December 30, 2023 • 22 mins
In this episode, Abdul dives into the financial whirlwind of gold's surge and market behaviour. Explore the mysteries behind gold's record high, challenge conventional wisdom on real rates, and dissect the market frenzy post-Federal Reserve meeting. Join us for insightful analysis and a touch of humor as we navigate the unpredictable landscape of global finance.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:02):
Good afternoon, ladies and gentlemen.Welcome back to the Best of Diet podcast,
where we help you or smarter andarder back providing you weekly market updates
and insights. So let's addressed toelefit in the room. We've been uploading
pretty irregularly the last few weeks,and that's mainly because, well partly due
(00:22):
to a few reasons. First,we upload when there is something that we
feel passionate or we feel happy totalk about or you know, want to
share with you guys. Next,we've been running this podcast for over I
think almost two years now, andwe're not sponsored, so we obviously don't
(00:42):
have a you know, big schedulewhen to upload, and but we do
this because we enjoyed doing this.It's more of a thing we do on
the side. You know, it'svery relaxed, laid back as you can
tell. You know, our productionquality isn't the best either, but if
you've been following us in the pasttwo years, you know our approach is
(01:03):
pretty pretty chill. We just youknow, have a conversation with our guests
or have a conversation just me andpart But we do this when there is
something we feel that we want totalk about. And there hasn't been too
much this the past few weeks,and we've also been busy, but let's
let's move on. With that beingsaid, we do have two interesting stories
(01:26):
that I want to talk about.One it's about gold and to talk with
the markets. Right, so,electricllings across the world. We're delighted last
Friday as gold, you know,the shiny metal that I love, I
hope you all love too, hitall time high two thousand, one hundred
and fifty two point three zero dollarsper short counts. It's a bit of
(01:49):
a surprise for us in the market. You know, in the markets watching
world. Usually you think, ina high rates world we should see lower
gold prices, but no, goldhas done just the opposite, and today
we ask why. So the realrate is the amount of money inflation adjusted
you can just get so, youknow, you can just get risk free
(02:10):
in the market, and gold justsits there. It just sits there.
Gold doesn't use any yield whatsoever.So if the opportunity cost of just the
break you can earn on money rises, what you're willing to pay for this
stuff that really other than a littlebit of industrial use, and you know,
(02:30):
making jewelry. I guess it justsits there so that that prize is
going to come down. But thisis all very humiliating, right because we've
been taught that this relationship was oneof the most stable relationships in all of
finance. Real rates up Gold priorsit down, and when you have jobs
like you know, like we're theposition I'm in where i'm you know,
(02:53):
I'm saying this sort of thing againand again, you feel pretty intelligent.
And then you have a period likelast year when it just didn't work.
And in the past couple of yearshave been a bit of a roller coaster
for Gold. It hit a high, it high in twenty twenty, and
then kind of traded sideways up anddown. But now you're broke into the
all time high, and it's worthI think, asking why. And you
(03:15):
know, on this account of realrates, there is a story that can
be told in Gold's favor, whichis that enough? Sorry? Even though
real rates are high generally speaking,interest rates are high in general, probably
the highest they've been since two thousandand eight. They have fallen recently,
as we've talked about on the lastepisode, and people are looking at the
(03:38):
US Central Bank seeing them talking aboutpausing and maybe considering cuts at some point
in the future. So maybe thegold price is kind of anticipating in some
way further declines in rates. So, just like much of the market,
which we'll get into later, itappears that all kinds of risk, acid,
stocks, bonds, whatever at theFED and saying hey, rate rates
(04:01):
might come down soon. Also,the economy appears to be slowing a bit
and that should kind of drag realrates as well. So that's been one
thing moving in gold's favor. Andyou know, another big thing is the
dollar. Right, the majority buyer, the majority of buyers of gold,
not the US, it's not theEuropeans, it's the emerging markets. So
(04:25):
if you're a gold buyer in Kazakhstan, India, Nager, whatever, it
is, the dollar weekends, right, you have more purchasing power when it
comes to buying gold. Now,to be clear, there are other offshore
non US dollar gold markets, butthey're a lot smaller than the main one
in London, which is all pricingdollars. So week dollar helps, Falling
(04:48):
rates recently helps despite the high ratelevel overall. So what's next. Well,
then you have the kind of classicand This might sound a a little
bit of you know, gold buggery, but geopolitical risk people seem to like
to buy gold when things get alittle hairy in the world. As we
(05:10):
talked about it later. Sorry,before you know, gold is a safe
haven trade and whenever there's a warbreaking out, people like to add gold
to the portfolio. And it's partof the I don't know what's going on
in the world, that mean,just buy gold kind of trade, right,
And you did see some reaction tothe war that broke out in the
Middle East in October in gold goldis up I believe, I think six
(05:35):
percent in the week following did thebreak or to the start of the war.
