• Inflation rose for the second consecutive month in August
• Stubborn inflation may trigger even higher interest rate hikes from the Fed
• JPMorgan Chase CEO Dimon warns of an impending downturn

Inflation Climb Continues

Pushing consumer prices to alarming new heights, unrelenting inflation continues to be a major concern. It accelerated for a second consecutive month in August. The Consumer Price Index (CPI), which measures the price of everyday goods like gasoline, groceries, and rents, surged in August compared to the previous month. This increase marked the steepest monthly rise this year. On a year-over-year basis, prices climbed by a daunting 3.7%, exceeding the reading in July. The seemingly unsolvable problem of inflation has financial experts growing more concerned about recession.¹

The problem reaches beyond just headline inflation. That rise is largely attributable to a leap in gas prices. Core prices, which exclude the more volatile measurements of food and energy, also rose in August. It came in much higher than expected. Core prices are showing just how intractable inflation is becoming. They remain more than two times higher than pre-pandemic levels.

²

The Fed Response

The Fed has been aggressively raising interest rates to combat inflation. They are on one of the fastest tightening paces in decades. Despite efforts to curb inflation, it remains well above the Federal Reserve’s 2% target. As of now, the Fed is expected to maintain rates at their current 22-year high during their upcoming meeting in September. However, August’s hotter-than-expected inflation report could influence further rate hikes in the fourth quarter. That is much to the dismay of Wall Street, which was hoping for a pause, or even a cut, in rates that could spur the growth of stock prices.

Inflation’s Personal Impact

Benjamin Franklin said small leaks will sink great ships. Governments and corporations can argue about what effect a small percentage change in data will have on the macrolevel. But inflation’s impact on the individual is what truly moves the economy. And that impact is looking grim.

US household income faced a decline in 2022 for the third consecutive year. This decline was primarily attributed to the soaring 7.8% inflation rate. It marks the largest annual increase in the cost of living since 1981. People are running out of savings to keep up with rising prices. Total household debt reached $17.06 trillion in Q2 2023 and credit card debt exceeded $1 trillion.³

The Supplemental Poverty Measure (SPM) considers participation in government programs. It increased from 5.2% in 2021 to 12.4% in 2022. The data highlights the financial struggle faced by many Americans as the cost of living continues to rise.⁴

People shouldn’t expect relief anytime soon. Robert Frick is an economist with Navy Federal Credit Union. He said, “This was bad news for Americans who feel inflation most acutely when filling their tanks and writing their rent checks… And given core inflation rose, it’s clear inflation around current levels may be with us for months.”⁵

A Warning from Wall Street

JPMorgan CEO Jamie Dimon issued a stark warning about the US economy. Dimon said, “We’ve been spending money like drunken sailors around the world…To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake.” He cited several significant headwinds to the economy. He included stubborn core inflation, continuing war, and high interest rates.⁶

Dimon has previously warned about an impending “economic hurricane.” He now expresses doubts about the concept of a “soft landing.” While some economists anticipate a gentle economic slowdown, Dimon remains skeptical. He raised concerns about the Federal Reserve’s quantitative tightening campaign, increased reliance on fiscal deficits, and the downstream impact of various economic factors. Dimon emphasized that the impact of these changes might not be evident immediately. Businesses should be prepared for potential disruptions in the coming year.

Protecting Your Portfolio from Inflation

In times of rising inflation and economic uncertainty, it’s essential to consider strategies to safeguard your funds. A Gold IRA from American Hartford Gold can provide a valuable hedge against inflation. Precious metals like gold have historically preserved wealth and retained their value when traditional assets falter. By diversifying your portfolio with a Gold IRA, you can mitigate the impact of inflation and economic turbulence, ensuring a more secure financial future. Learn more today by contacting American Hartford Gold at 800-462-0071.

