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Markets don’t particularly care that we humans divide our time frames into monthly periods.  They follow their own long and short-term cycles.  But since humans will be reading this,  we have to give some attention to the turbulent January that just ended.

It was a decent, but not spectacular, month for the stock market.  The S&P closed just under the 7,000 mark with a gain of about 1.5% percent.  In foreign equity markets, the EFA, the broader global MSCI Index were up 4.9%.  EEM, representing Emerging Market did even better with an 8% gain.  Foreign markets continue to outperform the US, after years of lagging.  Certainly, some diversification into foreign markets has been justified solely by performance.

For the US markets, we have a positive “January effect”, the notion that a positive January bodes well for the coming year.  As we recently wrote, while there are some exceptions, during bull markets the odds are pretty good at around 80% that if January ends with a gain, the year ahead will be a positive one.

The real fireworks came near the end of the month.  Some cite the selection of Kevin Warsh to replace Jerome Powell as the head of the Federal Reserve as the source of volatility.

Some commentators believe Warsh will be much more stringent with money supply growth, and hence they are calling for “the end of the debasement trade.” Maybe.

Before leaping to conclusions, Warsh has been nominated, but not confirmed.  In addition, if he is confirmed, monetary policy is made by a committee of mostly Biden appointees, and Warsh must work within the context of the economy when he assumes his responsibilities.  That is a different position from commenting from the sidelines. 

We recently ran a long interview with him in the video section, conducted by the Hoover Institution, and he is a close friend of the current Secretary of the Treasury, Scott Bessent. Warsh’s father-in-law has contributed to the Trump campaign. He is considered a critic of FED QE policies, and served on the FED during the 2007-2008 Great Financial Crisis.  Because of his criticism, some believe he is “hard money”.  Lacking a gold standard, that term simply means a FED Chairman who is less likely to print money. He is yet to be confirmed.

Slower money supply growth would certainly cause markets that have advanced sharply, expecting more rapid money growth (the everything bubble), to react severely to a major change in the monetary regime. But as we had noted earlier, even without that, parabolic charts and overvalued markets often produce very sharp corrections along the way. The metals sold off violently at the end of the month, but still posted impressive gains.  How far these markets might correct is a subject for another day.

Gold was up about 13% for the month.

Silver was up about 19.8%.

Platinum gained 5.95%.

Oil came off what we think was an important bottom, with West Texas Intermediate up 14.49%.  If oil can break $70, it will rupture its intermediate bearish linear trendline.  The oil moved in the opposite direction of most commodities we found interesting.  Why would oil start to firm up if Warsh is supposed to put us in a deflationary recession?

Bonds were flat with the AGG bond aggregate up just .25%.  Tighter money and higher rates should cause bonds to tank.  They didn’t.

The US dollar remained weak but rallied when precious metals sold off.  Still, in the month it fell 1.16%.  The dollar is modestly oversold on a momentum basis and is due to rally on technical grounds.

Silver mining stocks (SIL) were up almost 13%, and gold mining stocks (GDX) were up 9.8%.  However, like the metals, they broke sharply at the end of the month.  They will likely stabilize near their 50-day moving average, and then we will likely see a rally back up to fill some of the gaps.  It is too early to draw many conclusions.

XLE, representing oil and gas stocks, was up 14%.  We thought oil stocks looked good last October. 

Since we wrote that piece on oil, XLE, the ETF representing the sector, is up by more than 20%.

The markets now have to wrestle with whether Warsh will be tighter on money.  Almost all markets have been lifted higher on a sea of money and credit creation, so all markets are vulnerable to some degree.

The economy has been well supported as well, with the liquidity created by massive government spending and deficit financing. In fact, almost all major economies are stimulating with deficit financing.

Will the US under both Trump and Warsh take a completely different direction?

It should be noted that this is a pivotal election year.  Trump certainly knows that his chances of success pretty much end if he loses the narrow margins he has in Congress during this year’s mid-term election. Historically, midterm elections are difficult for incumbent Presidents, even without turning down the money spigot. He may even face impeachment, and Democrats have made clear that they would like to prosecute as war criminals anyone associated with ICE and Trump’s deportation efforts.

Trump has been critical of Powell’s supposed “high-interest-rate policy”, so he would not likely select a Fed Chair who would be more severe than Powell.

So was Warsh selected to deliver tight money and lower inflation, or to pump up the economy for the election?

As we have noted before, we are probably past the point of austerity as a solution.  The economy is too leveraged up with debt, and besides deflation, which may be necessary, does not fly politically speaking. The decision has been made to “grow our way” out of the deficit problem and the crisis of popular, but unfunded, social entitlement programs. We believe that Warsh agrees basically, or Trump and Bessent would not have selected him.  They want a team player to execute the plan.

As for the precious metals, excesses on the upside breed excesses on the downside.  The markets broke with a “key reversal”, a charting term that describes making a new high, followed on the same day with a close lower than the previous day.  The move has left huge gaps that likely need to be filled in a rally phase, likely in the next few weeks.  How the market behaves afterward will tell us more about whether this is a short-term, minor setback in the precious metals trend, or something more sinister.

If central banks remain big buyers and we are correct that the US is pursuing more rapid economic growth, gold will have a correction but will remain in a longer-term bull market.  We will have an opportunity to “buy the dip.”

However, if Warsh was selected to stomp on the monetary brakes, that would be a different story for gold and many other markets as well.

During the 1970s, we can remember gold breaking 30% or so three times, and even up to 50%, on its journey from $35 and ounce to $850 at the end of the decade.  Having some historical perspective is helpful against hysteria.  We remember the panic in the summer of 1976. Gold fell in half to $100, but it finished the decade at more than 8 times that price.

The stock market, though historically overvalued, is also likely to continue in its bull trend.

A new Fed Chair has been selected, but not yet confirmed.  All markets will be trying to determine whether this change alters the likely supply of money and credit. 

We doubt that, even as austerity is needed and serious efforts to reduce budget deficits are required, Trump and team will stomp on the monetary brakes.  Austerity would mean painful adjustments in markets, damaging the “wealth effect”, capital spending, and employment plans.  This would seriously impact consumer spending, which accounts for some 70% of the economy. The political cost of a recession would be considerable for Republicans.  Unlike Reagan, Trump did not have a thundering victory, operates with a narrow margin in the House, and lacks loyalty even among some Republicans.

Most people want border control, strong defense, and less woke cultural policies from the government.  But if their 401(k) drops sharply, family members become unemployed, or their Medicare and Social Security benefits are cut, they are likely to vote with their pocketbooks.

We think Donald Trump knows this, and we suspect Kevin Warsh does as well.  And we doubt it is simply political expediency.  Between tax cuts and reduced regulation, securing new supply chains, and bolstering the military,  Trump has consistently advocated his integrated vision to make America Great Again.  He has campaigned against waste and fraud, but he has not proposed huge budget cuts and has put entitlements off-limits.  He has publicly called for lower interest rates despite persistent inflation above 2%.

The belief in restoring rapid American economic growth and better conditions for the middle class has been a deeply held tenet of his entire political career.

If our assumptions are correct, the markets need to correct some of their short-term excesses, but the overall bullish trend will resume.