So I'm guessing you're telling you're thinking, right, well, well after
you're telling me that the war inGaza's pushing the gold price but not the
oil price, you know, which, then I, yes, you think
it's far fresh, but I understandgeneral insecurity, you know, world feels
(05:59):
like a scary place. But youthink the first thing to go up if
people thought the war in the MiddleEast was a true geopolitical problem that could
spread, you think the first pricethat would go up would be oil.
But to be honest, we've notreally seen that we've seen gold go up,
and I mean part of that hasbeen that there hasn't been you know,
(06:19):
big oil supply disruptions, partly whywe haven't seen aill prices go up.
The straight of hormones formos is open, right, and so and so
forth. But I guess the questionis right. It's always hard to tell
to what extent price moves reflect geopoliticaluncertainty. One thing in favor of this
(06:43):
point, though, is that therethere is a gold price model put out
by the World Gold Council, whichis the big trade body for the gold
market, and they found that inOctober, which was a good month for
gold all things considered, there wasa lot of unexplained emotion that can be
explained by normal factors like the dollaror interest rates in their model, which
(07:04):
suggests that there could be some uncertainty, some hedging in the gold price,
possibly from the war breaking out.This is always a bit of a slippery
point and it's difficult to establish,but it's worth mentioning that this is a
classic bycase for gold. You know, if the world gets scary, it
you buy gold, no questions asked. So another thing that I'm interested in
(07:27):
is about central banks, which Ibelieve is the fourth reason. Right,
So we've gone falling rates a weekof dollar, geopolitical risk, and emerging
central banks. And this one isa lot more concrete, I think than
the geopolitical risk point, which isfor that a long time. In emerging
markets, the central banks have startedloading up on gold, a trend which
(07:49):
has only accelerated since the war inUkraine, the big sancsance regime that the
West put out in Russia, whichhas incentivized a lot of emerging markets.
Right, who considered Russia a peereconomy to say, I mean, you
know, could we be next?Right, maybe we should get out of
the dollar and at least a littlebit, you know, let's like reduce
(08:11):
our exposure. So in case thishappens to us, you know, we're
we're kind of prepared. So theidea is that owned dollars puts your you
know, you under the thumb withthe US hedge money or something like that.
Right, it's a weakness to beexposed to the dollar in your reserve
assets. In response to what's happenedto Russia, of course, So and
that the other part is that theUS is is of in some ways like
(08:35):
decreasing global trade importance right as China'srising and taken India's rising, taking up
a larger shared the economy. Theseemerging central banks, while they still are
holding a lot of dollars, tobe very clear, they are holding a
lot of dollars. You just onthe margin don't need as much, right,
(08:56):
so we're going to put on accessmoney that you don't need. Well,
you know, gold's a half decentoption if you fear the central bank,
you're not chasing returns, so right, so people tend to buy gold
in a way that's a commentary onwhat crap non dollar feac currencies are,
so which I believe is a goodpoint that this this puts a little more
(09:18):
concrete a central bank demand has beenhitting records again and again and again in
the last several quarters. Twenty twentytwo is a record year for central banks
central bank purchases of gold. Twentytwenty three is on track to have yet
another record year. I think we'reup fourteen percent a year to date on
(09:39):
the record year last year in goldpurchase by central banks. So anyway,
this is a big new structural sourceof gold demand and I think, you
know, between these four things,real raids, US dollar, zoop,
political risk, emerging market, emergingmarket, central banks, You've got a
complete story as to why this golhas been on the rise this the last
(10:01):
few months. So that's with thatstory, let's go on and talk about
markets. So they kind of hada similar similar reactionly like gold. To
be honest, last week. Thequestion is I think on the mind of
a lot of investors, you know, what the heck happened pretty much last
week. So the time of thisrecording, I'm not sure whuns when this
(10:24):
will be uploaded, but since theFED meeting last week or two weeks ago,
when this comes out, markets havegone completely bananas. Right, We've
already busted through a lot of targetsthat investors and analysts had for twenty twenty
four because stalks and bonds are goingto the moon, you know, quite
literally, you know. And againon this episode we're going to try and
(10:48):
figure out why. But let's rewinda tiny bit. So the Fed left
rates on hold still you know,five percent and some change, but there
were where there was some new stuffthat came to light, which includes the
dots. Everybody loves the dots,so for those from a famillion. So
(11:09):
the FED FED rate setters put littledots on a chart to show where they
think rates can or should be atcertain points in the future. And you
can get a little bit kind ofhoroscopy about the dots, honestly, but
the dots are the best kind ofguide we have as to what the FED
is going to do next. Andthose pretty little dots, well, you
(11:31):
know, these dots have moved quitea lot. Actually, So in the
last set of dots, which camein September, there were still a couple
of members of the fed's Open MarketCommittee, the rate Setting Committee, who
were way out saying rates are goingto have to be you know something in
twenty twenty four, not too sure, but there were there were a few
of them still stamping their foot andsaying rates are gonna have to be higher
(11:54):
still in twenty twenty four. Andthe group as a whole thought, you
know, we are gonna be inthat five percent range into twenty twenty four.