Notes:
1. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
2. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
3. https://www.newyorkfed.org/newsevents/news/research/2023/20230808
4. https://www.foxbusiness.com/economy/us-household-income-fell-2022-census-data-shows
5. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
6. https://www.foxbusiness.com/economy/jamie-dimon-warns-risks-us-economy-weve-been-spending-drunken-sailors

• The national deficit is projected to double from $1 trillion to $2 trillion
• Increased deficits can lead to inflation, high interest rates, and recession
• Safe haven assets like physical gold and silver can protect funds from the effects of soaring deficits

Deficit Doubles

The American economic landscape is approaching a steep cliff that is growing drastically higher. The US federal budget deficit is projected to double this year. The non-partisan Committee for a Responsible Federal Budget (CRFB) estimates it will grow from about $1 trillion to a staggering $2 trillion. The chasm between government spending and revenue collection is widening at an alarming rate, unseen since major crises such as World War II and the 2008 financial meltdown. The soaring budget deficit could have catastrophic consequences for retirement funds and the economy as a whole.¹

²

Deficit Growth Paradox

Traditionally, deficits tend to shrink during periods of economic growth. Increased business activities and higher income levels lead to greater tax revenues. Also, government must spend less on unemployment benefits. However, economists are baffled. The current deficit surge defies conventional economic wisdom. It is occurring during a time of strong economic growth, record-low unemployment rates, and thriving corporate profits.

Deficit Causes:

The deficit explosion follows a record drop in the budget deficit last year. It fell from about $3 trillion to roughly $1 trillion. That drop was due to an uptick in capital gains revenue as Americans sold more stock and recorded large gains. The Treasury department in 2022 also benefitted from a spike in general tax collection. Inflation pushed up the nominal income for millions of households.³

Several factors contribute to the exponential growth of the federal budget deficit in 2023:

High Inflation: Soaring inflation rates are eroding the purchasing power of the dollar. The government must spend more to provide essential services and pay off debt.

Escalating Interest Payments: As the government accumulates more debt, interest payments rise substantially. Funds need to be diverted away from other critical areas of the budget.

Declining Tax Receipts: Falling markets have led to a sharp decline in capital gains revenue. Higher tax brackets and standard deductions resulted in less tax revenue for the IRS in 2023.

Government Expenditures: Government spending increased in 2023. Social Security and Medicare costs rose since they are indexed to inflation. Also, the 2022 Inflation Reduction Act started disbursing billions of dollars.

The Deficit’s Worrisome Transformation

From August 2022 to July 2023, the federal government spent approximately $6.7 trillion while collecting only $4.5 trillion in revenue. This represents a stark 16% increase in spending compared to the previous year. That is coupled with a 7% decrease in revenue.⁴

The change has economists worried. Marc Goldwein is the senior policy director at the CRBF. He said, “That’s pretty scary, because normal before the pandemic was $1 trillion. And in 2015, it was $500 billion. So, we went from $500 billion is the normal, to $1 trillion is the normal, to $2 trillion is the normal in less than a decade.”⁵

Deficit Impact

The deficit surge comes as lawmakers rush to avert a government shutdown. They are looking to pass a short-term deal to keep the government running. Expect deadlock as the sides spar over spending cuts and expiring tax cuts. If talks stall, a government shutdown would be catastrophic for the country.

Economists anticipate annual deficits approaching $3 trillion within a decade. Such high deficits can lead to inflation, higher interest rates, and ultimately, a debt crisis. Soaring interest rates could stifle private investment and make loans prohibitively expensive.

Brian Riedle is an economist at the Manhattan Institute. He warns, “A debt growing much faster than the economy will drive up interest rates, reduce economic investment, and over time make interest payments the largest federal expenditure — risking a federal debt crisis.”⁶

Higher deficits also hamper the government’s ability to respond effectively to economic downturns. This could lead to prolonged recessions and even depressions.

