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The Door is Open For a Fed Panic

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With the credit markets having basically seized up and employment now showing early signs of weakness, the Fed has no choice but to put the market on notice that it is prepared to ease if necessary.

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In the wake of today's weaker employment report, the door now swings open even wider for the Fed to panic and begin to run the "printing press".

And based on the market's reaction in the dollar, gold, and fixed income today, the market seems to agree...


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Even though the gold shares probably hit their low on Wednesday for the recent 50 percent correction of the July rally, I would expect the XAU/Gold ratio (see the chart below) to be bottoming today, and for the shares to resume their outperformance of the metal next week once the stock market stabilizes in the wake of the FOMC .

Note: I only said "stabilizes" because the stagflationary environment we're in isn't necessarily going to be positive for the US equity market in general, even after interest rates have been cut, although certain sectors that have exposure to overseas economies and rising commodity prices could fare better).


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At minimum, the Fed should indicate a change in bias towards potentially easing next week in my view. With the credit markets having basically seized up and employment now showing early signs of weakness, the Fed has no choice but to put the market on notice that it is prepared to ease if necessary. The US economy is addicted to continuous credit growth. Like a shark that must continue to swim in order to breath, credit growth must continue to accelerate or the economy simply seizes up and dies.

And given that we already have an inflation problem (and I don't care what the government's "core" rate of anything says to contrary because if you eat, drive, or buy just about anything other than residential real estate... prices are rising, not falling), rate cuts will only exacerbate that inflation problem.

I would expect the equal-weighted CRB (CCI) to accelerate its climb going forward as a result, even though GDP-sensitive base metals may underperform the likes of gold and silver, which was the pattern we saw back in 2001-2002 at a similar point in the US credit cycle too.


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The dollar won't particularly like this stagflationary environment that we're plunging into head first at the moment, but gold will absolutely love it.
Position in gold shares

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