And then all those outlier hawks havebeen shot out of the sky and
everybody moved down to four percent range. Right, So there was like this
big change in the album. Andso as you say so as I say
so, Powell, He's not wantedto pass up an opportunity to be a
(12:20):
bit miserable. But instead he wassaying, first of all, Ronald Clause
Victory Lap all those bozos who saidwe were heading into recession were wrong.
And there was just kind of,you know, kind of a sort of
no, no, no, youmessaged one up. And he did not
to the fact that things can stillgo wrong, but it was, as
I said, by his standards,quite demonstrated. He was also saying,
(12:43):
Okay, inflation is still about thetarget, but we don't have to wait
for it to hit two percent beforewe started cutting. And in fact,
he cautioned against waiting until everything wasexactly at two percent before they started to
ease policy. So we're not talkingabout but we're not talking about it,
but we're thinking about talking about it. And and and that was that wasn't
his phrase. But that's as bestas I could tease out the message now.
(13:09):
But the real point, the mostsalient point for this discussion, is
not what Powell said, or whatwe heard him say or what we thought
he said, but what the marketsheard him say. Because you can hear
one thing and you can do another, right, The markets heard him doing
backflips and playing little trumpet. Hepretty much. So he allowed, as
how the Open Market Committee thinks there'sgoing to be three rate cuts. That's
(13:31):
their aggregate judgment is three rate cutsthe next year. And the market said,
did you hear him? He justsaid six. So the markets expect
the federal funds rate to fall belowfour next year. So that's six'
five I don't know, six cuts. And correspondingly, every risk acid that
has not nailed down has left offthe floor and is doing a little dance
(13:54):
around. And hence why the market, you know, slack markets you have
picked up and they're completely rallying.Right, So the market again is doing
some weird stuff, stuff that makessense and some that doesn't make it makes
less sense. And the stuff thatmakes sense is that if markets really,
if they really do think we're goingto get six raid cuts next year,
(14:15):
then accordingly government bond yields should havecollapsed. And that kind of makes sense
if that's what the market thinks,even if that's not necessarily what the Fed
thinks about how far they're going togo. So government bond yields to collapse
because prices have gone up so muchand we're right back the levels that we
haven't seen since at least the summer, since everyone was talking about higher for
(14:37):
longer. And stocks have shot upto very close to all time highs.
So again we're very close to alltime highs, and we're kind of thinking,
you know, is the crisis over? And the funny thing is,
though, you know, we cantalk about this more later on, but
these things don't make a lot ofsense in in totally when we put all
this together, it doesn't really makesense. So either growth is going to
(15:00):
be good, in which case DEFEDis going to be cautious about how many
times it cuts rates, or growthis going to be less good and the
FED will cut more. And that'show our frame reality what the market seems
to be hearing. And we're notthe only ones to point this out,
by the way, it is thatgrowth will be good and defend will not
be cautious about cutting rates. Soyou've got all these kind of you know,
(15:22):
unicorns that when you add their Bloombergterminals, trading away with their their
hooves and saying, okay, soFED is going to cut rates six times,
right, But there's not going tobe recession, so let's buy stocks.
And one of these sets of peoplehas to be wrong, you know,
That's how markets work. Can't alwaysbe right, so not everyone can
(15:43):
be right. And I think that'sprobably true. And although there is more
of a you know, interpretation ofwhat markets are doing, which is that
they're kind of cutting the worst casescenario out. So the stock index has
that has risen the most of themajor ones is the Wrestle two thousand stock
Index, which is where we putall our stocks, small stocks in well,
(16:07):
all the American small stocks and increasinglyeven the lack of veterans, you
know, the shittier stocks. Reallybut a lot of these stocks have balance
sheets that are highly levered, sotherefore are rate sensitive. And since Powell
opened his mouth last week saying thosestocks that are you know, are up
to six or seven percent, whichis a huge movement just a couple of
(16:30):
days. So it's like the stocksthat would have been in the most trouble
if something bad had happened in twentytwenty four are the ones that are moving
the most. So that's kind oflike you know, question marks. Question
marks. You could interpret that asmarket saying, well, the fast mark
going to had tidened us into arecession. Inflation is kind of under control.