The Mounting Interest Burden

Interest on the national debt is projected to soar to $5.4 trillion by 2053. That surpasses the amount spent on critical programs like Social Security, Medicaid, Medicare, and defense. It could consume up to 35% of all federal revenue in three decades. Interest payments alone are estimated to triple to a staggering $1.4 trillion by 2032. These spiraling interest costs, coupled with surging national debt, could make borrowing money for the country increasingly expensive. The risk of an existential crisis for the country is real.⁷

“Higher interest costs could crowd out important public investments that can fuel economic growth — priority areas like education, research and development, and infrastructure. A nation saddled with debt will have less to invest in its own future,” the Peter Peterson Foundation said.⁸

Conclusion

The ballooning US federal budget deficit poses an existential threat to the nation’s economic stability and prosperity. As the deficit spirals out of control and the national debt skyrockets, it becomes increasingly vital to safeguard your financial future, including your retirement funds.

To protect your retirement funds, consider exploring alternatives such as a Gold IRA from American Hartford Gold. In uncertain times, diversifying your investments with assets that historically retain their value, like precious metals, can offer a measure of financial security. Contact us today at 800–462-0071.

Notes:
1. https://www.foxbusiness.com/economy/us-federal-budget-deficit-projected-double-year
2. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
3. https://www.foxbusiness.com/economy/us-federal-budget-deficit-projected-double-year
4. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
5. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
6. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
7. https://www.foxbusiness.com/economy/the-us-paying-record-amount-interest-on-national-debt
8. https://www.foxbusiness.com/economy/the-us-paying-record-amount-interest-on-national-debt

• The first half of 2023 was record-setting for gold sales
• Gold demand is predicted to continue rising thru to 2024
• Demand is driven by gold’s safe haven qualities and the de-dollarization trend

Gold Continues Its Upward Trajectory

Gold is having a very good year and the trend is likely to continue to 2024. The global nature of the gold market has allowed different sectors and locations to support an overall rise in gold demand and prices. Central bank, investment, and jewelry demand are creating a supportive environment for gold prices. The London Bullion Market Association (LBMA) gold price averaged $1,976 during the second quarter – a record high. That’s 6% higher than last year and 4% higher than the previous record in 2020.¹

Jewelry

Jewelry consumption improved despite high gold prices with a 3% increase over 2022. The overall rise was attributed to rebounding sales in China and Turkey. Analysts foresee holiday related spending supporting a continued rise to the end of the year.²

Investment

Bar and coin investment increased by 6% in H1 (the first half of the year). The increase was largely due to markets in the US and Turkey. In the US, investment demand was fueled by the banking crisis and the volatile debt ceiling negotiations. Momentum carried the market through to the end of the first half of the year.³

Over the counter investment (buying directly from a dealer) jumped in the second quarter. Sales hit 335 tons, with gold coins leading the way in year-over-year retail growth. In China, bar and coin investment grew 32% from last year.⁴

Meanwhile, US investors continued to show a strong appetite for bars and coins. H1 demand was 65 tons, the strongest half-yearly total since 2008 (the year of Global Financial Crisis). The collapse of Silicon Valley Bank and Signature Bank created shockwaves that sent investors scrambling to buy physical bullion products. US Mint coin sales reflect this upsurge in demand. Sales of American Eagles and Buffaloes reached almost 1 million ounces by the end of June. Compare that with annual sales of 1.4 million ounces over the full year 2022.⁵

There is a sense that investment interest remains piqued. Demand will likely rise as we approach the 2024 presidential election campaigns and if any signs of banking instability re-emerge.

Central Banks

The World Gold Council’s latest Gold Demand Trends report shows that gold benefited from record central bank buying in the first half of the year. Central bank buying in H1 reached 387 tons. Buying slowed down in the second quarter, but a strong first quarter sealed the deal. Gold purchases are widespread among emerging and developed countries.

⁶

Massive central bank purchases are continuing the trend from last year. In 2022, central banks added an eye-catching 1,136 tons of gold, worth about $70 billion, to their stockpiles. According to World Gold Council data, it was the largest amount bought, until this year, since 1950.⁷

Analysts forecast central bank buying will remain strong thru to the end of the year. The global de-dollarization wave is pushing demand. Sanctions on Russia have other countries reducing their reliance on the dollar. They are turning to gold for reserves instead.

