Silver is about to radically outperform gold, plus the bear market is over? Not likely.

Silver vs Gold
March 6 (King World News) – Graddhy out of Sweden:  Very big picture there is an absolutely huge divergence between Gold and Silver. Something’s got to give. Last time the two had a larger divergence like this, silver played catch-up big time. As we know, silver outperforms gold both to the downside and the upside.

The Massive Chasm Between Gold & Silver Cannot Last

The Bear Market Is Over? Not Likely
Peter Boockvar:  Just because it hasn’t happened yet, does that mean it won’t? The economy has absorbed a lot of interest rate body blows and it won’t break. The stock market bottomed in mid October and the fed funds rate will soon be 200 bps higher than it was then and while well off their highs stocks act well for sure this year. Does that mean it’s all clear? Well, it’s certainly sparked plenty of no and mild landing calls and some saying the bear market is over.

Similar Setup That Did Not End Well
Before I give some further opinions of the economic impact of a higher rate regime, let’s look at the two recessions/bear markets that took place pre Covid. Alan Greenspan started raising interest rates in June 1999 and finished with a 50 bps rate hike to 6.5% in May 2000. We know the stock market ripped until March 2000 and the S&P 500 almost hit a record high in September 2000. Was there an all clear? It wasn’t until the Fed started cutting rates in January 2001 did the wheels fall off stocks and the recession technically didn’t start, according to the NBER, until May 2001. The recession ended in November 2001 but the bear market didn’t until October 2002.

Greenspan after cutting rates to 1% in June 2003 then started hiking in June 2004 and after a ‘measured pace’ of increases that took the fed funds rate to 5.25% by June 2006, the stock market partied on until October 2007 right after the rate cuts had just begun. The recession wasn’t declared to have begun until December 2007. The recession ended in June 2009, 3 months after the bear market did and where the bear market bottomed 3 months AFTER the last rate cut.

So yes, just because some things haven’t happened yet doesn’t mean it can’t…

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I’ve talked for a while my worries about the higher for a while interest rate regime and the nicks and cuts it brings to any overlevered borrower, either household or business, that has either floating rate debt and/or debt coming due this year. The negative impact is not an event, it is a progression of small ones that adds up. What I want to add here is the economic activity that DOESN’T take place because of the rate shock we’ve had. What house is not bought because of affordability challenges? And thus the lost growth from new moves in? What roommate is moving back in with their parents because they can’t afford the rent and the apartment is given up?

The Harsh Reality
What discretionary spending is not going to happen because consumers tire of paying 20% interest on unpaid credit card balances? What IPO is not taking place because the capital markets only will welcome profitable companies on a GAAP basis? What multi family apartment project was just shelved because the numbers no longer work? What VC investment was held up because expected profitability in 2028 is just not acceptable right now? What spending will be cut back on because one’s new monthly car lease is 45% higher than the last one done 3 years ago? How many more car repossessions do we have ahead of us? How many more keys to office buildings are going to be handed back from here? How many expansion projects might not take place because of a higher cost of capital hurdle? How many new people are not going to get hired from here because corporate profit margins are deteriorating and the earnings recession continues on?

This is all to come and thus it is way too premature to get comfortable just because certain things like a technical recession and more equity pain hasn’t happened yet. This again gets to my belief that a vertical move higher in interest rates in one year after 15 years of essentially zero more chips away at economic activity rather than creates a financial event because households and businesses are impacted at different times as debt comes due, resets and economic decisions need to be made. A main reason to still worry is because of the high leverage and financialized economy and markets that decades of easy money has created. The cure is more equity, more cash needed to replace debt but that takes a lot of time.

While he is a known hawk, ECB Governing Council member Robert Holzmann is talking really tough today as he wants 50 bps rate increases in March, May, June and July. That would take their deposit rate to 4.5% from the current 2.5%. The German 2 yr yield is at a fresh 15 yr high in response, higher by 3 bps today.

Germany 2 Year Yield

Their 10 yr yield though is a touch lower and the euro is little changed. While there is rarely dissent at the Fed, you can just imagine the growing internal disturbances within the ECB as the hawks and doves go at it. Speaking of which, a dovish Council member today Mario Centeno from Portugal is talking about slowing inflation and that the ECB “should not rush to conclusions very fast.”

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