The really bad stuff is not goingto happen, and that should give
(16:52):
us a couple more percents, youknow, of momentum upwards. It doesn't
mean next year is going to allbe rainbows and the sunshine, but whatever
kind of good things you have overthere, that's predicted. But it doesn't
mean that, but also does alsomean that the worst scenarios have been eliminated.
(17:15):
And there are some investors that I'vespoken to that are like, Okay,
so you've got this incredible set ofcircumstances all baked into market pricing.
This makes this makes me nervous,that's what you know. And firstly because
we've already busted through where you know, we thought we would have been in
the end of twenty twenty four.Never mind, it's not even the twenty
(17:38):
twenty four yet. But you've alsowhen you've got markets that are, you
know, price perfection, it doesn'ttake very much to tip things into imperfection.
Every bad things to happen, andthis is what people are worried about.
So the big question is what cango wrong? Because it can go
wrong but what can go wrong?So stocks have become expensive. One of
(17:59):
the great things we might have saidthat at the beginning of twenty twenty three
is as dogs look pretty reasonable value, right if you look back being twenty
twenty three SMPS that I remember wasask something like eighteen, which is kind
of historically normal. Now it's assomething like twenty two times earnings, and
at twenty two you're thoroughly on theexpensive side. And even more importantly than
that, the seven stocks that aredoing all the work to keep that index
(18:22):
up, the Begnificent seven, thesexy seven, Amazon, Microsoft Alphabet,
the video Apple Meta. I thinkthat's seven, right, But I think
most of these logs are very expensiveindeed, And so your point about perfection
being difficult and things can go wrong. We can get one or two,
(18:45):
you know, slightly spooking inflation reports, and then that's the thing, and
everyone realizes then it's not going tobe six cuts, it's going to be
three or two. The history ofinflation in the US is not a history
of a line that goes straight upand then it comes to down. Is
the history of lives that you knowoscillates. And the FED is very aware
of this. Fact, and hasmentioned it on several occasions. And so
(19:07):
if they get even a hint thatthere's going to be an accelerating pattern of
inflation, they're going to change theirattitude very quickly. Because the only thing
worse than being the Federal Reserve andthen being the Federal Reserve Open Marc Committee
that didn't see in time that inflationwas serious is being the Federal Reserve Open
Marc Committee that defeats inflation and thenlet's it wrap up again. They don't
(19:30):
want to do that, so nobodywho wants to be remembered in history as
that group of people, people thatare doing well and then just you know,
mess it up towards the end.So the main thing that can go
wrong well is that inflation, theinflation monster has not really been vanquished after
all, and that it comes backand you get like a kind of toper
(19:53):
inflation number, and then the Fedshave to readjust their whole plan and maybe
or oh, sorry, maybe weget a recession. How about that?
So sorry, we get a recession, and that everyone's wrongly been saying it's
going to come any day for atleast a year. And this thoughts kind
of shouldn't be up where they areagain kind of relating to the valuation point
(20:15):
that I said earlier, were earlytwenty twenty three socks were at a good
price, And so the point I'mmaking is that we're not in a different
situation as we were before, andthere are stuff, there are other stuff
that can go wrong. There's anawful lot of politics to happening next year.
What is like, you know,four percent of the population of Earth
is going to be subject to anelection next year. But this might you
(20:40):
know, people in the UK,the US, right, and it definitely
will include the massive continent of theUnited States. And well here this is
a prediction for for listeners, right. I don't think any of the politics
is going to matter. To behonest, my view about market is that
they don't understand politics very well,perhaps because nobody understand politics very well,
and therefore they have a strong tendencyto pretend that nothing has happened. You
(21:02):
know, we didn get a rallywhen Trump was first elected because you know,
corporate tax cuts were such a bigthing of his agenda. But I
think that was kind of analysis,Like, I don't think the market is
going to make many bets on thefiscal policy or the central bank appointees or
the real presidents. I think,you know, the market is going to
(21:22):
just ignore that whole thing. Icould be wrong, but I mean we've
been harping on this stuff. Youknow, things can go wrong. But
I'm seeing the way through the economyis slowing and fation is coming down.