Chinese analysts noted that due to an accelerating global de-dollarization trend, the current “gold rush” shows no signs of stopping. It is expected to continue in the coming months. As of June 2023, gold reserves held by the People’s Bank of China (PBC) reached 1,926 tons. That marked an increase of 680,000 ounces compared to the previous month. This makes the eighth consecutive month of rising gold purchases by the PBC.⁸

The US Federal Reserve’s aggressive interest rate hikes since early 2022 have exerted significant devaluation pressure on non-dollar currencies. Under this circumstance, only increasing gold reserves can help other countries stabilize the exchange rates of their currencies, said Chinese bank analysts.

Rating agency Fitch Ratings’ recent downgrade of the US credit rating has also sped up the de-dollarization movement. This surge in investor risk aversion could further drive-up gold prices.

Louise Street, Senior Markets Analyst at the World Gold Council, commented:

“Record central bank demand has dominated the gold market over the last year and, despite a slower pace in Q2, this trend underscores gold’s importance as a safe haven asset amid ongoing geopolitical tensions and challenging economic conditions around the world.”⁹

China

For China, increasing gold reserves is also a means to help internationalize the yuan. Sufficient gold will give the yuan the backing and credibility it needs to become a dominant international currency. They aim to lure other central banks to start using the yuan for settling international trade instead of the dollar.

Recession

A looming global recession will also spur greater gold demand. Street said, “Looking ahead to the second half of 2023, an economic contraction could bring additional upside for gold, further reinforcing its safe-haven asset status. In this scenario, gold would be supported by demand from investors and central banks, helping to offset any weakness in jewelry and technology demand triggered by a squeeze on consumer spending.”¹⁰

Conclusion

The data clearly points to a potential continued upward trajectory for gold. The precious metal is sought by investors and central banks alike for its inherent safe haven qualities. You can take advantage of those qualities with a Gold IRA from American Hartford Gold. Contact us today at 800-462-0071 to learn more.

Notes:
1. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q2-2023
2. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q2-2023
3. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q2-2023
4. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q2-2023
5. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q2-2023/investment
6. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q2-2023/chart-gallery
7. https://www.globaltimes.cn/page/202308/1295753.shtml
8. https://www.globaltimes.cn/page/202308/1295753.shtml
9. https://finance.yahoo.com/news/gold-demand-trends-gold-continues-060000243.html
10. https://finance.yahoo.com/news/gold-demand-trends-gold-continues-060000243.html

• Despite trader optimism, economists point to strong recession indicators
• The recession has been delayed by stimulus money and rate hike effect lag
• The S&P 500 potentially faces more than a 30% drop

Indicators Still Point to Recession

When it comes to recession, bullish economists are eager to say, “I told you so,” pointing to low unemployment, strong consumer spending and an S&P 500 rally. But top Wall Street strategists believe now is not the time to gloat. A recession is on the way.

Forecasters began warning of recession and a stock market sell off back in April 2022. By October 2002, 65% of economists said recession would arrive in 12 months. They based this on the Fed’s rapid rate hikes. The Fed’s goal was to tame record inflation by contracting the economy. The Fed raised rates from near zero to 5.5%. This hiking cycle is the fastest and most aggressive since the early 1980s. Since World War 2, 80% of Fed hiking cycles have resulted in a recession.¹

As the bulls point out, the economy seems to have avoided the drop in earnings and rise in unemployment – so far. The reason for this, according to economists, is due to the lingering effects of the massive fiscal and monetary stimulus efforts during the COVID-19 pandemic. As well as the long lag time before the Federal Reserve’s rate hikes filter through to the economy. Even Fed chair Powell admitted as such. He said, “We have covered a lot of ground, and the full effects of our tightening have yet to be felt.”²

There was nearly $5 trillion in stimulus disbursed. It went to households and businesses, as well as state and local governments. The cushion allowed people to keep spending and ignore higher interest rates. But that is starting to change. Cash reserves are being used up. The number of Americans falling behind on credit card debt is on the rise. Credit card delinquencies have almost doubled since 2021. Auto loan and mortgage delinquencies are also on the rise.

