Crypto crash, out of control inflation in Europe and record gold purchases

This week, the news is marked by the crisis of confidence in the entire cryptocurrency sector after the spectacular fall of the FTX exchange platform. This bulletin will not return to this event, which was extensively commented on in the financial press. Our goal is not to follow this particular market.

However, we can logically expect this new “black swan” to further complicate things on the markets, which will have to face a liquidity problem linked to margin calls caused by the victims of the crypto crash. These margin calls are likely to affect all paper assets and make future sessions uncertain.

A major element nevertheless protects the indices from a decline: the number of bearish positions opened on the SPX has reached a record level. These peaks of pessimism very often coincide with market rebounds. The “market makers” love this type of configuration to trigger “squeeze” when too many “Put” positions are open.

The reaction of the markets to the consequences of the crypto crash is therefore likely to prove difficult to read.

The other event of the week is the publication of the latest US inflation figures.

The CPI index came out at a lower level than expected in October, at 7.7% over one year.

“I think we are at the top on inflation” is the favorite key phrase of most observers and portfolio managers in the middle of this fall of 2022.

Several indicators support this view:

The fall in maritime transport costs is accelerating, particularly on ship rotations between China and Western countries. This is a sign of economic slowdown, but we can also see in these figures the first signs of an economic embargo on Chinese products. During recent interviews with mining producers, I felt concerned about probable trade restrictions with China, in a geopolitical context that will undoubtedly deteriorate in the coming months.

This indicator is therefore the cumulative effect of the beginning of de-globalization and a global economic slowdown. De-globalization is not deflationary, on the contrary. That said, a global economic slowdown would be very negative for the price of certain commodities.

Among these raw materials, those related to the construction sector are the most concerned. Especially since this sector has been one of China’s growth engines in recent years.

The price of lumber has returned to these pre-Covid levels:

It is true that the residential real estate figures in the United States are currently experiencing a dizzying fall. Housing start volumes are plunging at an unprecedented rate, even at the height of the 2008 real estate crisis.

But the real estate sector is not the only one to suffer from a drop in activity.

The used car market is posting its biggest annualized decline since 2008 this month, after surging last year:

The Fed seems to have achieved its goal: the demand for houses and cars in the United States has literally disappeared!

Will this be enough to bring down inflation for a long time? If the question may arise across the Atlantic, we are far from seeing any decline in inflation in Europe.

The PPI index, which measures the prices paid by European producers, is up everywhere. This is a major difference with the United States where this index is, on the contrary, in the process of stabilizing.

In Italy, the PPI index even exceeds the 50% mark for the first time, which announces an uncontrolled rise in consumer prices in the coming months:

In addition to having devastating effects on activity, persistent inflation is also increasing the losses of European savers.

This is even more visible in Germany: even if the rates have risen to 2%, inflation is rising faster and real rates continue to collapse. The ECB’s lack of responsiveness to inflation is turning into financial repression for German pensioners and savers, with negative real yields deteriorating even further.

Fixed income managers are going to have to explain to their clients how an investment considered “unrisky” presents such large losses. Let’s take the example of a client who has invested €10,000 in a European government bond product (life insurance, for example) which yields very little to him (less than 2%, because at the time he signed this contract , rates were very low). He finds that the unrealized losses on his investment are major at the end of the year. His financial adviser will reassure him by explaining to him that if he does not sell, he will not realize his losses, then that he will continue to receive his (very low) remuneration of a few tens of euros and will receive his €10,000 in after 10 years. But the adviser will probably be careful not to tell him that at the current rate of inflation, this €10,000 will not be worth much in real terms in 10 years. Nor will he tell him that an equivalent bond product taken out today would yield much more, because the rates are now much higher. Except that the customer will not be able to switch from one product to another without realizing his losses on his old contract! The client will emerge from his interview with the impression of having been trapped by his adviser, whereas the latter had nothing to do with it. He is the victim of an absurd monetary policy which damages the relationship of trust that he had so much trouble establishing with his client!

This crisis of confidence now extends to the very value of the European currency.

There are more doubts about the situation in Europe.

The ECB has not yet reduced its balance sheet. The program of quantitative easing hasn’t really been stopped yet. What will happen when Europe enters a recession? Will the ECB be forced to launch a new QE? How not to consider, therefore, that the only outcome is hyperinflation? This is the risk that the European monetary authorities are taking. Such a situation would be dangerous, because it would threaten the social and political cohesion of all the countries in the euro zone.

In the face of these risks, it makes sense to see gold in euros bouncing above its uptrend line. The price of an ounce of gold is attacking its next resistance, at €1,750.

In the physical gold market, the Perth Mint sold a record 183,102 ounces of gold and 1,995,350 ounces of silver in the form of coins and bars in October. A historic record in Australia!

Australian real wages are plummeting, en route to levels not seen since 2008. And forecasts don’t point to a significant rebound from those levels.

It is probably to cope with this loss of real income that many individuals have decided to invest part of their savings in physical gold and silver.

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