearly 12 million from its pre-pandemic trend. 

Unemployment, adjusted for the sharp drop in labor-force participation, is around 10%, and the rate is even higher for African-Americans, Hispanics, women, and the less educated, reflecting both the dual nature of the pandemic and longer-running labor-market disparities.

Another trend that predates COVID-19 is the transformation of work through automation and digitalization – processes accelerated by how businesses and consumers have responded to the pandemic. This trend, too, threatens to deepen pre-existing inequalities, because black and Hispanic workers are overrepresented in the jobs that are at the greatest risk from automation.

A sustained recovery to an economy with full employment and ample “good jobs” will require a significant reallocation of workers from the low-wage, low-skill positions that have disappeared as a result of the pandemic to new ones requiring higher skills and more training. A recent study by the McKinsey Global Institute (MGI) finds that up to 25% “more workers than previously estimated” may need “to switch occupations.”

The pandemic has had a particularly severe impact on jobs requiring high levels of physical proximity and face-to-face contact, including waiters, shop clerks, hotel receptionists, stadium workers, stylists, and other low-wage positions. Again, women, minorities, and the less educated are overrepresented among these frontline workers.

Many of the physical-distancing practices adopted by consumers and businesses during the pandemic will likely persist. In 2020, e-commerce sales increased more than 32%, growing 2-5 times faster than their average rate over the previous five years. And now, many consumers say they will continue to shop online even after the pandemic is over.

Likewise, many companies’ survival now depends on their ability to shift to remote work, a practice they had long resisted. 

With emerging evidence indicating that remote-working employees are sometimes working longer hours and are more productive, many businesses are planning to allow for various types of hybrid arrangements after the pandemic.

According to MGI’s analysis of more than 2,000 activities across some 800 occupations, as many as one-quarter of workers in advanced economies could perform their jobs remotely 3-5 days per week without losing effectiveness. 

That would translate into 4-5 times more people regularly working from home.

Remote work, however, is concentrated in higher-wage jobs. According to a survey conducted in the US last April, approximately 60% of high-earning workers could do their jobs effectively from home, compared to 34% of low-earning workers. 

Not surprisingly, high-wage occupations in the US have suffered much smaller declines in employment than low-wage categories.

A large permanent shift to remote work would have far-reaching implications for urban centers and the workers who provide services in office buildings, restaurants, hotels, and shops. 

Before the pandemic, such services accounted for an estimated one in four US jobs, as well as a large and rising share of employment among workers without a post-secondary education. 

Now, recent research confirms that as pandemic-related remote work has increased, the demand for local services in cities has begun to fall.

More telecommuting and remote work could permanently change the geography of work, spurring a longer-term migration of talent from large, high-cost cities that had been the engines of job creation. 

There is already evidence from residential rents and office vacancy rates in both the US and Europe that some workers and companies are moving from the highest-cost areas to smaller cities. 

Moreover, entire countries are now competing to attract footloose remote workers. 

For example, Estonia and Georgia have relaxed their requirements for short-term visas, and Greece is offering special tax incentives.

Businesses are also investing in digital technologies and automation to enable more physical distance between their employees, and to create flexibility to cope with changes in demand. 

Robots and artificial-intelligence applications have helped workers on assembly lines maintain safe social distancing; expedited e-commerce warehouse operations; allowed for more self-checkout in stores; helped banks process the surge in stimulus loans; and even filled in as cooks, flipping burgers and preparing French fries.

These forms of pandemic-driven automation are likely to displace workers on a larger scale than economists had previously expected. 

The largest impact will be in food services, retail, hospitality, customer service, and office support, which accounted for a significant share of pre-pandemic employment and comprise mainly low-wage jobs.

In the US, there could be 4.3 million fewer food- and customer-service jobs, and nearly one million fewer office support jobs in 2030 than would have been the case without the pandemic. 

All eight countries studied – China, France, Germany, India, Japan, Spain, the United Kingdom, and the US – exhibit the same pattern of reduced demand for low-wage occupations and jobs. 

In these countries, an estimated 12% more workers will need to change occupations than we predicted before the pandemic.

Finally, jobs paying in the top 30% of wages – such as those in health care and the STEM (science, technology, engineering, and math) professions – are set to grow. 

But these require a very different mix of skills and credentials than the low-wage jobs that are disappearing. Training displaced workers thus will become a major priority.

The potential mismatch between future skill requirements and available jobs presents an opportunity to reimagine work, the workforce, and the workplace for employers of all sizes. 

But it also increases the urgency of funding and implementing effective training and income-support programs for workers who are forced to move to other occupations, industries, and locations.

Building a “good jobs” future is possible. 

But, as the California Future of Work Commission points out in a new report, getting there will require both public and private investment in workers’ skills.

Laura Tyson, former chair of the US President's Council of Economic Advisers, is Professor of the Graduate School at the Haas School of Business and Chair of the Blum Center Board of Trustees at the University of California, Berkeley.

Susan Lund is a partner at McKinsey & Company and a leader at the McKinsey Global Institute.