And though inflation seems to have plateaued, prices haven’t come down. Consumers will soon be forced to cut back on spending. Tom Essaye is the founder of Sevens Report Research. He explains it this way – “People get very excited about CPI and say, ‘Hey, CPI went up only 0.1% over the past month and it’s only up 3% over the past year. Well, think about that in practical terms. If I go to buy my kids a bag of Skittles, in 2019 it cost $0.75. Now it costs $1.50. Am I supposed to get excited because next year it costs $1.55?”³

Another reason a recession is considered imminent is the lag time between rate hikes and their effects. This is visible in the manufacturing sector. Industrial production is starting to trend downward. The Institute for Supply Management’s Purchasing Managers Index shows there is widespread worry across the industry. The downward trend reflects dropping consumer demand. Manufacturing is considered a thermometer for the broader economy.

Another lagged effect of the rate hikes is the impact of tighter lending standards. A recent survey showed more than half of banks are making it harder for businesses to get loans. Banks are growing more concerned about borrower’s ability to pay them back. These loans are vital for companies to grow and pay employees. When the money stops, businesses contract and unemployment rises.

Reliable Recession Signal

Economists point to the Treasury yield curve as evidence that a recession is on the way. The Treasury yield curve measures the different interest rates that are paid out on various bonds issued by the US government. Usually, the interest rate on short-dated Treasuries is lower than yields on far-out bonds like the 10-year Treasury. But when that flips and interest rates on short-term Treasuries are higher than their long-term cousins, it is known as a yield-curve inversion. Since the 1960s, the indicator has a perfect track record of preceding recessions.

⁴

The message of an inverted yield curve is that while interest rates are high now, in the future, the rate of economic growth and inflation will be slower. Interest rates will then be lower. Historically, it has taken a recession to realize such a scenario. The extent of the current inversion is extreme by historical standards. It is at its widest gap since the 1982 recession.⁵

Recession Impact and Recourse

If the recession is mild, analysts see the S&P 500 likely falling as much as another 13%. But in the past 13 recessions, the S&P 500 has dropped an average of 32%, as noted by the Royal Bank of Canada.⁶

People can choose to remain optimistic and hope that there will be a soft landing with no recession. Or they can see the financial data and prepare for an economic downturn. methods One of preparation is shifting part of your portfolio into recession resistant assets like physical precious metals. In fact, the Gold IRA from American Hartford Gold is designed to shield portfolio value from recession. Contact us today at 800-462-0071 to learn more.

Notes:

1. https://www.businessinsider.com/us-economy-still-headed-for-recession-stock-market-crash-2023-8
2. https://www.businessinsider.com/us-economy-still-headed-for-recession-stock-market-crash-2023-8
3. https://www.businessinsider.com/us-economy-still-headed-for-recession-stock-market-crash-2023-8
4. https://www.businessinsider.com/us-economy-still-headed-for-recession-stock-market-crash-2023-8
5. https://www.morningstar.co.uk/uk/news/238448/wait-is-the-bond-markets-recession-indicator-broken.aspx
6. https://www.businessinsider.com/us-economy-still-headed-for-recession-stock-market-crash-2023-8

• Moody’s and Fitch Ratings downgraded the credit rating of the banking industry
• The downgrade was due to high interest rates and growing risk of bank failures
• Experts turn to physical precious metals as banks and the government become worse stores of wealth

Banking Industry Downgraded

The phrase “like money in the bank” is taking on a new meaning nowadays. The once secure banking industry is growing increasingly riskier. Bank stability is being challenged with high interest rates, rising deposit rates and slumping profitability. Now they can add a rating downgrade to their list of troubles. On the heels of a US credit downgrade, a depreciating financial industry threatens to undermine the broader economy.

Last week, Moody’s Investment Services downgraded the credit rating of 10 mid-sized banks by a single notch. They cited growing financial risks and strains that could erode their profitability. They also warned of a review of six other lenders and assigned a negative outlook to 11 other banks.

