In speeches yesterday, both the head of the European Central Bank Christine Lagarde and the head of the US Federal Reserve confirmed that asset purchase programs will stay with us for a long time. This still means an increase in the monetary base, which could trigger further asset price inflation.
Federal Reserve Chairman Jerome Powell emphasized in his Wednesday speech the importance of maintaining extremely loose monetary policy for the foreseeable future to support the U.S. labor market. In a speech to the Economic Club of New York, Jerome Powell warned that getting the economy to full employment will be no easy task and will require more than just dovish policy to achieve it. The Fed chairman dismissed concerns that the massive fiscal stimulus plan proposed by US President Joe Biden could trigger unwanted inflation. Meanwhile, inflation expectations in the US have risen above 2.1 percent, mainly driven by rising commodity prices, especially oil.
A further significant increase in the monetary base could therefore cause further asset price inflation in the financial markets, i.e. stocks, commodities or cryptocurrencies, as the money provided to institutions has to find an outlet. Only a small percentage of this money reaches the real economy, hence there may first be a wealth effect among those who are participating in the current bull market, and thus most of the money may end up in the real economy. However, as long as central banks do not change their policies, interest rates will remain at record lows and investors could look for potential gains in risky assets.
Interestingly, as a consequence of the current actions, both JP Morgan and Goldman Sachs see a new super cycle in the commodity market, which we have also mentioned many times. Industrial commodities, metals, but also agricultural commodities seem to be showing strong upward trends. Therefore, if the scenario of continuation of growing prices of commodities, including oil or silver, comes true, it is hard not to expect a potential growth of inflation expectations, and then inflation itself. This, in turn, with zero interest rates, may continue to push capital towards assets that can protect against inflation. These would then theoretically include commodities themselves, which raise prices in the economy, but also gold or bitcoin, which is considered to be the latest hedge against rising prices and massive paper money printing.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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