So we do have a kind ofgoldilogs combination of slowing infation slowing but still
positive growth. Stocks are expensive,but they don't look bubbly per se as
(21:45):
arguable, and I don't know right, and I just feel like there's there's
a way through here. And Isay, you know, I kind of
ignore all the negative preditions regarding politics. That that's all I'll say. I
don't think politics a huge role inin in swinging where the markets move next
year, but that's at happen thatstory. I hope you guys have enjoyed
(22:11):
this episode. Thank you very muchfor tuning in, and I wish you
all the best of health and successmoving into the new year. Thank you
very much. Catch us next time. Peace,
Good afternoon, ladies and gentlemen.Welcome back to the Best of Diet podcast,
where we help you or smarter andarder back providing you weekly market updates
and insights. So let's addressed toelefit in the room. We've been uploading
pretty irregularly the last few weeks,and that's mainly because, well partly due
(00:22):
to a few reasons. First,we upload when there is something that we
feel passionate or we feel happy totalk about or you know, want to
share with you guys. Next,we've been running this podcast for over I
think almost two years now, andwe're not sponsored, so we obviously don't
(00:42):
have a you know, big schedulewhen to upload, and but we do
this because we enjoyed doing this.It's more of a thing we do on
the side. You know, it'svery relaxed, laid back as you can
tell. You know, our productionquality isn't the best either, but if
you've been following us in the pasttwo years, you know our approach is
(01:03):
pretty pretty chill. We just youknow, have a conversation with our guests
or have a conversation just me andpart But we do this when there is
something we feel that we want totalk about. And there hasn't been too
much this the past few weeks,and we've also been busy, but let's
let's move on. With that beingsaid, we do have two interesting stories
(01:26):
that I want to talk about.One it's about gold and to talk with
the markets. Right, so,electricllings across the world. We're delighted last
Friday as gold, you know,the shiny metal that I love, I
hope you all love too, hitall time high two thousand, one hundred
and fifty two point three zero dollarsper short counts. It's a bit of
(01:49):
a surprise for us in the market. You know, in the markets watching
world. Usually you think, ina high rates world we should see lower
gold prices, but no, goldhas done just the opposite, and today
we ask why. So the realrate is the amount of money inflation adjusted
you can just get so, youknow, you can just get risk free
(02:10):
in the market, and gold justsits there. It just sits there.
Gold doesn't use any yield whatsoever.So if the opportunity cost of just the
break you can earn on money rises, what you're willing to pay for this
stuff that really other than a littlebit of industrial use, and you know,
(02:30):
making jewelry. I guess it justsits there so that that prize is
going to come down. But thisis all very humiliating, right because we've
been taught that this relationship was oneof the most stable relationships in all of
finance. Real rates up Gold priorsit down, and when you have jobs
like you know, like we're theposition I'm in where i'm you know,
(02:53):
I'm saying this sort of thing againand again, you feel pretty intelligent.
And then you have a period likelast year when it just didn't work.
And in the past couple of yearshave been a bit of a roller coaster
for Gold. It hit a high, it high in twenty twenty, and
then kind of traded sideways up anddown. But now you're broke into the
all time high, and it's worthI think, asking why. And you
(03:15):
know, on this account of realrates, there is a story that can
be told in Gold's favor, whichis that enough? Sorry? Even though
real rates are high generally speaking,interest rates are high in general, probably
the highest they've been since two thousandand eight. They have fallen recently,
as we've talked about on the lastepisode, and people are looking at the
(03:38):
US Central Bank seeing them talking aboutpausing and maybe considering cuts at some point
in the future. So maybe thegold price is kind of anticipating in some
way further declines in rates. So, just like much of the market,
which we'll get into later, itappears that all kinds of risk, acid,
stocks, bonds, whatever at theFED and saying hey, rate rates
(04:01):
might come down soon. Also,the economy appears to be slowing a bit
and that should kind of drag realrates as well. So that's been one
thing moving in gold's favor. Andyou know, another big thing is the
dollar. Right, the majority buyer, the majority of buyers of gold,
not the US, it's not theEuropeans, it's the emerging markets. So
(04:25):
if you're a gold buyer in Kazakhstan, India, Nager, whatever, it
is, the dollar weekends, right, you have more purchasing power when it
comes to buying gold. Now,to be clear, there are other offshore
non US dollar gold markets, butthey're a lot smaller than the main one
in London, which is all pricingdollars. So week dollar helps, Falling
(04:48):
rates recently helps despite the high ratelevel overall. So what's next. Well,
then you have the kind of classicand This might sound a a little
bit of you know, gold buggery, but geopolitical risk people seem to like
to buy gold when things get alittle hairy in the world. As we
(05:10):
talked about it later. Sorry,before you know, gold is a safe
haven trade and whenever there's a warbreaking out, people like to add gold
to the portfolio. And it's partof the I don't know what's going on
in the world, that mean,just buy gold kind of trade, right,
And you did see some reaction tothe war that broke out in the
Middle East in October in gold goldis up I believe, I think six
(05:35):
percent in the week following did thebreak or to the start of the war.