Moody’s actions come after a banking crisis that started in March with the sudden collapse of Silicon Valley Bank. Once the nation’s 16th largest bank, their depositors grew fearful of the bank’s solvency and made a classic bank run. Signature Bank and First Republic Bank soon followed, leading to more concerns about the banking industry’s stability.

Moody’s downgrade is on the heels of one from Fitch Ratings. In June, Fitch lowered the banking industry to AA- from AA. Fitch Ratings is now warning the banking industry could be downgraded again from AA- to A+. If that happens, Fitch would be forced to reevaluate ratings on each of the more than 70 banks it covers. Shares of JPMorgan, Bank of America and Citigroup fell on news of the warning.

Downgrade Meaning

Banks rely on bond sales to help fund their operations. A downgrade makes those issuances more expensive. That’s because Investors demand more return to own lower rated bonds. As a result, costs increase for banks and profits go down.

Impact of Fitch Downgrade

Another Fitch downgrade creates a new problem for banks. If the industry’s score is downgraded to A+, then it would be lower than some of its top-rated lenders. The country’s two largest banks by assets, JPMorgan and Bank of America, would likely be cut to A+ from AA-. This is because banks can’t be rated higher than the environment in which they operate. Which in turn triggers downward adjustments for their smaller rivals. Weaker lenders would be moved closer to non-investment grade status.

Tough Timing

Regulators want banks to issue more bonds as they become more expensive for the banks. The FDIC, Federal Reserve and Office of Comptroller of the Currency are trying to stop the long simmering banking crisis from boiling over. They want to prevent any future bank runs. Regulators want the banks to issue more long-term debt to stabilize them. The long-term debt is meant to absorb losses if the bank fails. It is meant to make it easier for banks to hold onto depositors and slow down a run.

Role of Interest Rates

The Federal Reserve rapidly raised interest rate to fight inflation. Rates went from almost zero to 5.5% within a year.

¹

Minneapolis Federal Reserve President said the risk is that if inflation is not completely under control, the Fed may have to raise rates further. Banks “might face more losses than they currently face today.” According to CME Group’s FedWatch Tool, market participants believe the Fed will hold interest rates near their current levels well into the first half of next year. They want to bring inflation down to the central bank’s 2% target.²

Prolonged higher interest rates could force Fitch to go through with the downgrade. Record high rates put extreme downward pressure on the industry’s profit margin. In addition, higher rates lead to more defaults. The more defaults, the more likely the downgrade is going to happen.

The collapse of the commercial real estate market is also threatening small and mid-size banks. They are the primary lenders in that industry. Small banks hold 67% of all commercial real estate loans. Developers typically only paid the interest on real estate loans. They would refinance when the principle came due. But high interest rates are making that unaffordable. As a result, there is an exponential increase in defaults. These nonpayments are hammering the bottom line of small banks. ³

Follows US Downgrade

Earlier this month, Fitch Ratings downgraded the credit rating of the United States from “AAA” to “AA+.” Fitch cited the nation’s growing debt and continued partisan standoffs over the debt limit. Fitch Ratings said these political standoffs have prompted spiraling national debt and a lack of confidence in the US government to manage it.

Moody’s and Fitch are exposing an unwelcome truth about the banking industry and the United States government. They are both becoming more unstable. Once solid secure repositories for investors, both banks and the US are becoming riskier and riskier investments. For those who are interested in securing their retirement funds, safe haven assets like precious metals offer a safer alternative. A Gold IRA from American Hartford Gold can preserve your wealth as the bedrock of the US (and world) financial system cracks. Contact us today at 800-462-0071 for a personalized gold solution.

Notes:
1. https://www.fool.com/investing/2023/08/15/moodys-downgrades-10-banks-heres-what-investors-ne/
2. https://finance.yahoo.com/news/why-bond-rating-downgrades-are-the-last-thing-banks-need-right-now-204145044.html
3. https://www.fool.com/investing/2023/08/15/moodys-downgrades-10-banks-heres-what-investors-ne/