Interest Rates Higher Longer

Perhaps the biggest news this week was the unexpected 180-degree policy turn by the Bank of Japan. Whereas the BOJ had previously affirmed that it would do what ever it takes to keep interest rates at or below zero, it gave up the impossible task of trying to defy the natural laws of economics forever, especially when the Fed, which controls the world’s reserve currency, is engaging in QT after too many years of mucking the capital markets up with so many trillions of dollars of QE.

Not surprisingly then, the biggest mover in our Key Market Metrics was the long-dated U.S. Treasury, which lost 4.62% last week as U.S. Treasury rates rose considerably. The 10-year for example rose to a yield of 3.75%.

Not making the Fed’s job any easier in fighting inflation were the following data points this week:

  • GDP came in hotter than expected. The market was expecting 2.9% but it came in at 3.2%.
  • The Fed’s favorite inflation indicator—Core PCE Deflator—printed slightly hotter than expected in November +4.7% YoY vs +4.6% exp (MoM was in-line at +0.2% after an upward revision for October).
  • A $1.7 trillion spending bill appears to be on the way toward becoming law as 18 senate Republicans joined in with Democrats to give Biden every bit of vote buying power he demanded and more!

Obviously, the smart money crowd is not happy about that because it means that in order to tame inflation, interest rates are going to have to remain higher for longer, which is bound to lead to a recession in 2022 and more importantly for them, it will take stock prices down. According to an article in Zero Hedge today, the biggest outflow of money from equity funds occurred this week when $41.9 billion flew the coop! But, I do believe gold and silver are now starting a major bull market. As Crescat’s Tavi Costa recently pointed out, every time 70% of the U.S. Treasury yield curve has inverted, it has signaled a bull market in gold straight ahead. As of today, 94% of the U.S. Treasury market was inverted. 

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.