So I'm guessing you're telling you're thinking, right, well, well after
you're telling me that the war inGaza's pushing the gold price but not the
oil price, you know, which, then I, yes, you think
it's far fresh, but I understandgeneral insecurity, you know, world feels
(05:59):
like a scary place. But youthink the first thing to go up if
people thought the war in the MiddleEast was a true geopolitical problem that could
spread, you think the first pricethat would go up would be oil.
But to be honest, we've notreally seen that we've seen gold go up,
and I mean part of that hasbeen that there hasn't been you know,
(06:19):
big oil supply disruptions, partly whywe haven't seen aill prices go up.
The straight of hormones formos is open, right, and so and so
forth. But I guess the questionis right. It's always hard to tell
to what extent price moves reflect geopoliticaluncertainty. One thing in favor of this
(06:43):
point, though, is that therethere is a gold price model put out
by the World Gold Council, whichis the big trade body for the gold
market, and they found that inOctober, which was a good month for
gold all things considered, there wasa lot of unexplained emotion that can be
explained by normal factors like the dollaror interest rates in their model, which
(07:04):
suggests that there could be some uncertainty, some hedging in the gold price,
possibly from the war breaking out.This is always a bit of a slippery
point and it's difficult to establish,but it's worth mentioning that this is a
classic bycase for gold. You know, if the world gets scary, it
you buy gold, no questions asked. So another thing that I'm interested in
(07:27):
is about central banks, which Ibelieve is the fourth reason. Right,
So we've gone falling rates a weekof dollar, geopolitical risk, and emerging
central banks. And this one isa lot more concrete, I think than
the geopolitical risk point, which isfor that a long time. In emerging
markets, the central banks have startedloading up on gold, a trend which
(07:49):
has only accelerated since the war inUkraine, the big sancsance regime that the
West put out in Russia, whichhas incentivized a lot of emerging markets.
Right, who considered Russia a peereconomy to say, I mean, you
know, could we be next?Right, maybe we should get out of
the dollar and at least a littlebit, you know, let's like reduce
(08:11):
our exposure. So in case thishappens to us, you know, we're
we're kind of prepared. So theidea is that owned dollars puts your you
know, you under the thumb withthe US hedge money or something like that.
Right, it's a weakness to beexposed to the dollar in your reserve
assets. In response to what's happenedto Russia, of course, So and
that the other part is that theUS is is of in some ways like
(08:35):
decreasing global trade importance right as China'srising and taken India's rising, taking up
a larger shared the economy. Theseemerging central banks, while they still are
holding a lot of dollars, tobe very clear, they are holding a
lot of dollars. You just onthe margin don't need as much, right,
(08:56):
so we're going to put on accessmoney that you don't need. Well,
you know, gold's a half decentoption if you fear the central bank,
you're not chasing returns, so right, so people tend to buy gold
in a way that's a commentary onwhat crap non dollar feac currencies are,
so which I believe is a goodpoint that this this puts a little more
(09:18):
concrete a central bank demand has beenhitting records again and again and again in
the last several quarters. Twenty twentytwo is a record year for central banks
central bank purchases of gold. Twentytwenty three is on track to have yet
another record year. I think we'reup fourteen percent a year to date on
(09:39):
the record year last year in goldpurchase by central banks. So anyway,
this is a big new structural sourceof gold demand and I think, you
know, between these four things,real raids, US dollar, zoop,
political risk, emerging market, emergingmarket, central banks, You've got a
complete story as to why this golhas been on the rise this the last
(10:01):
few months. So that's with thatstory, let's go on and talk about
markets. So they kind of hada similar similar reactionly like gold. To
be honest, last week. Thequestion is I think on the mind of
a lot of investors, you know, what the heck happened pretty much last
week. So the time of thisrecording, I'm not sure whuns when this
(10:24):
will be uploaded, but since theFED meeting last week or two weeks ago,
when this comes out, markets havegone completely bananas. Right, We've
already busted through a lot of targetsthat investors and analysts had for twenty twenty
four because stalks and bonds are goingto the moon, you know, quite
literally, you know. And againon this episode we're going to try and
(10:48):
figure out why. But let's rewinda tiny bit. So the Fed left
rates on hold still you know,five percent and some change, but there
were where there was some new stuffthat came to light, which includes the
dots. Everybody loves the dots,so for those from a famillion. So
(11:09):
the FED FED rate setters put littledots on a chart to show where they
think rates can or should be atcertain points in the future. And you
can get a little bit kind ofhoroscopy about the dots, honestly, but
the dots are the best kind ofguide we have as to what the FED
is going to do next. Andthose pretty little dots, well, you
(11:31):
know, these dots have moved quitea lot. Actually, So in the
last set of dots, which camein September, there were still a couple
of members of the fed's Open MarketCommittee, the rate Setting Committee, who
were way out saying rates are goingto have to be you know something in
twenty twenty four, not too sure, but there were there were a few
of them still stamping their foot andsaying rates are gonna have to be higher
(11:54):
still in twenty twenty four. Andthe group as a whole thought, you
know, we are gonna be inthat five percent range into twenty twenty four.
