Warsh's Policy Error

Eager to prove his bona fides and establish his gravitas, new Fed chair Kevin Warsh hiked the fed funds rate last week. In doing so, he revealed to the investment world that he is nothing more than the direct descendant of Bernanke and Yellen. Not a new leader with new priorities for a changing world but, instead, just another devotee to the Phillips Curve and Keynesianism. 

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Let's begin with the obvious. Yes, the inflation rate, whether it's measured by CPI or PCE, has been rising. Additionally, the bond market has sold off with investors demanding higher nominal interest rates as compensation for higher inflation. But what is the driving force of this? The war in Iran! 

Iran War Triggers Global Oil Supply Shock

It is the Iran War that has sent global energy prices soaring, and it is the Iran War that has led directly to higher inflation and higher nominal interest rates. The amount of oil coming out of the ground and the amount of oil being shipped around the world has fallen significantly, and the impact is commonly known as a supply shock. 

Supply shocks in wheat or orange juice are one-off events that can be overlooked. Supply shocks in energy cannot, as everything from diesel fuel to jet fuel to heating oil is impacted and those higher input costs get passed along to consumers. No amount of fed funds rate hikes can ease this sort of inflation because no amount of rate hikes can open the Strait of Hormuz or get new sources of crude oil out of the ground. 

But Warsh doesn't see it that way. Instead, he just reflexively and almost instinctively reaches for the rate hike button. Again, he seems so eager to prove to his fellow central bankers that he's not simply a sock puppet for Trump that he's unwilling to look over the horizon at the problems he is now worsening. See this devastatingly accurate post from economist James Thorne: 

Thorne eloquently highlights the crux of the matter. By hiking the fed funds rate, Warsh is allowing the market and global events to control him, rather than the other way around. Hiking rates into a supply shock will invariably lead to stagflation as the supply shock allows for inflation to persist, yet Warsh's rate hike(s) will worsen what was already a looming economic slowdown.  

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Yield Curve Control And Rising Gold Prices

In the months ahead, the U.S. consumer and U.S. companies will begin to curtail their economic activity as they gird themselves against higher inflation. As economic activity slows, tax receipts at all levels will fall off. As tax receipts fall off, government deficits expand. As deficits expand, the need for new fiat currency creation will increase. As new fiat currency creation increases, inflation will continue. As inflation continues, the global bond markets will demand even higher interest rates. A lack of bond buyers will lead the U.S. Treasury and Secretary Bessent to increase their Yield Curve Control efforts. Yield Curve Control leads to sharply negative, inflation-adjusted or "real" interest rates, and negative real interest rates make the acquisition and holding of physical gold that much more valuable. 

And with that, here we are. It's not that Warsh is the cause of the problem; it's that he did nothing to address the problem last week and, in fact, only made things worse by his strict adherence to status quo economic thought. "I see inflation, so I must hike rates", says the arrogant narcissist. As such, your friends and neighbors will soon pay a high price...and not just at the gas pump or grocery store. 

You, of course, are somewhat protected from these egotists and megalomaniacs IF you hold physical gold and silver. Stagflation and sharply negative real interest rates are a powerful duo in driving precious metal prices higher. See the late 1970s as a historical reference.  

In summary, if you already hold physical gold and silver, the events of last week should lead you to buy more. If you don't yet own physical gold and silver, it's not too late to get started.  

More Gold & Silver Insights 

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