Silver Slides Alongside Pivot Optimism

When one narrative fails, you can always create a new one

While we’ve warned repeatedly that inflationary realities do not support a dovish pivot, Powell was highly hawkish on Dec. 14. Yet, with unanchored inflation slowly eating away at the U.S. economy, the prospect of higher unemployment and a deep recession have the monetary gamblers looking for a way out of their current predicament.

Consequently, the new narrative proclaims that if a dovish Fed raises the inflation target, everyone will live happily ever after. For context, ZeroHedge has been leading the charge for some time.

Please see below:

Source: Twitter

Similarly, with hedge fund manager Bill Ackman – who is often of sound mind when it comes to investment logic – joining the fray, the difference between 2% and 3% inflation now means the difference between a painful recession and prosperity.

Please see below:

Source: Twitter

However, one of the biggest bubbles in the financial markets is investors’ belief that the Fed can decide whether the U.S. economy prospers or suffers. Remember, every Fed committee in history could have increased the inflation target to avoid a painful recession, but it didn’t work.

For one, once you get to 3% inflation, reducing the metric by another 1% is largely immaterial. Second, the destructive nature of inflation is highly underestimated, and the 1970s showed that turning dovish to support the economy ended in ruin, as all it did was spur more inflation, and eventually capsize the U.S. labor market.

As a result, while the narrative proclaims that the Fed can choose its desired level of pain, the reality is that the seeds have already been sowed. Furthermore, if the Fed could solve all of the financial markets’ problems by raising the inflation target to 3%, then why not choose 4%, 5% or 6%? As it stands, the Fed could have raised the inflation target to 9% and never raised rates once in 2022.

But, that gambit only works in theory, and the long-term consequences of unchecked inflation will only bring forth the painful recession that investors believe this Fed has the power to avoid. For example, the Fed’s autopsy of the 1965 to 1982 period titled “The Great Inflation” noted:

“In 1964, when this story began, inflation was 1 percent and unemployment was 5 percent. Ten years later, inflation would be over 12 percent and unemployment was above 7 percent. By the summer of 1980, inflation was near 14.5 percent, and unemployment was over 7.5 percent.”

Please see below:

Source: U.S. Fed

Likewise, Paul Volcker’s realization that “over time inflation and the unemployment rate go together” is spot on, and if the crowd assumes that letting inflation faster will create a positive outcome, they’re highly uninformed about the historical relationship.

Thus, the important point is that it’s egotistical to assume that this Fed can accomplish something that almost no other committee has accomplished before; and since nine of the last 10 iterations of rising inflation ended with a recession (since 1948), it’s laughable to think that Powell and this generation of investors know how to magically solve inflation when generations before them couldn’t. Do you really think they’re that smart?

In reality, the crowd misjudges the fundamental path ahead, and the S&P 500 could send the silver price into a nosedive .

Overall, while many new narratives will swirl between now and the end of 2023, the harsh truth is that labeling something as satisfactory does not change its fundamental implications. For example, you can label 5% inflation as appropriate, but it doesn’t change the burden it puts on consumers and the uncertainty it puts on businesses. As such, high inflation has historically been bad for economic growth and the financial markets, and sentiment won’t change that.

So, while that same sentiment keeps the silver price uplifted in the short term, the fundamentals remain highly ominous.

Alex Demolitor
Precious Metals Strategist