The anticipated disinflationary phase is finally here
Excerpted from this week’s edition of Notes From the Rabbit Hole, NFTRH 921:
Macro
A hybrid “macro/sector fundamental” for gold stocks is the Gold/RINF (inflation expectations) ratio. HUI (yellow) leveraged the Gold/RINF ratio as it should have, during the 2025 rally.
Here we again pound the table on this: Gold miners leverage gold’s counter-cyclicality and the disinflationary winds that blow during a counter-cycle (with gold rising vs. mining cost inputs and inflation signals). Since modern economies are built on inflationary policy, the miners NEGATIVELY leverage cyclical inflation. As always, I would tune out anyone insisting you buy gold stocks for inflation protection. They are out there.
The interesting thing here is that while gold stocks are 47% higher than [gold as adjusted by the ‘inflation expectations’ gauge] from the rough start of the 2025 rally, each has declined about 50% (+/-) from the February highs. HUI has done the logical thing since inflation fears started to become a renewed issue (in terms of gold).
Now think about Warsh, with a little Bessent on his shoulder whispering sweet disinflationary nothings in his ear, and think about the current macro. I believe this is a phase, whether a Goldilocks phase or simply disinflationary with liquidity problems, prior to the next inflationary operations.
This phase is brought on by tough new Fed hawk-talk, driving yield curves down into flattening posture. If they are going to bring future inflation, they have to have something to inflate against. And it ain’t inflation fears, I’ll tell you that. They will not bring more inflation to an already inflation-saturated situation. They need to “rescue” us from the threat of declining prices, especially in stocks. Or at least be given license by the gentle disinflation of a Goldilocks phase. In short, they need to sanitize the current inflation to pave the way for those in the future.
I believe it is bullshit. A psy-op of sorts that CME traders, other humans and machines alike seem to buy every time. Maybe that is the point. The market must be pounded into obedient submission prior to the next inflationary operation. So why not simply obey and get it over with?
That may well be the coding the algos go by: fed-speak-hawk = rotate internally (away from targeted and vulnerable areas like inflation trades). It’s like a game of cat and mouse as the yield curve flattens and the machines scurry to align with interim market internals.
I have little doubt that Bessent and Warsh plan to get back on the dove as soon as is convenient. But for the moment, they are doing what they feel they have to do to tamp expectations back to where they need them.
The Fed is undertaking this operation against inflation expectations despite waning liquidity. The graph below indicates the amount of money commercial banks hold in Fed accounts. It is a measure of the “ultimate” liquidity in the banking system.
It is trending down while the stock market trends up. This is risk, defined. Warsh/Bessent are wearing hawk costumes for now, but again, it’s a psy-op. I believe they know full well they will be inflating once again and this picture says they may be inflating against declining asset markets once the Semi bubble blows out and the market’s internal rotations find no more beat down areas to “play”.
Then – and now I am riffing – it comes back to gold. Amid liquidity crises with policymakers readying the inflation machinery gold is the first mover, likely with a silver bullet in its hip pocket. Why are the precious metals so on the outs right now while Semi mania, AI mania, Rocket mania, Kalshi mania and whatever other manias are out there finish up? Because they are preparing to lead to the upside, as they did to the downside. It’s not rocket science. Before Bessent advises a change of wardrobe for Warsh (hawk to dove costume) I expect gold to bottom and lead.
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