While the employees of government agencies and financial institutions celebrate Presidents Day, this is an opportune time to reassess the broader economic spectrum. In my last post, I discussed the unusual dynamic among President Donald Trump, Federal Reserve Chair Janet Yellen, and the gold market. While Trump has captured the hearts of conservatives, conservative investors have had to engage in an awkward balance.
It’s fair to say that most folks were taken by surprise from Donald Trump’s historic victory. Indeed, many investors had hedged their bets in the gold market. They wanted Trump to win, but they knew that rival Hillary Clinton had a sizable lead in the polls. Under any other circumstance, Clinton would have won. That would mean a continuation of Janet Yellen’s Keynesian policies, and therefore, rising inflation courtesy of the Fed.
But after the election results came in, the gold market collapsed. Equities became the driving force, with the Dow Jones Industrial Average eventually breaking the mythical 20,000 point barrier. It even looked like Trump was willing to play ball now that he was President, and perhaps peace could be found with the Federal Reserve and Janet Yellen.
Against the rhetoric of Donald Trump during the campaign, it’s logical to assume that rising inflation would no longer be a problem. However, that has not been the case at all. According to data provided by the Fed, inflation expectations declined sharply during the second leg of the Obama administration. Instead of rising inflation, we saw a spike in deflation.
Mathematical analysis further confirms the relationship between deflation and the softening of the gold market at that time. The statistical correlation between inflation expectation and the gold market was 79% between 2011 to the end of 2015. That is about as direct of a relationship as you can get.
However, in 2016, something changed. The gold market had seen their best performance in several years despite absence of rising inflation. In fact, inflation expectation declined by nearly 7%! Gold, and the broader precious metals complex, actually led investor sentiment instead of dancing with it in lock step.
What’s even more bizarre is the present softness in the gold market. Technically, gold is up 6.6% year-to-date, and is sandwiched between its 50 and 200 day moving averages. By itself, this is a solid performance. However, the average inflation expectation is up an astounding 28% from the year so far to 2016. If the gold market could soar with deflation, imaging what it could do with sharply rising inflation!
And I think the biggest takeaway is this — our dollar is being devalued at a record pace, yet the financial markets don’t reflect this reality. The much-celebrated rally — something that the Donald Trump team took credit for, by the way — is a hoax. It may turn out to be the biggest con job of this decade.
This disturbing allegation is further confirmed by my next story, which covers the possibility that we may have already suffered the initial impact of a second Great Depression, and we just don’t know it yet. Stay tuned to Crush The Street as we unleash the bombshell data!