Pivot or Plateau? US and UK Fiscal Policy Discussion

Jeffrey Christian: It’s Jeffrey Christian of CPM Group coming to you for Monex. We try to do these videos every month, typically with someone from Monex, but this month I’m on my own. Monex had asked me to address issues related to US and UK monetary policies, what’s really going on, what should be expected. There’s been a lot of confusion I think in terms of UK monetary policy following the installation of a new government and a very large unfunded tax cut in the face of rising interest rates.

A month ago, CPM Group did a video called, “The Tale of Two Markets” and we talked about, what we call the real market for gold and silver and what was going on in the real market, and then we address some of the issues in what we call the fantasy market, which is this place where things don’t act the way they really act in real life, and gold going to $10,000 next week, and silver is going to $700, and the world is going to collapse, and the dollar is going to collapse, and the treasury is going to collapse. Well, this is the Tale of Two Markets—the Interest Rate Edition.

What’s going on in the United States and the UK with monetary policies is they’re becoming restrictive. There have been a host of issues that have been inflationary. Some of them are cyclical. Some of them are post-pandemic post-economic lockdown, some of them are secular long-term changes in the economy. All of them have been exacerbated by oil policies from OPEC plus Russia, by the Russian invasion of Ukraine, by Chinese, U.S. belligerence and disruptions in trade and a host of other issues. Reality is that we have inflationary pressures. Some of them are starting to dissipate, but a lot of them are persistent and there are a lot of risks. As a result of that inflation, US Fed, and the Bank of England, and the European Central Bank, and others have been raising interest rates to try to quell inflation and we’re seeing a mixed economy. We’re seeing signs and pockets of weakness economically, and we’re seeing signs and pockets of strength, and those pockets of strength contribute to inflation. We’ve seen growth, real growth in the United States, Europe, Japan, China, pretty much around the world, fall sharply this year. It’s still generally positive, but there are quarters and half years of negative growth. It’s expected by the United States, by the IMF, the World Bank, the United Nations, the OECD, and CPM Group, that next year we will continue to see very low growth, even slower growth and more weakness in 2023, than we’ve been experiencing in 2022. As a result of that, our interest rate expectations are that interest rates will continue to rise in November and December in the United States, probably plateau in the first five months of next year at relatively higher rates, and then probably start to decline June, July of next year in the face of ever weaker economic activities, and yes, we do expect a recession, and it could appear a real significant recession. It could appear as early as the second half of 2023 or even the first half of 2023. Our best guess is that we sort of muddle along for at least the next nine months or so and that a recession will be most significant in 2024 or 2025.

The UK is in somewhat similar situation, but perhaps even worse situation and it has a new government. A Tory government just like the previous government was and it’s gotten off on the wrong foot. It had a very large, something like $45 billion pounds sterling tax cut, mostly for the wealthy, in order to try and stimulate the economy, which is stagnate like ours. Also, to show that this Tory government is presumably, or they’d like to believe, like the Margaret Thatcher of government of the 1980’s. That unfunded tax cut, put a spook in the economy, the pound sterling came down sharply and it came at a time when the Bank of England had been raising interest rates to fight inflation. As a result of the weaker pound and higher interest rates, pension funds in England started to have financing problems and valuation problems, and it was looking as if the combination of an extremely stimulative fiscal policy at the time when the Bank of England was tightening monetary policy could really hurt the English economy even more than it’s already suffering from. As a result, the Bank of England has been buying bonds and pouring money into the British economy to try to provide the liquidity that the pension funds need to stabilize their valuations. They’ve been doing that during September and the first half of October, and today, October 11th as I’m recording this, the Bank of England said, “Hey, another 3 days and we’re going to stop our monetary accommodation and bond buying program and we’re going to reduce this extra liquidity that we’ve been pumping into the economy.” It’s not that they are walking away from their restrictive monetary policies, they’re adhering to their monetary policies and they and the IMF, and everybody else are suggesting to the Tory government that they should get fiscal policy in line with monetary policy, that they should back away from such large action giveaway and they should start looking to be more restrictive in their fiscal policies. The UK economy has some particular problems going on as a result of BREXIT. Our estimate is that the UK economy will grow 10% less over the decade from 2020 to 2030, than it would have otherwise, due to the BREXIT exit. In addition to that, you have Scottish and Northern Irish nationalism raising their heads. The Scotts are not particularly happy with BREXIT, they’re not particularly happy with the way the English dominated parliament and government have been handling the economy, as well as social matters, and Northern Ireland also has issues with the way England has been behaving in terms of UK policies, especially with imports and exports. As a result of all of this, England is facing even worse situations than Continental Europe, Japan, and the United States. All that put together doesn’t mean that the Bank of England is going to pivot away from its restrictive monetary policies, nor does it mean that the US Fed will do the same, and that’s where the Tale of Two Markets comes in. You have these drama queens in the gold and silver market who like to scare people into buying gold and they offer up overly simplistic views and one of the views is the great reset, where currencies are going to be called in, so you better have gold and silver, and that’s really not likely to happen. Another one now is the pivoting. Well, the Fed cannot afford to be restrictive so it will have to pivot away from the raising interest rates and pulling back from its bond buying programs and return to a more stimulative monetary policy, and now there’s talk about how the Bank of England has to pivot away from its restrictive monetary policy, because of the pension fund issues, and neither is true. The concept and the word of pivot sort of suggests this dramatic reversal of position.

I told you what our interest rate outlook is for the US, which is rising interest rates yet this year, this quarter, the next three months, followed by a plateauing of interest rates, and then lower interest rates as we slouch toward a recession. It’s not a pivot, it’s a cyclical shift in monetary policy in reaction to how we expect the real economy to unfold. So, it’s not the dramatic reversal positions, it’s not going to happen with the US Fed and it’s not going to happen with the Bank of England. In terms of England, if you do have a conflict between the Tory government’s fiscal stimuli and the Bank of England’s monetary conservatism, I would always bet on the Bank of England over a government.

What does this all mean for gold and silver? It means that we’re probably going to see more of the same that we’ve seen over the last two years. Gold prices rose from $1,300 in early 2020 to $2,000 in August 9th, 2020. It’s been consolidating between $1,650 and $2,000 ever since then. It probably is going to continue until we see worse monetary policies, worse fiscal policies, more political problems than we have today, and recession. Similar activities are expected in the UK and in Europe.

There are several factors that are coming up that I’ll just throw out right now. In a few days, the Chinese Community Party is going to have its congress and that could lead to some very interesting developments in Chinese government policies. We have to see; it could go either way. United States will have its by-elections on November 8th and that also could go either way, and then you have the ongoing tragedy within the Russian government and that could go either way, and in each instance it can go one way, fail and then go the other way. So, we have to watch what those three big political realms of developments are going to do over the next two to three months.

I went longer than I should have. I’m sorry about that. I hope that this is good for you and helpful as you paddle your kayak down the rivers of precious metals investments. Take care.