And then all those outlier hawks havebeen shot out of the sky and
everybody moved down to four percent range. Right, So there was like this
big change in the album. Andso as you say so as I say
so, Powell, He's not wantedto pass up an opportunity to be a
(12:20):
bit miserable. But instead he wassaying, first of all, Ronald Clause
Victory Lap all those bozos who saidwe were heading into recession were wrong.
And there was just kind of,you know, kind of a sort of
no, no, no, youmessaged one up. And he did not
to the fact that things can stillgo wrong, but it was, as
I said, by his standards,quite demonstrated. He was also saying,
(12:43):
Okay, inflation is still about thetarget, but we don't have to wait
for it to hit two percent beforewe started cutting. And in fact,
he cautioned against waiting until everything wasexactly at two percent before they started to
ease policy. So we're not talkingabout but we're not talking about it,
but we're thinking about talking about it. And and and that was that wasn't
his phrase. But that's as bestas I could tease out the message now.
(13:09):
But the real point, the mostsalient point for this discussion, is
not what Powell said, or whatwe heard him say or what we thought
he said, but what the marketsheard him say. Because you can hear
one thing and you can do another, right, The markets heard him doing
backflips and playing little trumpet. Hepretty much. So he allowed, as
how the Open Market Committee thinks there'sgoing to be three rate cuts. That's
(13:31):
their aggregate judgment is three rate cutsthe next year. And the market said,
did you hear him? He justsaid six. So the markets expect
the federal funds rate to fall belowfour next year. So that's six'
five I don't know, six cuts. And correspondingly, every risk acid that
has not nailed down has left offthe floor and is doing a little dance
(13:54):
around. And hence why the market, you know, slack markets you have
picked up and they're completely rallying.Right, So the market again is doing
some weird stuff, stuff that makessense and some that doesn't make it makes
less sense. And the stuff thatmakes sense is that if markets really,
if they really do think we're goingto get six raid cuts next year,
(14:15):
then accordingly government bond yields should havecollapsed. And that kind of makes sense
if that's what the market thinks,even if that's not necessarily what the Fed
thinks about how far they're going togo. So government bond yields to collapse
because prices have gone up so muchand we're right back the levels that we
haven't seen since at least the summer, since everyone was talking about higher for
(14:37):
longer. And stocks have shot upto very close to all time highs.
So again we're very close to alltime highs, and we're kind of thinking,
you know, is the crisis over? And the funny thing is,
though, you know, we cantalk about this more later on, but
these things don't make a lot ofsense in in totally when we put all
this together, it doesn't really makesense. So either growth is going to
(15:00):
be good, in which case DEFEDis going to be cautious about how many
times it cuts rates, or growthis going to be less good and the
FED will cut more. And that'show our frame reality what the market seems
to be hearing. And we're notthe only ones to point this out,
by the way, it is thatgrowth will be good and defend will not
be cautious about cutting rates. Soyou've got all these kind of you know,
(15:22):
unicorns that when you add their Bloombergterminals, trading away with their their
hooves and saying, okay, soFED is going to cut rates six times,
right, But there's not going tobe recession, so let's buy stocks.
And one of these sets of peoplehas to be wrong, you know,
That's how markets work. Can't alwaysbe right, so not everyone can
(15:43):
be right. And I think that'sprobably true. And although there is more
of a you know, interpretation ofwhat markets are doing, which is that
they're kind of cutting the worst casescenario out. So the stock index has
that has risen the most of themajor ones is the Wrestle two thousand stock
Index, which is where we putall our stocks, small stocks in well,
(16:07):
all the American small stocks and increasinglyeven the lack of veterans, you
know, the shittier stocks. Reallybut a lot of these stocks have balance
sheets that are highly levered, sotherefore are rate sensitive. And since Powell
opened his mouth last week saying thosestocks that are you know, are up
to six or seven percent, whichis a huge movement just a couple of
(16:30):
days. So it's like the stocksthat would have been in the most trouble
if something bad had happened in twentytwenty four are the ones that are moving
the most. So that's kind oflike you know, question marks. Question
marks. You could interpret that asmarket saying, well, the fast mark
going to had tidened us into arecession. Inflation is kind of under control.
