Pro Perspectives 1/13/23

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January 13, 2023
 
We end the week with stocks on the highs, and (still) trading into this big trend line that represents the bear market of last year. 
We had a positive catalyst for stocks on Thursday, with the weak inflation report.  And we had another positive catalyst today, as the big banks kicked off Q4 earnings season with solid performance.
 
Three of the four big banks beat earnings estimates.  But each also set aside more reserves for potential loan losses — to the tune of $2.25 billion (between the four).  And that is added to what is already a war chest of capital that remains in the coffers from the worst of the pandemic period.  
 
If we add back these new Q4 allowances for potential loan losses, all four of the biggest four banks in the country would have beat earnings estimates, AND improved on the earnings from the same period a year ago.  
 
So, as we discussed yesterday, Wall Street has been wrong on Q4 economic growth, and based on the bank reports today, it’s a safe bet that they have undershot on earnings growth in Q4.
 
Let’s take a look at gold …
Gold has been on a tear, up nearly 6% on the year, already.  It closed on the highs today, and at the highest level since April of last year.  It’s only $150 from the record highs.
 
Is gold finally signaling that the unsustainable global sovereign debt bubble is going to be pricked this year?  Maybe. 
 
And it may come from Japan.  Japan has been fighting the deflationary vortex for the better part of the past thirty years.  They’ve printed yen, and inflated debt, with no inflationary consequences — until now.
 
In fact, the post-covid global inflationary environment may prove to have been the perfect storm for stoking inflation in Japan. Inflation is running at a four decade high, and the Bank of Japan looks like it may lose control of the Japanese government bond market (JGBs). 
The Bank of Japan has been intervening, daily, trying to contain the yield on 10-year JGBs to 50 basis points (part of their "yield curve control" program).  
 
The question is:  If they back off of this band, altogether, how low will the value of JGBs fall, and how fast? 
 
I suspect that's why gold is heading for record highs.   
 
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