The really bad stuff is not goingto happen, and that should give
(16:52):
us a couple more percents, youknow, of momentum upwards. It doesn't
mean next year is going to allbe rainbows and the sunshine, but whatever
kind of good things you have overthere, that's predicted. But it doesn't
mean that, but also does alsomean that the worst scenarios have been eliminated.
(17:15):
And there are some investors that I'vespoken to that are like, Okay,
so you've got this incredible set ofcircumstances all baked into market pricing.
This makes this makes me nervous,that's what you know. And firstly because
we've already busted through where you know, we thought we would have been in
the end of twenty twenty four.Never mind, it's not even the twenty
(17:38):
twenty four yet. But you've alsowhen you've got markets that are, you
know, price perfection, it doesn'ttake very much to tip things into imperfection.
Every bad things to happen, andthis is what people are worried about.
So the big question is what cango wrong? Because it can go
wrong but what can go wrong?So stocks have become expensive. One of
(17:59):
the great things we might have saidthat at the beginning of twenty twenty three
is as dogs look pretty reasonable value, right if you look back being twenty
twenty three SMPS that I remember wasask something like eighteen, which is kind
of historically normal. Now it's assomething like twenty two times earnings, and
at twenty two you're thoroughly on theexpensive side. And even more importantly than
that, the seven stocks that aredoing all the work to keep that index
(18:22):
up, the Begnificent seven, thesexy seven, Amazon, Microsoft Alphabet,
the video Apple Meta. I thinkthat's seven, right, But I think
most of these logs are very expensiveindeed, And so your point about perfection
being difficult and things can go wrong. We can get one or two,
(18:45):
you know, slightly spooking inflation reports, and then that's the thing, and
everyone realizes then it's not going tobe six cuts, it's going to be
three or two. The history ofinflation in the US is not a history
of a line that goes straight upand then it comes to down. Is
the history of lives that you knowoscillates. And the FED is very aware
of this. Fact, and hasmentioned it on several occasions. And so
(19:07):
if they get even a hint thatthere's going to be an accelerating pattern of
inflation, they're going to change theirattitude very quickly. Because the only thing
worse than being the Federal Reserve andthen being the Federal Reserve Open Marc Committee
that didn't see in time that inflationwas serious is being the Federal Reserve Open
Marc Committee that defeats inflation and thenlet's it wrap up again. They don't
(19:30):
want to do that, so nobodywho wants to be remembered in history as
that group of people, people thatare doing well and then just you know,
mess it up towards the end.So the main thing that can go
wrong well is that inflation, theinflation monster has not really been vanquished after
all, and that it comes backand you get like a kind of toper
(19:53):
inflation number, and then the Fedshave to readjust their whole plan and maybe
or oh, sorry, maybe weget a recession. How about that?
So sorry, we get a recession, and that everyone's wrongly been saying it's
going to come any day for atleast a year. And this thoughts kind
of shouldn't be up where they areagain kind of relating to the valuation point
(20:15):
that I said earlier, were earlytwenty twenty three socks were at a good
price, And so the point I'mmaking is that we're not in a different
situation as we were before, andthere are stuff, there are other stuff
that can go wrong. There's anawful lot of politics to happening next year.
What is like, you know,four percent of the population of Earth
is going to be subject to anelection next year. But this might you
(20:40):
know, people in the UK,the US, right, and it definitely
will include the massive continent of theUnited States. And well here this is
a prediction for for listeners, right. I don't think any of the politics
is going to matter. To behonest, my view about market is that
they don't understand politics very well,perhaps because nobody understand politics very well,
and therefore they have a strong tendencyto pretend that nothing has happened. You
(21:02):
know, we didn get a rallywhen Trump was first elected because you know,
corporate tax cuts were such a bigthing of his agenda. But I
think that was kind of analysis,Like, I don't think the market is
going to make many bets on thefiscal policy or the central bank appointees or
the real presidents. I think,you know, the market is going to
(21:22):
just ignore that whole thing. Icould be wrong, but I mean we've
been harping on this stuff. Youknow, things can go wrong. But
I'm seeing the way through the economyis slowing and fation is coming down.
So we do have a kind ofgoldilogs combination of slowing infation slowing but still
positive growth. Stocks are expensive,but they don't look bubbly per se as
(21:45):
arguable, and I don't know right, and I just feel like there's there's
a way through here. And Isay, you know, I kind of
ignore all the negative preditions regarding politics. That that's all I'll say. I
don't think politics a huge role inin in swinging where the markets move next
year, but that's at happen thatstory. I hope you guys have enjoyed
(22:11):
this episode. Thank you very muchfor tuning in, and I wish you
all the best of health and successmoving into the new year. Thank you
very much. Catch us next time. Peace,
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